What’s really up with this new Homebuyer Incentive Program?
I’ll preface this piece by saying that it is based solely on my opinion of the program and that everyone’s circumstance is different. If the incentive is something you are considering I strongly recommend reviewing the resources provided by the government to determine if it’s the best fit for you www.placetocallhome.ca
In September of 2019 as part of the government of Canada’s National Housing Strategy, a new program was launched called the First Time Home Buyers Incentive (FTHBI). There was a lot of noise surrounding the launch of this program, which rolled out to the market even before the final details were nailed down. So almost six months later, how is the program helping Canadians with affordability?
As it turns out, not as much as you might think.
The last statistic I heard was that since the launch there have been a total of 48 completed applications in BC and 147 in Ontario – two of the places that struggle the most with affordability.
48. In. BC. Out of a population of more than 5 million.
So, what’s the problem with the program you ask? In my humble opinion – there are a few. First off, to be clear it is only for buyers with less than 20% down, so they must qualify under insured rules and they will be subject to a high ratio insurance premium. In short, if you have the means to put at least 20% down then this program is NOT for you.
• Maximum household income is $120,000
• Maximum loan amount is 4x income (this means that the maximum property value sits somewhere around $550,000 assuming the borrowers are at the maximum income)
• The government has a registered stake in the property and the incentive is repayable after 25 years or when the borrower sells
For a lot of people that I speak to the shared equity piece seems to be the biggest point of contention, because while it may look like free money up-front with no interest or payments (yay, free money!) there is absolutely a back-end cost to the transaction.
The easiest way to explain it to clients is that the government is essentially a co-owner in the property and while, yes, they will share in the risk of owning the property in the event it drops in value, they will also share in the lift.
Imagine you buy a condo in Abbotsford today for $300,000. You have 5% down ($15,000) and the government gives you the other 5%. Yes, you’ve dropped your mortgage payment by about $85 a month, but when the same condo is worth $600,000 in 10 years and you decide to sell it, you now owe the government 5% of $600,000 (or $30,000). That represents an annualized return for the tax man of about 7% per year – definitely not free money.
By comparison, if you took out a $15,000 10-year-loan at the same 7% rate with regular monthly payments, you’d have paid around $6000 in interest by the end of the 10-year period – less than half the cost. Sure, you can find a range of different calculations online that show you the potential savings of the FTHBI, and absolutely, if you put more down payment on a home there will be an interest cost savings. However from what I’ve seen many of these calculations are illustrated over a 25 year period which may not be a realistic illustration, because unless you’re planning to use your first purchase as your forever home, you’ll end up selling prior to the 25 year term which will trigger repayment and dip into your equity.
That’s why I personally think that most of the upside is for the government, particularly in urban areas like Vancouver and Toronto where affordable housing is such an issue. Because even if that Abbotsford condo were to drop in value by 10 or 15%, it is probably unlikely that you will sell and go back to renting given that you’d lose their initial down payment and given the lack of other available housing options. While in theory, if the $300,000 condo dropped in value to $250,000, you could sell and would only owe the government $12,500 of the $15,000 you were given, practically speaking it’s very unlikely that you are going to take this step to simply get a $2500 break on the incentive.
So, does it make sense to use the program? I think the answer is that it depends. If that extra 5% down is the difference between you getting into the property or not, and you can’t afford another monthly payment or don’t have the option of borrowing from the bank of mom and dad, then it may very well make sense to take advantage of it, because participating in the market in some form is better than not participating at all. But if there are other avenues for you to explore it may make more sense to exercise those first, in particular if you’re at all concerned about co-owning with Justin Trudeau (can you imagine all that luscious hair clogging up the sink?)
Questions? Let’s talk.