Homebuyers might scrimp, save and sacrifice their way to a minimum down payment only to discover that the remaining mortgage amount is still too large for lenders to approve.
If saving a larger down payment is the obstacle standing between you and your first property, the First-Time Home Buyer Incentive might 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 that lends eligible home buyers either 5% or 10% of a home’s purchase price. By using FTHBI funds to bolster your down payment, you’d have more equity at the outset of your mortgage and decrease the amount you have to borrow.
FTHBI loans are interest-free and must be repaid in full within 25 years or when the house is sold, whichever comes first. But 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 a similar proportion of the property’s eventual 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 FTHBI?
To apply for the FHTBI, you 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 sufficient 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.
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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 mortgage amount 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
Because you’ve entered into a shared equity agreement with the government, they essentially own 5% or 10% of your home. That means they’re entitled to the same share of that home’s value at the time you repay your FTHBI loan. The more your home appreciates, the more you’ll be required to pay back.
If your home increases in value, your repayment amount will either be the original loan percentage applied to the current market value of the home, or the equivalent of 8% annual growth of the original loan amount, whichever is lower. If a home loses value, you’ll pay back the higher of the two amounts.
Let’s say you purchase a $600,000 home using a 5% FTHBI loan worth $30,000. In 10 years, you sell it for $1,000,000.
- Five percent of the current sale price would be $50,000.
- The annual appreciation limit would cap the amount you owe at $2,400 per year, or $24,000 total. Add that $24,000 to the original amount borrowed and you get $54,000.
- You’d be required to pay back the lower of the two amounts — $50,000.
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.
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. Bringing down mortgage costs so more buyers can get financed is what the FTHBI is all about.
But how much money will it actually save people? We ran a few examples through the Government of Canada’s FTHBI calculator, and the results were positive, if not overwhelming:
- With a 5% FTHBI loan on a $725,000 home in Toronto, an $80,000 down payment and a 25-year mortgage at a 5.5% interest rate, you’d see monthly mortgage savings of approximately $264.11.
- With a 5% FTHBI loan on a $500,000 home in Calgary, a $30,000 down payment and the same mortgage conditions as above, your monthly savings would be $183.14.
Now, let’s compare those savings to how much you might have to repay in five years’ time.
- Let’s say your Toronto home sells for $950,000. You owe the government 5% of the sale price, or $47,500. That’s $11,250 more than you borrowed five years ago, but you saved $15,846 in mortgage payments over that same period. All told, you’re up more than $4,000 in savings — and you own a house.
- If the Calgary property sells for $600,000, 5% of the sale price would be $30,000, or $5,000 more than you originally borrowed. But you’ve saved $10,988 in mortgage payments, so in this case you’ve pocketed almost $6,000 in mortgage savings.
Pros and cons of the First-Time Home Buyer Incentive
As of March 31, 2021, 18 months after the First-Time Home Buyer Incentive 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, 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 you could still accumulate serious equity 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 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 seriously expensive real estate markets like 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.
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.