The Federal Government, in an attempt to stimulate new construction starts and ease the barrier to entry for those on the fringe of qualifying for home ownership, announced earlier this year their intent to start a billion-plus dollar fund aimed at first time home buyers. Details have been scarce with the Government and CMHC trying to figure out exactly how the program will look come it’s expected launch in the fall.
For updates to the fund, criteria or other information regarding the program, it’s always best to check with the source:
What follows is my commentary on the most recent update delivered to my brokerage by a representative of CMHC on July 9th, 2019.
The incentive program is, in essence, a fund that is currently set to last to a maximum of (a) $1.2B (billion) distributed or (b) three years. It is meant to work in conjunction with the existing First Time Home Buyer program that allows individuals or couples who qualify as first time home buyers to pull funds from their RRSP to use towards the purchase of a qualifying home. This leads us to our first important similarity – the qualifications for who is a first time buyer under the Incentive program are the same criteria the CRA uses to determine who is eligible for the RRSP program.
To qualify, above and beyond being classified as a first time home buyer, ALL parties to the transaction, meaning all those borrowing or co-signing may only make a COMBINED income of no more than $120,000 / year. The co-signer point is worth noting.
Now the money borrowed, meaning the amount of the convention mortgage PLUS the money from this program is limited to four times (4X) the combined income noted above.
Now the amount you may be eligible for will be either 5% (resale) or 10% (new construction). Again the larger amount for new construction is another measure to help incent new builds.
The example on the CMHC website uses all the maximums, so I’ll do the same here:
Maximum income: $120,000
Maximum mortgage + incentive: $480,0000
Now we haven’t talked about the down payment, which is going to add yet another level of complexity. The catch (if there is one) is that the CMHC is the one tasked with administering this program, which means that you need to have a CMHC insurable mortgage, which means that the maximum down payment can be 19.99% (any mortgage under 20% is CMHC insurable). Therefore, using the 10% for new construction maximum you are left is a maximum down payment of 9.99% coming from your own funds (including RRSPs as noted above).
The Incentive dollars counting towards two different limits (the total borrowable funds but also the total maximum down payment) allows us to figure out our ceiling for a purchase price.
Again using the maximum of $480,000 (mortgage+Incentive) and assuming the maximum of that combined making up 85.01% (80.01% mortgage + 5% Incentive for resale) the maximum purchase price comes in around $564,639. That of course assumes you can qualify for the mortgage.
Here’s a table to make it a bit more clear and so you can find something more in line with your own situation since making exactly the maximum eligible is probably not going to be the most common:
Using the most extreme maximum example, you must:
- Qualify as a first time home buyer
- Have the 14.99% down payment ($84,639.39)
- Qualify for a mortgage of 80.01% ($451,767.67)
Free Money is Good, no?
Now, hopefully you’ve figured out whether you qualify for this program and how much house you can afford. Great. Now time to ask the question, should you even bother?
There are a couple of things worth noting. First, this is an INTEREST-FREE EQUITY LOAN. In layman’s terms – this money is a loan that is tied to the value of the property. Property goes up in value, the amount you owe goes up. Property goes down in value, the amount you own goes down.
The money is not repayable in chunks, full sums ONLY. The amount you owe will be based on the property value at the time you make the repayment. You may repay at any time (in full only) but must pay at the end of the 25 year amortization period OR when you sell or otherwise dispose of the property – whichever comes first.
You sell the house for one reason or another, or the property burns down and insurance pays out .. great .. in either case you have cash on hand to cover the debt.
What happens at the end of 25 years if you’re still living in the house? The full amount becomes immediately due. Don’t have the cash saved up? The only answer the CMHC rep was able to provide is that they would assess inability to pay on a case by case basis. Protip: plan on selling OR have a savings plan in place from day 1.
The presenter did elude to CMHC having an appraisal done on the property in these situations (at the home owners expense). So it won’t be directly tied to your assessment from MPAC just as an FYI (and because I figured we could use some more acronyms here).
If using this program and you buy a house for $500,000 – whatever equity stake you took from the government (5% or 10%) it’s that stage (the percentage) you pay back on the sale. Using 10% on a $500,000 purchase – if you then sell that house for $650,000 you will owe the government $65,000! If you live in the house for 25 years and the valuation comes back at $1,000,000 – you will then suddenly have a bill for $100,000!!! Buyer, I mean borrower beware.
As always, any other questions feel free to reach out 🙂
Gordon J. Wallace, Sales Representative
RE/MAX Real Estate Centre Inc., Brokerage