Starting September 2nd 2019, Canadian first-time home buyers can apply for the First-Time Home Buyer Incentive (FTHBI). For those of you who aren’t familiar with the home buying process, you may want to have a quick glance at our Guide to Buying a Home before going through this article.
For owner-occupied purchases taking place after November 1, 2019 Canadians will have the ability to borrow a portion of their downpayment from the federal government through the FTHBI. A higher down payment helps you lower your mortgage balance, and as a result reduces your cost of borrowing by way of lower mortgage insurance and interest costs. In return for those mortgage savings, the government is then entitled to a portion of your property gains or losses as a part-owner in your home. For example, if you bought a $300,000 home using the 10% FTHBI (which means they gave you $30,000) and sold it 10 years later for:
The FTHBI amount depends on the property you are purchasing. For newly built homes, you can borrow 5% or 10% of the property value through this program. For all other properties, it’s only 5%.
You must meet all the following criteria to be able to participate in the FTHBI:
Keeping in mind the above, we estimate the highest possible purchase price one could buy under this program would be $565,000. If you’re looking to buy above that range, you likely won’t be able to utilize the FTHBI.
When you move your existing mortgage to another property while keeping your same mortgage balance, term and interest rate. Your mortgage must be portable and doing this saves you money by avoiding early prepayment charges since you aren't technically breaking your mortgage.
Assuming you’re okay with the pros and cons listed above that comes with the FTHBI, it essentially comes down to one question: Are the mortgage savings greater than the property gains you would have to pay back? This answer is heavily influenced by two factors: time and location.
Time: Your mortgage savings will be recognized as of the day you start making mortgage payments, while your foregone property gains won’t be realized until you sell the property in the future. Thus, the present value of those gains in today’s dollars gets lower the further out you intend on selling the property.
Location: Since you are repaying the FTHBI on the basis of property price appreciation, residents who live in cities with the highest expected property price growth would benefit less. Mortgage rates will be roughly the same regardless of the city, but the price appreciation can vary wildly. To help illustrate this, we have run the FTHBI Tool across multiple cities using the following assumptions:
Qualifying Income: $80,000
FTHBI Amount: 10% of property value
Time Until Sale: 5 Years
*Note that the chart below is as of September 1st, 2019. Since the outputs are based on fluctuating inputs (ex: mortgage rates may change) your results may differ if you run the tool at a different date.
The above graphic demonstrates the borrower’s net benefit assuming the 10-year average home price appreciation for select major urban cities. We found that the break-even point is around 3.6% annual property gains, meaning that if you expect your property to appreciate by more than 3.6% per year you likely wouldn’t benefit from the FTHBI.
Let’s say you’ve run the numbers and want to proceed. The program will have roughly $400 million of available funding per year and we estimate that if every qualified first-time home buyer applied for this program, there would only be enough funding for 1 in 10 people. If you wish to take advantage of the FTHBI and plan on buying in the near future (you can only apply for the program once your purchase offer on a property is accepted), reach out to your mortgage professional and put together a plan to leverage this new incentive before the funding is depleted.