When real estate prices ascend into the stratosphere, down payments are dragged along for the ride — creating a nightmare for first-time home buyers.
Prospective buyers might scrimp, save and sacrifice their way to a minimum down payment only to find out that the remaining mortgage amount more than lenders want to approve.
If cobbling together a larger down payment is the wall standing between you and your first property, the First-Time Home Buyer Incentive, a government-administered program that can increase your down payment by 5% or 10%, could provide the boost you need to get over it.
What is the First-Time Home Buyer Incentive?
The First-Time Home Buyer Incentive, or FTHBI, is a program administered by the Government of Canada whereby eligible home buyers are loaned either 5% or 10% of a home’s purchase price.
FTHBI funds bolster a first-time buyer’s down payment, giving them more equity at the outset of the mortgage and decreasing the overall size of the home loan provided by a lender.
The loan is interest-free and must be repaid in full within 25 years or when the house is sold, whichever comes first. Because the FTHBI is what’s known as a “shared equity” agreement, where each participant owns a percentage of the property, you’ll have to repay 5% of 10% of the property’s current market value, not the dollar amount you borrowed.
At first glance, the FTHBI seems like a golden opportunity for first-timers to get some much needed help. But the shared equity piece of the puzzle, as well as the eligibility requirements, really need to be understood before deciding if the program is right for you.
Who is eligible for the First-Time Home Buyer Incentive?
FTHBI applicants must:
- Be a Canadian citizen, permanent resident or legally authorized to work in Canada.
- Be a first-time home buyer, meaning you have never owned a home. Homeowners who have gone through a divorce or breakdown of a common-law partnership are also eligible, as are those who have not lived in a home that they owned (or that was owned by their spouse or common-law partner) for the last four years.
- Have enough funds to make the minimum down payment.
- Be pre-approved for a mortgage that is more than 80% of the property’s value, and thus covered by mortgage insurance.
How the First-Time Home Buyer Incentive works
Eligible home buyers can apply for the FTHBI once they’ve been pre-approved for a mortgage by a mortgage lender and found the house they want to buy.
Whether your FTHBI application is approved — and whether the program is useful to you — depends on two key factors:
- Location. In most parts of the country, the amount of the mortgage can’t be more than four times your qualifying income. In Toronto, Vancouver and Victoria, the limit is 4.5 times your income.
- Income. Your total household income can’t be greater than $120,000. In Toronto, Vancouver and Victoria, the cutoff is $150,000.
Let’s say you live in Ottawa and your household earns $120,000. Under the terms of the Incentive program, the mortgage can’t be more than four times your income. That means, the most you can borrow from a lender and still get approved for the FTHBI is $480,000.
If you live in Vancouver and earn the household max of $150,000, the most you could borrow from a mortgage lender and still be approved for the FTHBI program is $675,000.
If your household earns even a dollar more than those income thresholds, or there are no homes for sale within the price limits established by the government, your application for a FTHBI loan won’t be approved.
Those who manage to qualify for the FTHBI will receive one of the following:
- 5% of the purchase price of an existing home.
- 5% or 10% of the purchase price for a new construction home.
- 5% of the purchase price for a new or resold manufactured or mobile home.
Still intrigued? Great. There’s just the pesky little issue of paying back the government a percentage of your home’s value instead of the actual dollar amount you borrowed.
Paying back the First-Time Home Buyer Incentive
When it comes time to pay back your FTHBI loan, either when you sell your home or once the 25-year mark has passed, there is a good chance you won’t be paying back the same amount you originally borrowed.
Because you’ve entered into a shared equity agreement with the government, they essentially own 5% or 10% of your home.
When that home gets sold, hopefully for more than you originally paid, they’re entitled to extract the same percentage of equity, but it’s based on the current market value rather than the original purchase.
Here are a couple of ways it can play out.
Paying off the FTHBI loan when you sell
Let’s say you find a $500,000 condo in Vancouver, and you take out a FTHBI loan of 5% of the purchase price, or $25,000. Then, when you decide to sell the home 10 years later, it’s worth $800,000.
At the time of sale, you’ll owe the FTHI program 5% of the sale price — not the $25,000 you originally borrowed, but $40,000.
Keep in mind that the FTHBI also works the opposite way. If your home decreases in value while you own it, the 5% or 10% repayment amount will be less than what you originally borrowed. It’s not the greatest of consolation prizes, but the shared equity format means the government is taking the risk right along with you.
