First-time home buyers and the new federal government incentive

July 12, 2019

When the federal government tabled its 2019 budget in March, it introduced a raft of measures aimed at helping Canada’s financially squeezed middle class. These included new programs and funding designed to make housing more affordable, through incentives to first-time buyers and an increase to the Home Buyers’ Plan from $25,000 to $35,000.

Interest-free loans, with caveats

One of the new measures is the First-Time Home Buyer Incentive, to be administered by the Canada Mortgage and Housing Corporation (CMHC). The program takes effect on September 2, 2019, and offers eligible first-time buyers an interest-free loan of up to 10% of the price of a newly built home, or 5% on a resale purchase.

The government will share in any gains to, or losses from, the value of your home. You would repay the loan (adjusted to reflect any increase or decrease in the home’s value) to the government when you sell or after 25 years, whichever is sooner.

How the incentive works

The incentive will be available only to those with an annual household income of up to $120,000 and will apply only to mortgages of less than four times an applicant’s household income. In other words, it will be available only to a first-time home buyer who takes a mortgage of $480,000 or less ($120,000 x 4), which translates to a home price of up to $505,000, assuming a 5% down payment.

Let’s see how this would work. Take Dr. Walker, PGY3, who is looking to buy a newly built home for $450,000. Her 5% down payment is $22,500, and she needs a mortgage of $427,500.

Through the First-Time Home Buyer Incentive, the government will loan her $45,000 interest-free (10% of $450,000). Her mortgage will now be $382,500 ($427,500 minus $45,000), reducing her monthly mortgage payments.

If the value of the house rises:

Ten years later, Dr. Walker sells her home for $490,000. She will need to repay the incentive as a percentage of the home’s current value, which would be 10% of $490,000, or $49,000 (instead of the $45,000 that she originally borrowed).

If the value of the house falls:

Imagine that 10 years later, the value of Dr. Walker’s home has dropped to $410,000. Again, she would need to repay the incentive as 10% of the home’s current value, which would be $41,000 (instead of the $45,000 that she originally borrowed).

At any time, Dr. Walker could repay the loan in full without a pre-payment penalty. Her repayment would be 10% of her home’s current fair market value.

Critics’ responses

Critics question how many Canadians will actually benefit from the incentive. While a home price of up to $505,000 might sound like a lot, consider that in Vancouver and Toronto — Canada’s two hottest housing markets — the average price of a detached house is well north of $1 million, and the average price of a condominium is more than $600,000.

Some housing market analysts say that the incentive program could have the unintended consequence of pushing housing prices even higher. Remember, eligible first-time buyers with the required  minimum down payment for a home would have even more purchasing power when making offers, courtesy of their interest-free government loan.

The CMHC responded to this inflation-centred concern several weeks after the incentive program was unveiled. “We have carefully targeted the [program] to help younger Canadians having trouble affording home ownership,” the Crown corporation said in a statement. “We do not expect the [program’s] inflation effect to be beyond a maximum of 0.2%–0.4%.”

Not a sure thing yet

Although the incentive program is slated to come into effect on September 2, 2019, it’s possible that the whole exercise could prove pointless. Should Justin Trudeau’s Liberal Party fail to win a second majority in the October federal election, their new housing measures could very well end up on the cutting-room floor.

References

1. Francis Fong, “Ottawa’s First-Time Home Buyer Incentive Is Flawed,” Policy Options, May 7, 2019.

2. Finn Poschmann, “Is Elevating Housing Prices a Good Way to Make Homes More Affordable?” The Globe and Mail, April 30, 2019.

The information contained in this document is not intended to offer foreign or domestic taxation, legal, accounting or similar professional advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals. Incorporation guidance is limited to asset allocation and integrating corporate entities into financial plans and wealth strategies. Any tax-related information is applicable to Canadian residents only and is in accordance with current Canadian tax law including judicial and administrative interpretation. The information and strategies presented here may not be suitable for U.S. persons (citizens, residents or green card holders) or non-residents of Canada, or for situations involving such individuals. Employees of the MD Group of Companies are not authorized to make any determination of a client’s U.S. status or tax filing obligations, whether foreign or domestic. The MD ExO® service provides financial products and guidance to clients, delivered through the MD Group of Companies (MD Financial Management Inc., MD Management Limited, MD Private Trust Company, MD Life Insurance Company and MD Insurance Agency Limited). For a detailed list of these companies, visit md.ca. MD Financial Management provides financial products and services, the MD Family of Funds and investment counselling services through the MD Group of Companies.

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