My previous professional experience at CMHC (Canada Mortgage and Housing Corporation) and AIG United Guaranty, which is now called Canada Guaranty, has taught me a great deal about various federal housing incentive programs. I will never forget the influx of new housing policies that were implemented in various real estate investment sectors. I also vividly remember their mechanisms to impact market movements either to boost 2005-2007, or to slow down during 2008-2009.
We are still witnessing the explosion of radical changes that have been introduced to mortgage rules, which caused a huge shock in the Toronto real estate market since 2017. There is now a 15% foreign buyers tax, a stress test for insured and then uninsured mortgages for purchase and refinance when changing the lender, a restriction of mortgage insurance to owner-occupied dwellings, shorter maximum amortization periods for a purchase price of less than $1 million, a minimum credit score of 600, a maximum 39% gross debt service ratio and 44% total debt service ratio calculated using the higher stress-test rates, an increase in the mortgage default insurance premium payable on insured mortgages to as high as 4%, just to name a few of these measures.
So I am truly impressed with the government’s most recent initiative called “The First Time Home Buyer Incentive” which becomes effective on September 2nd, 2019 and is administered by the Canada Mortgage and Housing Corporation (CMHC). This new program is of course aimed to make homeownership easier and more affordable to first time home buyers. I really feel this incentive program is a “real gift” to first home buyers, creating some hope and support to such an important and stressful process.
Let’s review the main highlights of ‘The First Time Home Buyer Incentive’ together:
- This incentive will be available to first-time homebuyers with qualified annual household incomes up to $120,000.
- It will allow eligible first-time homebuyers to apply for financing a portion of their home purchase through a form of a shared equity mortgage with the federal government for an insured mortgage through CMHC, Genworth or Canada Guaranty.
- The buyer’s mortgage plus the loan granted cannot be more than four times their qualified annual household income.
- The loan is interest free from a fund run by CMHC, matching the buyer’s down payment. The borrower can repay it at any time without a pre-payment penalty.
- The payment free loan is 5% for the purchase price on a re-sale home, or 10% on a new-build or pre-sale home. Doubling the incentive for purchasers of new homes would definitely encourage a supply new housing.
- This will help qualified first-time homebuyers purchase their first home with reduced monthly mortgage payment. As per CMHC, the borrowers will save up to $286 on a monthly mortgage payment for a $500,000 purchase of a newly built home.
- The loan, plus any equity uplift on that portion, is repayable to the government upon the sale of the home or after 25 years, or whichever happens sooner. The government shares in the upside and downside of the changes in the property value.
These are all great and very reassuring facts for the Canadian real estate market, especially for us in the GTA. It seems that the federal government is putting its own money at risk for several potential reasons, which could be:
- to recover Canadian real estate market
- to make up for the mess they recently caused
- to create certainty and stability
- to boost the real estate market
- to encourage the buyers who are currently on the fence to start investing
- to send a message to Canadians that we are at the bottom of the real estate market
The question is if the government is starting to invest in a potential equity uplift, shouldn’t we as well? I would love to hear your comments.
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With love and gratitude