With the new first-time homebuyers shared-equity program in place for over a month now, we have had the opportunity to utilize the program for several of our clients. This has given us some additional insight about the situations this program is right for and what to watch out for when considering the incentive as a first-time buyer.
What is the First-time Homebuyer Incentive?
As a reminder for those who may not have heard of the program, this incentive involves the Government of Canada contributing an additional amount to go towards the purchase of your home (on top of your own down payment). This decreases your total mortgage loan, which, in turn, decreases your monthly mortgage payments. The amount they will contribute is dependent on the type of purchase you are looking to make:
- For existing homes, the government will contribute an additional 5 percent towards your down payment
- For new builds, they will contribute an additional 10 percent
What to Watch out for:
1. If you are looking to buy a fixer upper and complete extensive renovations, the government would benefit from the money you put in to increase the value of your home.
- When you decide to pay out the government’s contribution, it has to be paid in a lump sum (which happens upon the sale of the home or at any time of your choosing up to 25 years). The amount owing is based on the total current value of your home at the time you pay it back, not what the government contributed when you purchased the home.
- For example: Let’s say you purchased a home for $300,000 and the government contributed 5 percent (which equates to $15,000). You decide to remodel the kitchen and finish the basement a few years after moving in. This brings the total value of your home to $400,000. If the government contributed a 5 percent down payment to your home when you bought it, they would be entitled to 5 percent of what your home is worth after renovating. In this case, you would have to pay them back $20,000 instead of what they paid in.
2. If you are hoping to purchase a starter home with a plan to move into something bigger in five years, paying back the government contribution would eat up a significant amount of equity in your home.
- The government contribution to your down payment does not port to a new home if and when you sell your property. Since you would have only been making payments for 5 years, you would have to pay a significant portion of your equity back to the government upon selling your home. Don’t forget that you will also incur REALTOR® fees upon the sale of your home.
3. The amount you will be able to qualify for may be a concern if you are a new graduate, just starting at a new job or are otherwise receiving a relatively low wage in comparison to home prices where you live.
- Remember, the maximum purchase price you are able to qualify for under this program in Alberta is four times your income level, so if you were making $40,000 per year you would only qualify for a purchase price up to $160,000. Without using the program, you may be able to qualify for more.
4. If you are looking to refinance to help pay off additional high-interest debts down the line, this program would affect the amount of equity you are able to access.
- You will have to pay out the government’s contribution upon refinancing, since this involves replacing your existing mortgage with a new one. Essentially, this means you would only be able to access between 70-75 percent of your equity depending on whether the home was a new build or you purchased an existing home.
5. Because the mortgage has to be insured (which means your down payment and the government’s contribution combined can only total up to 19.99 percent), you also have to consider CMHC fees.
- This premium would also need to be paid out if you plan to sell the home or refinance your mortgage.
Who does this program benefit?
- Anyone looking to buy a house where they plan to stay long-term - at least 10-15 years
- A property that is already renovated and will not need significant improvements over the course of the mortgage.
- Anyone who would benefit from a slight decrease in their mortgage payment. For example, if you used your RRSPs to contribute your portion of the down payment, you could take the additional amount saved and build your RRSPs back up. Alternatively, you could use the amount and apply it to your mortgage (depending on your prepayment privileges) and this money would contribute directly to the principal amount of your mortgage. Over the long term, this would help you pay off your home faster as well as reduce the total interest paid on your mortgage.
- Although this program was not intended to help potential homebuyers qualify for a mortgage, it does help in a few select situations. Your Broker can help you determine if it would help you, specifically.
Curious if the program would benefit you as a first-time homebuyer? Leave us a comment below, or contact our office and our Brokers would be happy to assess your situation in a complimentary mortgage consultation.