First of all, there is no such thing as a free lunch!
In March 2019, Canadian Federal Minister of Finance, Bill Morneau, presented the Liberal government’s federal budget for fiscal year 20201. While the budget considers many wide sweeping changes to various hot topics for eligible voting Canadians, one important aspect that we believe that will affect our clients and their families in the immediate-term are the changes to the Home Buyers’ Plan (HBP) and the newly minted First-Time Home Buyer Incentive (FTHBI).
Before you rush out to take advantage of the FTHBI, please note that you might not qualify if you live in a large city with inflated real estate prices (Toronto, Montreal, Vancouver or Ottawa) and also that the FTHBI is NOT free money. The FTHBI is a form of a loan from the Government of Canada via the Canadian Mortgage and Housing Corporation (CMHC). The loan will need to be paid back, maybe at a substantial premium, if you sell your home in the future.
For both programs, the minimum requirements to qualify as a “first-time” home buyer are:
- you have never purchased a home before
- you’ve recently experienced a breakdown of a marriage or common-law partnership
- in the last 4 years, you did not occupy a home that you or you current spouse or common-law partner owned
We believe the changes will affect housing accessibility, but not change housing affordability. In essence, a potential first time homebuyer on the edge, may be able to now qualify for a mortgage under the new regime, but that may not necessarily mean that it is financially responsible to do so. Furthermore, the FTHBI proposed by the Liberal government will only help a small subset of the population, particularly those living outside of the hot real estate markets such as in the GTA — the place where the incentive is supposed to help most.
The table below provides the details on how this all works.
No changes have been made to the mortgage stress test so all interested home buyers will still need to qualify.
| Home Buyers’ Plan | First-Time Home Buyers’ Incentive | |
| What is it? |
· Eligible, first-time home buyers may withdraw up to $35,000 (previously $25,000) from their RRSP, tax free. · A qualifying couple may withdraw up to $70,000 ($35,000 x 2) · Simply put, you are borrowing from your future self (i.e. retirement income) in order to support your lifestyle today · The Government of Canada does not own a share of your home |
· CMHC will buy a share of the ownership of your home (up to 10% of the purchase price), lowering the amount required to be borrowed from a mortgage lender and lower the effective monthly payment. · The shared equity mortgage from CMHC means the government will participate in gains and losses on the home’s equity. Discussed below. · CMHC will provide: – 10% for a first-time buyer’s purchase of a newly constructed home – 5% for a first-time buyer’s purchase of a resale (existing) home – 5% for a first-time buyer’s purchase of a new or resale mobile/manufactured home |
| How can I participate? |
· Meet the criteria for first-time home buyer · If you have $35,000 in your RRSP and you are buying your first home in Canada, you qualify. |
· Meet the criteria for first-time home buyer · Your qualified annual household income must be $120,000 or less · You must have the minimum down payment: – 5% of the first $500,000 and 10% for any amount over. – The total amount put down (including FTHBI amount) must be less than 20% of the home purchase price. Why? Simple. The CMHC also wants to be sure to collect premiums from insuring the mortgage · The insured mortgage and FTHBI amount cannot be greater than four times the qualified annual income. |
| How do I get the money? |
· No limit · To get the money: Enter into a written agreement to buy or build a home. Note the home cannot be owned for more than 30 days before request to withdraw the funds. Complete CRA Form T1036 and submit to us |
· $480,000 is the maximum amount that can be borrowed to qualify for the FTHBI (4 x maximum annual income of $120,000) · To get the loan: Contact a mortgage lender to determine eligibility Fill in and sign application documents (see Source #2). Take the signed applications to your mortgage lender |
| How do I pay back the funds? |
· The amount withdrawn must be paid back to your RRSP over a 15-year period, or else it is included in income · Generally, the minimum amount must be repaid in equal, annual installments over 15 years. You can pay more than the minimum amount. · Repayments are not tax deductible as an RRSP contribution and do not affect RRSP room. · If you sell your home before the funds are repaid you don’t have to pay off the balance. Just continue with annual RRSP repayments per schedule |
· This is where things aren’t as rosy as sold by the Government · The loan amount must be repaid after 25 years or when the property is sold. Whichever comes first. · There are three potential situations that could arise. Let’s assume that Holly purchases a $400,000 new constructed condo in Toronto (if such a place existed). She receives the maximum 10% loan from the FTHBI in the amount of $40,000. This amount is the shared equity loan with the Government of Canada. She plans to hold the condo for 10 years at which time she will sell it and move to a larger home to support a growing family. In a rising real estate market (not good news) Historically, the % change in average 1 bedroom condo prices in Toronto for the last 10 years was about 195%3. Assume that this trend continues. The $400,000 condo that Holly purchased will be worth $780,000 fair market value in 10 years. Since the loan is a shared equity loan, the government gets to participate in the increase in equity of the condo. Therefore the $40,000 loan will now be a $78,000 loan (10% of fair market value) that will need to be repaid the instant the condo sells. In a falling real estate market If the real estate bubble pops or we enter another global recession, house prices will fall. In this situation, the initial $40,000 loan may be worth less when Holly decides to sell her condo. However, this would mean that she would have also lost equity in her condo. Not the most ideal situation either In a stable real-estate market The $40,000 will be paid back at face value. |
Sources
- https://www.budget.gc.ca/2019/docs/plan/chap-01-en.html
- https://www.placetocallhome.ca/fthbi/first-time-homebuyer-incentive
- https://toronto.listing.ca/condo-price-history.htm
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