Paying off the FTHBI after 25 years of ownership
Another example: You hit the 25-year mark in the same Vancouver condo and it’s time to pay back your FTHBI loan, so you get a home appraisal to determine the property’s fair market value.
If it appraises at $1,000,000, you’d be required to pay back $50,000 instead of the $25,000 you originally borrowed through the FTHBI program.
Paying back more than what you borrow is bound to sound iffy to some people, but the program isn’t intended to help home owners maximize their profits. It’s about getting first-time buyers into a home when there are few other options. The FTHBI is really a second mortgage on your property, and mortgages aren’t free.
Paying off the FTHBI loan early
One way to avoid paying back more than you borrowed is by electing to repay your FTHBI loan as soon as you can. You can repay it at any time you like, without selling your home and without penalty. Your repayment will be based on 5% or 10% of the home’s value at the time, as determined by a professional appraiser
Will the First-Time Home Buyer Incentive save you money?
Starting off a home purchase with a bigger down payment means applying for a smaller mortgage, which should lead to fewer interest charges and smaller monthly payments. Shrinking mortgage costs so more buyers can get financed is what the FTHBI is all about.
Let’s look at a few examples of possible savings, estimated using the Government of Canada’s FTHBI calculator.
|Down payment w/o FTHBI||$50,000||$40,000||$20,000|
|Maximum home value||$725,000||$520,000||$400,000|
|Property type (max. Incentive)||New construction (5%)||Existing home (5%)||Existing home (5%)|
|Amortization||25 years||25 years||25 years|
|Mortgage interest rate||4%||4%||4%|
|Potential FTHBI amount||$36,250||$25,000||$15,000|
|Estimated monthly savings with higher down payment||$228.55||157.36||$94.60|
Depending on your budget, those monthly savings could make quite a difference. Just don’t count on the FTHBI being your silver bullet affordability solution. Your credit score, income and financial health all play a larger role in determining your overall mortgage costs.
How to apply for the First-Time Home Buyer Incentive
After getting pre-approved for a mortgage and finding a home you’d like to purchase, fill in the forms found on the FTHBI website. Give the forms to your lender, who will submit them on your behalf.
If your application is successful, you’ll then phone the closing service provider, FNF Canada, at 1 (855) 844-4535 to initiate your Incentive at least two weeks prior to the closing date of your home purchase, by giving them the contact information for your lawyer/notary.
Pros and cons of the First-Time Home Buyer Incentive
Despite the high prices and low inventory on display in Canada’s housing market over the past several years, the First-Time Home Buyer Incentive has largely been given the cold shoulder.
As of March 31, 2021, 18 months after the program launched, fewer than 10,000 home buyers had successfully applied for it, according to data tabled in Parliament and published by iPolitics.
There are definite reasons to give the FTHBI a miss, including the not-so-appealing prospect of sharing future equity gains with the government, but the benefits also need to be taken into consideration.
- Actually buying a home. By lowering the cost of your mortgage, the FTHBI could get you into a home when no other program can.
- Building wealth. Sure, you might have to pay back more than you borrowed, but think about the equity the FTHBI loan could help you accumulate in the meantime. If your property doubles in value, you’ll have to pay back twice what you borrowed, but those tens of thousands of dollars will be repaid out of hundreds of thousands of dollars in profit — profit you wouldn’t have earned without the FTHBI.
- Interest-free borrowing. At 0% interest, your FTHBI loan won’t put any added pressure on your monthly finances.
- Flexibility. You can pay back the loan in full at any time before the 25-year window closes, giving you an opportunity to exit the program before your house has time to appreciate at too torrid a pace.
- Limitations. The income and home valuation limits may be too low to help many households find housing that meets their needs.
- The big payback. The shared equity component of the FTHBI program could result in you paying back the government considerably more than what you originally borrowed.
- Appraisal costs. If you decide to exit the program before selling your home, you’ll have to pay for a professional appraisal to determine current market value.
The First-Time Home Buyer Incentive is unique in structure, but it’s not the only program available for first-time buyers looking for a leg-up.
Take some time to explore the many other grants and assistance programs that have been designed with the needs of first-time buyers in mind, especially if you plan on buying your first home in one of Canada’s two most expensive real estate markets, Ontario and British Columbia.
There are also several “green home” grants available that can save homeowners money when they invest in making their homes more energy efficient.
These programs won’t necessarily help you qualify for a mortgage, but they will reduce the overall cost of homeownership.