The Canadian housing market has become one of the hottest real estate markets in the world, particularly in large cities such as Toronto and Vancouver. In fact, home prices have increased by 219% since 1994. In order to alleviate some financial stress on Canadian home buyers, the government has implemented a number of incentives. In September 2019, the First Time Home Buyers Incentive (FTHBI) was introduced to Canadians by the government. In this guide, we’ll explore how the FTHBI works, eligibility requirements and other options available.
What is the First Time Home Buyers Incentive?
The First Time Home Buyers Incentive is a program that helps qualified first time home buyers reduce their monthly mortgage payments without increasing their financial burden. The FTHBI is also known as a shared-equity program. What this means is the government shares gains and losses with new homeowners as it varies over time.
For eligible individuals, the government loans buyers 5% of the purchase price for resale homes or 10% for new properties. The financing from the government is estimated to save new homeowners about $100 to $300 a month. Interest is not charged on the loan and debtors do not have to make scheduled payments. However, the amount is still payable in the future.
Homeowners must repay the money loaned under the FTHBI either when they sell the home or after 25 years has passed. The repayment date is whichever comes sooner. There is a catch, the amount that is owed on the repayment date is not what was borrowed initially. Instead, homeowners must repay the same 5% or 10% share they initially received through the FTHBI, but the percentage is taken from the property’s current fair market value, not the value when it was purchased.
This is where the share-equity feature comes into play. If you make a gain on your property, the government makes a gain on their loan and vice versa. In other words, the government takes a share of your property as an equity investment.
Not everyone is eligible for the First Time Home Buyers Incentive. As the name implies, you must be purchasing a home for the first time. There are a few other requirements to consider, as listed below.
- Qualifying Household Income Less Than $120,000. This income includes money earned from employment, self-employment, investments and rental income.
- Borrow Less Than Four Times Your Qualifying Income. The maximum qualifying income is $120,000 which means the most anyone can borrow under the FTHBI is $480,000 ($120,000 x 4).
- You Can Afford the Minimum Down Payment. The minimum down payment is 5% of the first $500,000 of the purchase price and 10% on any amount above that threshold. There is a maximum down payment to consider as well which is 20% of the home’s purchase price. The max rule is put in place to ensure that all mortgages funded under the FTHBI is insured by the Canada Mortgage and Housing Corporation (CMHC).
Other Canadian First Time Home Buyer Programs
If you live in a large city where home prices are particularly inflated, the FTHBI withdrawal limits might seem silly. In addition, if your household income is well below $120,000, you won’t be able to take out a ton of money which means that it won’t make a difference in your ability to purchase a home in a large city. On the other hand, if you live in rural Canada, this program can make or break your ability to purchase a property.
Another consideration is the repayment timing. Most people purchase a home for long term purposes which means that you’ll likely be repaying the FTHBI benefit back in 25 years. Often, that is the time that people plan to retire. Paying a hefty lump sum at that time can be unfavourable.
If you decide that the FTHBI program isn’t right for you or you simply want to understand what else is out there, check out the other first time home buyer programs available in Canada below.
- Government Investment Accounts. To help you save for a down payment and other costs of homeownership, consider utilizing government investment and tax-sheltered accounts. The Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) are the most commonly used options.
- Home Buyers’ Plan (HBP). The HBP allows Canadians to withdraw up to $35,000 from RRSP accounts tax-free to assist with the purchase of your first home. Keep in mind that the HBP is considered a loan from your RRSP account which means that repayment rules apply.
- Home Buyers’ Amount Tax Credit. Canadians who purchase their first home are eligible for a tax credit of up to $750 in the tax year that they bought the property.
- Tax Rebates. Some Canadians will be eligible for land transfer tax and GST/HST new housing rebates.