In one of my recent articles, I analyzed 3 incentives that refer to all first-time home buyers. I also promised a 2nd article with some more incentives that depend on specific criteria. Today is about the First Home Buyer Incentive.
What is it all about
The philosophy behind this incentive is to help qualified first-time homebuyers to pay a lower monthly mortgage payment. A larger downpayment results in a smaller mortgage, and, ultimately, lower monthly costs for you.
Practically the Canadian government partners up with you to offer you a 5% additional down payment for a re-sale or an existing home (house, condo, etc). In case you decide to buy a new build or pre-construction this downpayment can be 5% or 10%.
How does it work
As they say, there is no such thing as a free lunch. The First-Time Home Buyer Incentive is a shared-equity mortgage with the Government of Canada. It is not a mortgage you pay every month. However, they do want it back at some point.
The shared equity component of the incentive means that the government shares in both the upside and downside of your home value, up to a maximum gain or loss equal to 8% per year (not compounded). Which is calculated on the Incentive amount from the date of advance to the time of repayment.
As homebuyers you must repay the Incentive after 25 years, or when the property is sold, whichever comes first. You can also repay the Incentive in full any time before, without any penalties.
Who qualifies for this incentive?
This is where it gets more tricky limiting the pool of first-time home buyers that can use it. The criteria are:
● Your total annual qualifying income doesn’t exceed $120,000 ($150,000 if the home you are purchasing is in Toronto, Vancouver, or Victoria) This refers to the added income of both of you if are a couple.
● Your total borrowing, meaning the amount of your mortgage plus the amount provided by this incentive, is no more than 4 times your qualifying income (4.5 times if the home you are purchasing is in Toronto, Vancouver, or Victoria).
● You or your partner are a first-time homebuyer
● You are a Canadian citizen, permanent resident, or non-permanent resident authorized to work in Canada
● You meet the minimum down payment requirements with traditional funds (savings, withdrawal/collapse of a Registered Retirement Savings Plan (RRSP), or a non-repayable financial gift from a relative/immediate family member). So basically you also have to be able to produce the minimum down payment required by law. Which is why I refer to this as a boost to your down payment.
The Incentive is like a second mortgage on your home. Your first mortgage must be greater than 80% of the value of the property and is subject to a mortgage loan insurance premium. It also must be eligible through Canada Guaranty, CMHC, or Sagen.
In other words, this is not for you if you already have and want to use a down payment of 20% or more from your sources.
It is an interesting incentive that has been utilized by some of the buyers qualifying for it. It is always good to look into any offerings that can make buying your first home easier.
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