First Time Home Buyer Incentive
This week the government provided more details about the new First Time Home Buyer Incentive that’s launching September 2, 2019 with anticipated funding of the program to begin November 1, 2019. (meaning the possession date must be Nov 1 or later)
The program is designed for First Time Home Buyers (FTHB) with total income under $120k. The total borrowing amount is limited to 4x the purchasers total income.
The First Time Home Buyer has to provide 5% from their own resources (savings, gift, etc.). The government (CMHC) will then provide them with an interest free loan for an additional 5% for a resale home purchase or 10% for a new home purchase.
For example: A couple wishes to purchase a home under this incentive program. One partner earns $40k and the other earns $60k, then the total mortgage that they can qualify for is $400,000 under the incentive program. This would equal a purchase price of $431k for a resale home or $457k for a new home.
The interest free loan must be repaid after 25 years, or upon sale of the home, which ever comes first.
The amount to be repaid is determined by the sale price. That is, the First Time Home Buyer will pay 5% or 10% of the sale price back to the government (based on the original incentive).
For example. FTHB purchases for $350k and receives 5% incentive ($17,500), then sells the home for $400k. The FTHB must repay $20k to the government.
Another example, FTHB purchases for $350k and receives 5% incentive ($17,500), then sells the home for $300k. The FTHB must repay $15k to the government.
One question I get from clients is whether it’s worth it or not? Let’s look at the numbers…
Using the same example above, clients who earn $100k/year purchase a resale home for $431k with 5% down ($21,550).
Without the Incentive:
- Mortgage Payment (principle & interest) is $1,991.91/month
- Mtg Balance After 5 years: $363,223.54
With the Incentive:
- Mortgage Payment (principle & interest) is $1,870.74/month
- Mtg Balance After 5 years: $341,128.67
- Payment difference: $121.17/month ($7,270.20 over 5 years, 60 payments)
- Principle reduction difference: $22,094.87 (less incentive is $544.87)
- Total savings of approx $7,815.07
If these clients decided to sell after 5 years, they would have to pay back 5% of the sale price. If the sale price is less than the original purchase price, then they pay back less than the original incentive to the government. If the sale price is more, then they pay back more.
By utilizing the incentive, the clients would benefit by approx $7,800 over 5 years. (saved monthly payments and better principle reduction).
- If the home increases in value by approximately 31.9% (or 6.38% per year) over 5 years, then when sold, they would repay the original incentive, they would also pay back their savings of $7,800 and effectively break even.
- If the home increased in value by less than 31%, then they would make a positive return
- If their home increased in value by more than 31% then they would pay the government back more than they saved.
When I evaluate the numbers, it seems to me that First Time Home Buyers benefit from this incentive, provided they qualify. If it’s available to them, then they should take advantage of it.
A huge Thank You to Steven Crews of Verico iMortgage Solutions for sending over this information. If you have any questions about this program, or any other, you can contact Steven at 403-870-2669 ~ and be sure to let him know that Kelly Heintz sent you!