First Time Home Buyer Part #3
This is the third edition of our First Time Home Buyers blog series. In this series, we want First Time Home Buyers to understand everything that they need to be prepared for but also understand tips for success. We want you to understand all of the potential paths to success and what incentives can help you achieve it. Today, we are going to talk about the First Time Home Buyer Incentive and the First Time Savings Account
First Time Home Buyer Incentive
The First Time Home Buyer Incentive was proposed to help qualified home buyers ease the load of their monthly mortgage payments. It is a shared-equity mortgage loan with the Government of Canada. Yes, you co-own the home with the government.
The percentage of support changes depending on the type of home you are buying:
- 5% or 10% for a newly constructed home
- 5% for a resale home
- 5% for a new or resale mobile or manufactured home
The incentive is a loan based on the property’s fair market value. The loan is interest-free, and there is not a set way in which you must pay it back without incurring penalties (monthly, yearly, etc.), but there is a few conditions that you will want to be aware of:
- The loan, in its entirety, must be repaid within 25 years of the date borrowed or when you sell the home, whichever comes first.
- While the loan is interest-free, it is a “shared equity mortgage,” which means the government shares in any gains or losses on the property value up to a maximum profit or loss per year of 8% (not compounded)
To help you better understand how this incentive works, we have included an example:
Let’s say that you qualified for a mortgage of $400,000 on a resale home and already have $20,000 saved. Since it is a resale property, The Government of Canada will pay 5% of the cost of the property, at $20,000, making your total down payment $40,000, which equals a 10% down payment.
To add on to this example, let’s say you are able to pay $60,000 of the down payment on a $400,000 resale house, and the Government of Canada pays 5% at $20,000. This would make your total down payment $80,000, which is a 20% downpayment, meaning that you may qualify to not have to pay mortgage insurance on your home.
Who qualifies for the First Time Home Buyer Incentive
There are some obligations to who can qualify:
- Must be a first-time home buyer
- Must have a household income of $120,000 or LESS
- The mortgage is capped at 4.0 times the maximum household income of $120,000 ($480,0000), which means the average price of a home would be $500,000 to $600,000, depending on the down payment.
- You must be a Canadian citizen, permanent resident, or non-permanent resident authorized to work in Canada.
- You also must meet the minimum down payment requirements with traditional funds (which include savings, RRSP withdrawals) or a non-repayable financial gift from a relative or immediate family member.
*It is important to note that the Government of Canada has recently modified the eligible criteria for homebuyers in Toronto, Vancouver, and Victoria. In these areas, home buyers are now eligible for an increased Qualifying Annual Income of $150,000 instead of $120,000, and an increased total borrowing amount of 4.5 instead of 4.0 times their qualifying income. This change would increase their buying power to roughly $722,000, up from $505,000.
What makes this First Time Home Buyer Incentive so valuable?
The First Time Home Buyer Incentive is so valuable because it is already so tough to get a downpayment for their future homes. Additionally, with interest rates currently at high levels, you can have a greater downpayment so that you are not paying as much interest over time and lowering your monthly costs. Since the incentive is interest free, you can have a worry free mind knowing that you only must pay back the amount borrowed instead of even more additional costs (as long as you follow the conditions).
First Time Home Buyers Savings Account
This savings program is brand new and was part of the budget update last spring. It is designed for First Time Home Buyers to save on their down payment and closing costs, like legal expenses, inspections, and property transfer taxes.
Think of the First Time Savings Account as similar to a Tax Free Savings Account (TFSA), but it is only used towards the purchase of your first home and you can only use it for the next 5 years. First Time Home Buyers can contribute $8,000 a year, up to a maximum of $40,000 in those 5 years.
The First Time Savings Account will become available in April and if you’re of the age of 18 years or older, you will be eligible.
You can use one of the two (RRSP or First Time Home Savings Accounts) to utilize as down payment as a First Time Home Buyer, NOT both.
This new program will be regulated by the Financial Institutions and CRA, so nothing has been “finalized” with possible “loopholes” within this product.
We will announce on our social media accounts when this First Time Savings Account launches.
We think that this incentives are an amazing addition for First Time Home Buyers. The real estate market is very expensive in comparison to wage increases and past decades of inflation, but hopefully these incentives can give an opportunity for your to reach your dream of owning a home.
If you have any questions about how these incentives can help you, please give us a call or email.