First-Time Home Buyer Incentive Program – How it Affects the Average Buyer

In an attempt to assist first-time homebuyers in affording a house, the Liberal government has announced a new scheme – the First-Time Home Buyer Incentive (FTBHI). The objective behind this program is to provide assistance with down payment to buyers who are interested in getting a house. The incentive will provide interest-free loans on a shared-equity basis to raise affordability.

Terms and Conditions of Eligibility for the Scheme

Anyone wishing to participate in the program should be aware of the terms of the incentive such as:

  • Applicants must put down at least 5% of the value of the property from their own savings.
  • The government via the Canada Mortgage and Housing Corporation (CMHC) will invest an additional 5% in the down payment for an existing home.
  • In case the buyer is investing in new construction, the government will offer 10% to help with down payment.
  • The CMHC will have a proportional share in the property, whether it gains or loses value.
  • Buyers will not be required to make payments each month. However, they must repay the loan after 25 years or whenever they sell the house.

Additional conditions include:

  • Applicants must purchase default mortgage insurance or CMHC insurance on the house to provide lenders with protection against non-payment of the loan.
  • Buyers must prove that they have a household income of less than $120,000.
  • The incentive amount received under the scheme along with the mortgage value cannot be more than four times that yearly household income of the applicants. Estimated values are typically around $565,000.

The FTHBI May Actually Lower Affordability

Experts in the real estate industry have pointed out several flaws in the incentive.

  • In case homebuyers participate in the scheme, they could be eligible for a maximum purchase price that is 10% lower than what they might originally afford. That’s because, the incentive limits the value of the property to four times the household income. As a result, the program lowers affordability in place of raising it.
  • The average real estate prices in regions like Toronto and Greater Vancouver are higher than the limits set down by the FTHBI program. Homebuyers wishing to participate in the program may find it almost impossible to find homes that are valued at less than $500,000. Considering the high prices, these cities are typically the areas where homebuyers are most likely to need assistance. And, the FTHBI defeats the purpose for which it was planned.

Industry pundits also point to the failure of a similar incentive released by the B.C. government in 2016 as an example. The Home Owner Mortgage and Equity Partnership had to be canceled because of the surprisingly low number of applications it received. As against the expected 42,000 participants, only 3,000 prospective homebuyers applied for the program.

The CMHC Estimates 100,000 Applications in the Coming Three Years

Counter to the criticism and supposed flaws, CMHC President and CEO Evan Siddall stands by the effectiveness of the program. According to Siddall, any incentives for homebuyers are not likely to work in cities with high pricing in any case. Even so, real estate statistics for 2018 reveal some interesting facts. Twenty-five percent of the home sales in Toronto were valued at $500,000 and below. As for Vancouver, 17% for the homes sold were prices lower than $50K.

The ultimate effectiveness of the FTHBI initiative remains to be seen.