What is the first time home buyer incentive in Canada?

Purchasing your first home can be a stressful process even if cash is of no concern. Facts being faced, however, funding for your new home is almost certainly a big hurdle for you to overcome. Add this to all the paperwork you’ll have to complete, the signatures you’ll need to pen, the furniture you’ll have to buy, how you’ll decorate that new powder room you didn’t have before, and…It’s a lot.

If only there was a way to make it just a little bit easier for new homebuyers to get a leg up. Alas, dear reader, there is! The Canadian government offers the first time home buyer incentive to qualifying buyers. This incentive increases your down payment, which, in turn, decreases your mortgage carrying costs, making owning a home just a little bit easier, especially over the long term. Interested in saving money? Read on.

What is the first time home buyer incentive?

The first time home buyer incentive is a crucial part of Canada's National Housing Strategy, which has some very lofty goals. With this strategy that started in April of 2019, the Canadian government has several key goals for the next decade:

• Cut chronic homelessness in half

• Remove 530,000 families from housing need

• Invest in the construction of up to 160,000 new affordable homes

In short, the overarching goal is to get Canadians into homes that they can afford. As part of the program, the Canadian government wanted to support average-income consumers on their path to homeownership. The program offers an interesting way for both the government and you, the homeowner, to benefit. The incentive supplies the purchaser with between 5 and 10% of the home’s mortgage as an additional down payment. The government then enters into a shared equity mortgage with the buyer. This means that the government shares in the ups and downs of the market with the homeowner. When the homeowner sells the home, or after 25 years, the government is repaid the original percentage on the new value of the home. This means that if the home value goes down, the government may get less than the original investment. It also means that they could get more if the home is worth more now than it was when it was purchased.

Let’s take an example here. Let’s say you purchase a home for $100,000 with a $20,000 down payment. You apply for the incentive; the government will give you between $5,000 and $10,000 to put toward your down payment. For the sake of this example, let's say $10,000. Your down payment is now $30,000, which lowers the overall amount you’ll have to finance. This, in turn, lowers your payments and reduces the amount of interest you’ll have to repay over the term of the mortgage.

Let’s say, then, that you decide to sell your home and move; you need more space, got a new job, or want to live closer to the beach, whatever it is. Good news! Your digs are now worth $200,000 and you agree to sell at that amount! When you sell your home, the government will take its 10% back, meaning they’ll get $20,000 of your sale.

Alternate universe time: Say you purchased your home for $100,000 and received 10% ($10,000) from the government. However, you only sell your home for $50,000. The government will still only take their 10% back which is now just $5,000. The government shares the ups and downs of the home’s value.

Sounds awesome. Pretty popular program right?

The goal of the credit is to make buying and owning a home in some of Canada’s major cities easier for more Canadians. It seems that Canadians aren’t necessarily interested in having the government own a piece of their home. In a recent survey, conducted from September to December of 2019, just a third of new applications for the program were from major cities. Victoria, one of British Columbia’s most popular living destinations, saw the fewest applications during the studied period.

It’s not clear why Canadians aren’t interested in the program. Its construction suggests that it benefits those who stay in their home for more than a few years, allowing the value to rise. Still, uptake remains low, which means there is plenty of incentive left for you, dear home buyer!

Super! How do I apply?

First, determine if you’re eligible and make sure you have an absolute, rock-solid understanding of what the incentive provides:

• 5% or 10% for a first-time buyer’s purchase of a newly constructed home

• 5% for a first-time buyer’s purchase of a resale (existing) home

• 5% for a first-time buyer’s purchase of a new or resale mobile/manufactured home

Next, make sure you meet some of the eligibility requirements:

• Your total qualifying income doesn’t exceed $120,000 or $150,000 in Toronto, Vancouver, or Victoria

• Total borrowing is no more than four times your income or 4.5 times in the same cities as above

• You or your partner are a first-time homebuyer

• You’re a Canadian citizen, permanent resident, or non-permanent resident authorized for work in Canada

• You meet the minimum payment requirements with traditional funds; these include savings, withdrawals from a Registered Retirement Savings Plan (RRSP), or a monetary gift from immediate family.

You can think of the incentive as an extra mortgage. So there may be additional fees, like lawyers fees or appraisal fees, to go along with the doubling.

The next step is to get pre-approved for a mortgage and get to house shopping! When you’ve found the home you want, you can apply for the incentive using the two forms found on the Place to Call Home website.

When you go to sell your home, you’ll need to repay the original investment from the proceeds (see above). You’ll also need to repay the investment if you port your mortgage to another home or if you want to buy out your co-owner; this might happen if you get a divorce.

Are there any other incentives?

There are a lot of other incentives for home buyers too, including the Home Buyers amount, mortgage tax deductions, green home improvements, and the Home Buyers Plan (HBP). The HBP allows you to borrow from your Registered Retirement Savings Account (RRSP) to fund your down payment. These incentives, albeit helpful, won’t fund the purchase of a home for you, though. Be sure that you have plenty of savings too for the down payment, any renovations or furnishings you will need, and the upcoming mortgage payments so that you can safely purchase your home.

Wrapping it up

The first time home buyer incentive is a great program that can make home ownership possible for Canadians. Be sure you’re eligible for the incentive and that you pay close attention to the requirements. It’s not free money, and you will have to pay it back. Also, make sure you take advantage of the other credits available for Canadians purchasing homes to give yourself every advantage as you begin this new journey.