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First-Time Home Buyer Incentive: What you need to know

Young parents with two  children speaking with a female professional.

If you’re looking to buy your first home, you may have heard of the First-Time Home Buyer Incentive, a program introduced by the federal government in September 2019 that’s designed to make housing more affordable. The government also increased the RRSP withdrawal limit under its Home Buyers’ Plan from $25,000 to $35,000.

Interest-free loans, with caveats

The First-Time Home Buyer Incentive is administered by the Canada Mortgage and Housing Corporation, and it offers eligible first-time buyers an interest-free loan of up to 10% of the price of a newly built home, or up to 5% on a resale purchase. What’s more, there are no principal payments required on this portion.

The caveats? The government will share in any gains to, or losses from, the value of your home. You are required to 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 First-Time Home Buyer Incentive works

The incentive is a shared-equity mortgage, which means that the government has a shared investment in your home. The incentive is available to those with an annual household income of up to $120,000 and applies only to mortgages of less than four times an applicant’s household income.

In other words, you would qualify only if your household earns $120,000 or less, and if you take a mortgage of $480,000 or less ($120,000 x 4). This 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.

What happens if the value of the home 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 borrowed).

 Home price

10% interest-free loan

 Bought for $450,000

 Borrowed $45,000

 Sold for $490,000

 Repaid $49,000

What if the value of the home 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 borrowed).

Home price

10% interest-free loan

Bought for $450,000

Borrowed $45,000

Sold for $410,000

Repaid $41,000

Will the incentive help physicians?

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.

Since the incentive is available only to Canadians with an annual household income of up to $120,000, it will benefit only certain segments of the physician population: residents, new-in-practice and part-time.

The home price limit may be problematic, too. While a 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.

Whether to buy a home is one of life’s biggest decisions, and the right decisions about home ownership depend on your future goals and plans. A financial advisor can help you create a budget and determine how a mortgage would fit into your financial plan.

Talk to an MD Advisor* about what would be the best fit for your personal and professional plan.

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.