In this year’s Budget, the federal government introduced a new program – the First-Time Home Buyer Incentive (FTHBI), to help qualifying first-time home buyers get into the housing market. Under that program the Canada Mortgage and Housing Corporation (CMHC) (an agency of the federal government) will add a specified amount to the down payment made on a home purchase by a qualifying buyer, with the effect of reducing the amount of the monthly mortgage payment required of the new home owner.
Regrettably, few details of the new program were provided in the Budget papers, and additional details have been released on a somewhat piecemeal basis since then. CMHC recently issued a press release which indicates that the FTHBI will launch (barring unforeseen circumstances) on September 2, 2019 and will be available for home purchases which close on or after November 1, 2019.
Along with that press release, CMHC did announced some additional program details and, based on that information, the structure of the program will be as follows.
Any applicant to the program must be a Canadian citizen, permanent resident or non-permanent resident who is legally entitled to work in Canada. As well, prospective borrowers must, in order to qualify, have a maximum annual qualifying income of $120,000.
As the program name implies, program participants must be first-time home buyers (or, in the case of a couple, at least one of them must be a first-time home buyer). However, the definition of first-time home buyer is somewhat more expansive than might be expected. For purposes of the FTHBI, someone will be considered a first-time home buyer if he or she meets any of the following criteria.
- The applicant has never purchased a home before.
- The applicant has gone through a breakdown of a marriage or common-law partnership (even if he or she doesn’t meet the other first-time home buyer requirements).
- In the last 4 years, the applicant did not occupy a home that was owned by the applicant or his or her current spouse or common-law partner.
The four-year clause means that even individuals (or their spouses) who have previously owned a home may qualify for the FTHBI if their period of home ownership ended within the required time frame. The required 4-year period begins on January 1 of the fourth year before the year the new home was purchased, and ends 31 days before the date of that purchase. That computation is more easily understood in the examples provided by CMHC.
- If you purchase a home on March 31, 2019, the 4-year period begins on January 1, 2015 and ends on February 28, 2019.
- If you sold your home you lived in in 2013, you may be able to participate in 2018 or if you sold the home in 2014, you may be able to participate in 2019.
WHAT KINDS OF PROPERTIES QUALIFY FOR THE FTHBI?
Generally, most types of housing will qualify for the FTBHBI. More specifically, eligible properties include 1 to 4 unit residential properties which include new construction, re-sale homes and new and re-sale mobile homes.
In order to qualify, a property must be located in Canada and must be suitable for year-round occupancy.
HOW MUCH WILL CMHC CONTRIBUTE?
Under the rules which apply to all homebuyers, the minimum required down payment is 5% of the first $500,000 of the home purchase price and 10% of the portion of that purchase price over $500,000.
Where an applicant qualifies for the FTHBI, CMHC will provide additional funds to augment the applicant’s existing down payment. The amount of those additional funds is 5% or 10% of the purchase price, depending on the type of property purchased. Specifically, the incentive by property type is:
- 5% for a first-time buyer’s purchase of an existing resale home; or
- 5% for a first-time buyer’s purchase of a new or re-sale mobile/manufactured home; or
- 5% or 10% of a first-time buyer’s purchase of a newly constructed home.
The total borrowing amount (first mortgage plus incentive amount) is capped at four times the applicant’s annual income. Since the program is available only to those having an annual income of up to $120,000, the maximum total borrowing amount would therefore be $480,000.
Any funds advanced under the program will become a second mortgage on the property. No interest is charged and no regular payments (i.e. mortgage payments) are required on such funds.
WHAT ARE THE REPAYMENT REQUIREMENTS?
Participants in the program are required to repay the incentive amount after 25 years, or when the property is sold, whichever is earlier. Participants can also repay the incentive amount earlier without incurring any pre-payment penalty.
WHAT HAPPENS WHEN THE VALUE OF THE PROPERTY CHANGES?
One of the questions which arose immediately when the FTHBI was announced was how increases (or decreases) in the value of the purchased property would be handled. The short answer is that the repayment amount will be equal to the same percentage of the value of the property at the time of repayment as was originally provided to the home buyer. So, if a property owner was provided with 10% of the property value at the time of purchase, he or she must repay 10% of the value of the property at the time of repayment. Effectively, the government of Canada will share in both the upside and the downside of the property value on repayment.
The application of this rule in a situation in which the property value has increased and one in which it has dropped is illustrated in the following examples adapted from those provided by CMHC.
- Anita wants to buy a new home for $400,000. Under the First-Time Home Buyer Incentive, Anita can apply to receive $40,000 in a shared equity mortgage (10% of the cost of a new home) through the program. Years later, Anita has sold her first home for $420,000. At this time, she would now have to repay the original incentive she received as a percentage of her home’s current value. This would result in Anita repaying 10%, or $42,000 at the time of selling her house.
- John wants to buy a newly constructed house for $350,000, and he can receive a 10% incentive, or $35,000. Years later, John has decided to sell his home, but it is now worth $320,000. When he sells his house at the price of $320,000, John will have to repay the original incentive he received as a percentage of his home’s current value. This would result in John repaying 10%, or $32,000 at the time of selling his house.
There are still details of the FTBHI which have not yet been announced – in particular, details of the application process. However, individuals can sign up on the CMHC website to receive e-mails updates as future announcements are made. That sign-up is available at https://www.cmhc-schl.gc.ca/en/nhs/canada-first-time-home-buyer-incentive, and more information on the program generally can be found at https://www.placetocallhome.ca/fthbi/first-time-homebuyer-incentive.cfm.
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.