The new “First Time Home Buyer Incentive” would assist with housing affordability.
Similar to an almost interest-free loan, the borrower does not have to repay until years in the future. To qualify an applicant must have a household income of less than $120,000 per year and be able to come up with a 5% down payment (which is the minimum requirement for an insured mortgage with the CMHC).
In addition to those stipulations, the program caps out at four times the applicant's annual income, which means it can only help homeowners looking to buy properties where the mortgage value, plus the CMHC loan does not exceed $480,000.
But if a buyer meets these conditions CMHC would offer up to 10% of the value of a newly built home, or 5% of the value of a resale.
This could drastically assist first-time homebuyers who are desperately in need of financial assistance in the current market. The only question is at what cost?
Whats the catch?
CMHC would contribute to the downpayment in exchange for an equity stake in the home. The size of the homeowner's mortgage decreases but comes with a bill to be paid down the line.
Full details of how the program works won't come out until later in the fall, but today the government provided a rough breakdown of how it might work for a prospective buyer.
If a first-time buyer wants to get a home that costs $400,000, they'd have to come up with a $20,000 down payment (5%), under both the new rules and the old ones.
Normally, they'd have to take out a loan for $380,000 to cover the rest of the purchase price — but under the new program (if it's a newly constructed home), CMHC could give $40,000 toward the purchase price, in exchange for a 10% stake in the home.
That brings the buyer's mortgage down to just $340,000 for the home, instead of $380,000. On a standard mortgage at 3.5 per cent interest, that translates into a monthly mortgage payment more than $200 lower than it would have been for the 25-year life of the loan. That's more than $2,700 a year in potential savings.
Any prospective buyer has to get approved for a mortgage just as they normally would, and has to come up with the minimum down payment level that the CMHC requires in addition to paying back what they owe, plus a corresponding share in any gains, down the line.
The homeowner eventually has to pay back the CMHC's stake in the property — but not until they sell (or sooner, but only if they want to). Hypothetically, this could work out for the buyers benefit, especially if there is, in fact, no interest, because it would give buyers a foot in the door, assuming that the pricing of homes and qualifying rates allow the buyer to purchase.
By incentivizing new builds over resale homes, the government hopes its new shared equity mortgage plan can help stimulate more construction in Canada's housing stock.
CMHC is the Crown corporation that backstops the vast majority of Canada's housing market by insuring the loans that finance it. This new program will make its role in the market even larger than it already is.
Whether this is a good or bad thing will remain to be seen.
It raises the question of whether or not the insurance company is now essentially acting as an investor with a potential of a conflict of interest?
Details are still being worked out, but the government is estimating the plan could create about 100,000 new first-time buyers over the next three years.
In addition to this, the first time home buyers RRSP withdrawal as been increased from $25,000 to $35,000 and banks are discussing lowering interest rates further.
So hopefully, in combination, these new incentives will assist buyers in purchasing their first home.
Do you think CMHC is helping buyers or capitalizing on those who are already in a bad situation ? Tell us your thoughts.
Kandice Henry is a Real Estate agent with iPro Realty LTD. She has been in the Real Estate field for over 10 years.
Her hands-on knowledge began when she purchased, flipped, and leased her own properties. Five years ago she began her career as an agent and has had much success helping clients purchase and lease in both the residential and commercial sectors. She is a hard working agent who truly cares about finding the perfect fit for her clients. Kandice's resourcefulness lends to her full, experienced team behind her that is ready to help you close your next lease or purchase.