Embarking on the journey of purchasing your inaugural home in Canada brims with excitement. Yet, this excitement can be tinged with financial concerns, particularly for middle-class citizens. The formidable interplay of soaring real estate prices, the heightened cost of living, and the looming presence of inflation can cast a daunting shadow, rendering the prospect of home ownership distant and formidable.
For those diligently economising in pursuit of their first home, a beacon of hope shines through through the government-administered initiative known as the “First Time Home Buyer Incentive”. This ingenious program extends a helping hand by augmenting your down payment through a calculated percentage.
For first-time home buyers, the Canadian government presents a shared-equity mortgage option that not only reduces monthly mortgage obligations but also sidesteps the necessity of inflating your down payment. Aiming to enhance accessibility and affordability, this incentive program was conceived to financially assist Canadians in purchasing homes, with the government contributing to a portion of the home payment.
This article unravels all the essential information about the First Time Home Buyer Incentive. We will discuss the advantages and limitations, the eligibility criteria, and the application process for the First Time Home Buyer Incentive.
What is First Time Home Buyer Incentive?
The First Time Home Buyer Incentive (FTHBI) is a program facilitated by the Government of Canada and managed by the Canada Mortgage and Housing Corporation (CMHC). This initiative aims to assist eligible home buyers in Canada by offering them an interest-free loan equivalent to 5% or 10% of the purchase price of their home.
Introduced in 2019, this program provides first-time home buyers with a shared-equity mortgage in collaboration with the Canadian government. Through this arrangement, the government extends loans to individuals and, in exchange, becomes a stakeholder in the potential gains or losses in the property’s value.
By participating in the First Time Home Buyer Incentive, individuals embarking on their first home purchase can reap significant benefits through reduced monthly mortgage payments, presenting an opportunity for substantial savings.
How Does the First Time Home Buyer Incentive Work?
The First Time Home Buyer Incentive is a program designed to assist Canadians who are purchasing their first home. Those who meet the eligibility criteria can benefit from receiving financial support from the government, which is provided as either 5% or 10% of the home’s purchase price.
Unlike a traditional loan structure, this incentive operates uniquely. It involves a secondary mortgage placed on the title of the property. Importantly, this secondary mortgage does not require regular principal payments, and it comes with a set of favourable terms. The loan is interest-free, meaning there are no ongoing interest charges or prepayment fees.
The government’s involvement in the property is based on a shared equity mortgage. This signifies that they share in the property’s investment but do not assume ownership or full responsibility. It’s crucial to note that while often referred to as an “incentive,” this isn’t a grant in the traditional sense; rather, it’s a loan.
Repayment of the provided incentive becomes due in specific scenarios. One option is repayment upon selling the home, whereby the loan amount is settled using a portion of the sale proceeds. Alternatively, the loan repayment becomes due after 25 years if the home is not sold.
To illustrate the mechanics of this program, consider an example where you find your ideal home, a newly constructed property valued at $450,000. Assuming a standard 5% down payment requirement, you must provide $22,500 upfront. With a mortgage requirement of $427,500, your total financing would stand as such.
However, with the First Time Home Buyer Incentive, an additional avenue for financing opens up. Through this initiative, you can secure an interest-free loan of $45,000 (representing 10% of the property’s value) from the government. This loan integrates into your mortgage structure, leading to a new mortgage value of $382,500. As a result of this adjustment, your monthly mortgage payments are effectively reduced.
First Time Home Buyer Incentive (FTHBI) Eligibility Requirement
The First Time Home Buyer Incentive is aimed at middle-class home buyers who might need a boost in acquiring their first home.
To qualify for the First Time Home Buyer Incentive, you must meet a few criteria to determine your eligibility.
- You must be a first-time home buyer
- You must be a citizen of Canada, a permanent resident, or a temporary resident with a work permit in Canada
- You are buying a home in Canada, and you will live in it all year round
- You must have a combined family annual income of less than $120,000 ($150,000 for Toronto, Vancouver, and Victoria)
- You have at least 5% of the property’s value for a down payment.
- Your mortgage is a maximum of 4 times your qualifying income (4.5 times for Toronto, Vancouver, and Victoria)
- The mortgage must be greater than 80% of the property’s value i.e. your down payment must be less than 20%.
Does My House Qualify for First Time Home Buyer Incentive?
Both newly constructed and resale residential homes are eligible for First Time Home Buyer Incentive. The home can include up to four units.
Other eligible homes include:
- Single-family homes
- Duplex, triplex, and fourplex
- Mobile/manufactured home
- Semi-detached homes
- Condominium units
- Townhouses
The property you plan to buy must be in Canada, suitable, and available for owner-occupied, full-time, and all-year occupancy. The home cannot be used as an investment property but only for residing.
Applying For The First Time Home Buyer Incentive (FTHBI)
When you have been pre-approved for a mortgage, found your dream home, and determined that you are eligible for the First Time Home Buyer Incentive, you can apply.
To apply, fill out these two application forms and give them to your lender when completed.
FTHBI – SEM Information Package (PDF)
SEM Attestation and Consent Form (PDF)
Your lender will submit the application for you. You can give the final signed copy to your solicitor to retain on your behalf.
When your application is accepted and you receive your acceptance, Call FNF Canada to activate your incentive and provide your lawyer’s name.
You can call FNF Canada at 1-(855) 844-4535 at least two weeks before your closing date.
How Much Money Can I Get as a First-Time Home Buyer?
You can receive a fixed amount of money. The amount you get from the First Time Home Buyer Incentive program depends on several factors.
Depending on the type of property you are purchasing, you will receive either 5% or 10% of your home purchase price. Your percentage depends on what kind of home you want to buy.
