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A Guide to the First-Time Home Buyer Incentive

A Guide to the First-Time Home Buyer Incentive
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The federal government launched the First-Time Home Buyer Incentive (FTHBI) on September 2, 2019. With funding of $1.25 billion dollars to be used over the next three years, this program aims to help thousands of Canadians become homeowners. If you qualify, you apply for a 5% or 10% shared equity mortgage with the Government of Canada.

How it Works

First-time homebuyers may use this incentive to bring down their monthly mortgage payments without worrying about making a larger down payment. Borrowers do not have to make ongoing repayments toward the incentive and it does not attract interest. The type of home you wish to purchase has a bearing on the incentive:

  • 5% for buying a re-sale home
  • 5% or 10% for buying a new home

You get to repay the incentive in full at anytime ahead of time worrying about prepayment penalty. However, you need to repay it either when you sell the property or within 25 years. The home’s existing fair market value has a bearing on the amount you need to repay.

Consider this – you buy a home for $300,000 and receive a 10% incentive. When you sell your home, it values at $400,000. Your payback amount would then be 10% of $400,000, which is $40,000. In case the value of the home drops to $250,000, you’ll need to repay $25,000. So, while the government stands to benefit if the value of your home increases, it also stands to suffer a loss if the value depreciates.

Are You Eligible?

At least one of the applicants, in case of a joint application, should be a first-time homebuyer. In addition:

  • Your total qualifying household annual income is $120,000 or lesser.
  • You have not lived in a house owned by you or your existing spouse/common-law partner in the preceding four years.
  • You need to pay at least 5% as down payment for the first $500,000 of the purchase price, and 10% toward any amount that exceeds this mark.
  • You cannot pay more than 20% of the purchase price as down payment.

How Much Can You Borrow?

The maximum you may qualify to borrow limits to four times your qualifying income. If your qualifying income is around $120,000, which is the maximum income allowed, then the most you may expect to borrow is around $480,000. This includes the FTHBI amount and mortgage insurance. The upper limit largely limits the areas in which you may consider buying homes, given that the average price of homes in the country was around $500,000 in July 2019.

How Much Might You Save?

If you buy a home for $350,000 and use this incentive, you stand to save around $200 each month or around $2,400 every year. This is if you make a 5% down payment and qualify for a 10% incentive. Your monthly repayment would basically drop from around $1,730 to around $1,530.

Applying

To apply, you need to print and sign the application that you can find online, and take it to your lender. Your lender then completes the submission process. Once the application is accepted, you need to call FTHBI at 1-833-974-0963 and provide details about your solicitor.

Conclusion

If you have your numbers worked out and don’t mind paying back more than you borrow, should the value of your home increase, this incentive might work well for you. However, if you’re having trouble getting the 5% down payment together, you might want to think carefully about moving forward. After all, you also need to account for ongoing maintenance costs as well as any possible increase in interest rates.