Buying a home in Canada doesn’t come cheap these days, especially in Canada’s most costly real estate markets. The good news is that help is on the way. If you’re a first-time homebuyer buying in Toronto, Vancouver, or Victoria, it will soon be easier to qualify because of the changes to the First-Time Home Buyer Incentive (FTHBI).
What is the First-Time Home Buyer Incentive?
The First-Time Homebuyer Incentive is a national program the federal government introduced back in September 2019. The objective of the FTHBI was to help thousands of Canadians afford their first property. Otherwise, they wouldn’t be able to purchase a home. As long as you qualify as a first-time homebuyer under the program, you’re eligible to participate.
There are some things you should know. Even though the FTHBI is an interest-free loan, you’ll have to pay it back at some point. You’ll have 25 years to pay it back or until your home is sold, whichever happens first.
It’s important not to get the Home Buyers’ Plan (HBP) mixed up with the FTHBI. Both are different programs. You don’t have to pay back the FTHBI in installments like the HBP. As mentioned, it’s an interest-free loan.
You don’t have to make any payments on it until you sell your home or you’ve been there for 25 years.
Changes to the First-Time Home Buyer Incentive
The federal government’s Fall Economic Statement focused a lot on the ongoing Coronavirus pandemic. But that wasn’t the only thing it focused on.
The government included a tweak to the FTHBI to make it easier to qualify. The changes were originally announced way back in fall 2019, but many things were delayed due to COVID-19. The newly revamped FTHBI is now expected to come into effect in spring 2021 finally.
Here’s a summary of the changes.
Qualification Formula
The original maximum purchase price under the First-Time Homebuyer Incentive was four times the borrower’s household income. That’s being increased to four and a half times the borrower’s income. Thus increasing the maximum home purchase price a first-time homebuyer can afford when using the FTHBI.
Maximum Income.
To recognize that higher income is needed to get by in higher cost of living cities like Toronto, Vancouver, and Victoria, the maximum income to participate in the FTHBI has been increased. The maximum household income has gone from $120,000 to $150,000.
Maximum Purchase Price
Due to the new qualification formula and the new maximum income, the maximum purchase price one can afford under the FTHBI has gone from $505,000 to $722,000 in Toronto, Vancouver, and Victoria. That represents a sizable increase of $217,000 in the maximum purchase price in those markets. That’s certainly not a drop in the bucket.
Changes Expected to Increase the Uptake of the First-Time Home Buyer Incentive Program
By tweaking these rules, the federal government expects 20,000 more Canadian first-time homebuyers to participate in and benefit from the FTHBI. This would be a welcomed change. To say that the First-Time Homebuyer Incentive has been a letdown would be a huge understatement.
Since the introduction of the FTHBI in 2019, the program has struggled to find its place in the market. As of September 2020, the Canada Mortgage and Housing Corporation (CMHC), which administers the program, has received fewer than 10,000 applications worth less than $175 million in shared equity mortgages.
This is a far cry from the forecasting of the CMHC. The CMHC had originally set aside $1.25 billion for the program to be distributed over three years. The goal was to help 100,000 first-time homebuyers over that time period.
Interest-Free Loans
Under the FTHBI, first-time homebuyers who apply and are eligible receive an interest-free loan to use towards their down payment. Those buying a resale property receive up to five percent of the purchase price, while those buying a new build property receive up to 10 percent of the purchase price. The Incentive must be repaid in 25 years, with the government benefiting from any rise in value or sharing in the loss if the property declines in value.
When we look at the success of the FTHBI in Canada on a regional basis, it’s most popular in Quebec, where just fewer than 4,000 applications were received as of September 2020. This represents $63.4 million in shared equity, $49.3 million which came from the program.
Alberta came in second with nearly 2,600 applications. This represents $60.8 in mortgages. Meanwhile, in Canada’s most expensive provinces for real estate, Ontario and B.C., only about 740 first-time homebuyers applied there for mortgages totalling just $13.6 million in Ontario. In comparison, only about 325 applied for $5.9 million in mortgages in B.C.
The lacklustre performance in B.C. and Ontario really speaks to the program’s problems that the latest rules changes are looking to address. Previous to the announced rules changes, the FTHBI program was too restrictive to help the vast majority of homebuyers in big cities in Ontario and B.C. In fact, you might actually qualify to spend less if you were buying a home in those markets using the Incentive versus not using it.
$505,000 may be a reasonable purchase price in Saskatchewan or the Maritime provinces. Still, you’d be hard-pressed to find any decent properties under $500,000 in Toronto, Vancouver, or Victoria, essentially making the previous program worthless in those markets. The only places you might be able to afford are a shoebox condo under 500 square feet or a condo in a bad part of town with poor resale value. I can see why most first-time homebuyers skipped the FTHBI entirely in those markets.
Conclusion
While the tweaks to the FTHBI won’t solve the lack of affordable real estate in Toronto, Vancouver and Victoria overnight, it’s a good start. The revamped rules will actually allow homebuyers in these markets to afford a somewhat decent starter home. Homebuyers will still need to pass the stress test. However, they’re not limited by the abnormally low $505,000 purchase price ceiling previously in place for the program.
Related to: Changes to the First-Time Homebuyer Incentive