Type of property Percentage of Incentive Newly constructed home 5% or 10% Re-sale (existing) home 5% Mobile/manufactured home (new and re-sale) 5%
Paying Back an FTHBI Loan
Since the First Time Home Buyer Incentive is not a grant but a loan, you must pay it back. You will pay back the First Time Home Buyer Incentive in full after 25 years or whenever you sell your home, whichever comes first.
However, as an added advantage, you can pay back your First Time Home Buyer Incentive anytime you want without worrying about a prepayment penalty.
If you hit a big chunk of change, like an inheritance, lottery winnings, or a raise, you can pay your incentive in total if you want. Just know that any change in the value of your home will impact the amount you will have to pay back.
Knowing that you will be paying back your incentive to CMHC, not your mortgage lender, is essential.
How Much Do I Pay Back?
When you repay your loan, you will pay back the same percentage you borrowed, not the same amount.
Unlike traditional loans from financial institutions, where you borrow money and you have to pay back the same amount plus any interest the money has accrued over time.
With the First Time Home Buyer Incentive, you will only pay back the original percentage (either 5% or 10%) of the fair market value of your home up to a certain maximum.
For example, if you receive 10% for a home you purchased for $400,000, the government gives you a loan of $40,000.
Now that you want to sell your home after 25 years, if the appraised value has gone up to $700,000, you will pay back 10% of the new market value of your home ($700,000) = $70,000
However, if the value of the home has increased astronomically to, say, $2,000,000, then your loan repayment will be calculated differently such that we first calculate the allowable maximum gain, which is calculated at an 8% annual interest rate as follows:
The original incentive loan + an additional maximum gain which is the 25 years accumulated simple interest on the incentive at an 8% annual rate i.e $40,000 + ((40,000*8*25)/100) = $40,000 + $80000 = $120,000.
The allowable maximum is $120,000; therefore, you will pay $120,000 back instead of $200,000 (i.e 10% of $2,000,000)
The same rule applies when the fair market value of your home decreases. For example, if the appraised value after 25 years goes down to $200,000, you will repay $20,000 (10% of $200,000) instead of the $40,000 you borrowed.
However, let’s say just after 2 years of taking the loan, you sell the house, and the fair market value of your home is 200,000; then, instead of paying back $20,000, you would pay back the allowable maximum loss: $40,000 – ((40,000*8*2)/100) = $40,000 – $6,400 = $33,600.
In all, if your home goes up in value, you will pay more than you received from the government, and if your home value goes down, you will pay less.
Advantages of the First Time Home Buyer Incentive
- Interest-Free Borrowing: With the First Time Home Buyer Incentive, you can borrow money at a 0% interest rate. This loan won’t burden your monthly finances, providing you with financial relief.
- Flexibility: Enjoy the freedom to repay the loan in full at any time, even before the 25-year period concludes. This allows you to exit the program before your home’s value increases significantly.
- Expedited Homeownership: The First Time Home Buyer Incentive accelerates your journey towards owning your ideal home. By reducing your mortgage expenses, it helps you achieve homeownership more swiftly compared to other programs.
Disadvantages of the First Time Home Buyer Incentive
- Repayment Implications: The shared-equity aspect of the First Time Home Buyer Incentive comes with a drawback – you’ll end up repaying a larger sum than what you initially borrowed from the government.
- Appraisal Expenses: If you decide to sell your home while still participating in the program, you’ll be required to cover the costs of a professional appraisal. This appraisal determines your home’s current market value.
Alternatives to First Time Home Buyer Incentive
While the First Time Home Buyer Incentive is unique in its structure, other programs are available for first-time home buyers looking for a boost.
There are other grants and assistance programs designed with first-time home buyers and their needs in mind, especially if you want to buy your first home in Canada’s most expensive real estate markets- Ontario and British Columbia.
The First Time Home Buyer Incentive program is one of many other programs for first-time home buyers. Others include the RRSP home buyer plan, the First Time Homebuyer Tax Credit, and the GST New Housing Rebate.
Also, the Canada Greener Home grants program is available for homeowners who want to make their homes energy efficient.
While these programs may not help you qualify for a mortgage, they would help reduce the overall cost of home ownership.
Final Thoughts on First Time Home Buyer Incentive
If you are eligible for the First Time Home Buyer Incentive, buying your first home might be more accessible and affordable than you imagined.
The First Time Home Buyer Incentive is designed to lower your mortgage payment without increasing your down payment.
While the incentive program is interest-free, remember that the amount you will pay back will fluctuate with your home’s market value, and you might have to pay more than you originally borrowed.
FAQs on First Time Home Buyer Incentive
What is the minimum down payment for a first-time home buyer in Ontario?
The minimum down payment for a first-time home buyer in Ontario and across Canada is 5%.
How much money should I save before buying a house in Canada?
Before buying a home in Canada, save at least 5% for your down payment and around 3% of your home’s purchase price to cover closing costs, property appraisal fees, notary fees, title insurance, and more.
How does the first-time home buyer incentive program work in Canada?
The First-Time Home Buyer Incentive helps Canadians to purchase their first home. The incentive program offers 5 or 10% of the purchase price of their dream home to put toward a down payment. This money added to their down payment lowers the mortgage carrying costs, making homeownership more affordable for many Canadians.
Who qualifies for first-time home buyer Canada?
To qualify, you have to be a citizen of Canada, a permanent resident, or a temporary resident with a work permit in Canada. You must earn less than $120,000 and have the minimum qualifying down payment.
What is the first-time home buyer incentive in Ontario?
The First-Time Home Buyer Incentive in Ontario is a shared-equity mortgage with the Government of Canada, which offers citizens of Canada, 5% or 10% for a first-time buyer’s purchase of a newly constructed home and 5% for a first-time buyer’s purchase of a resale home.
