In today’s real estate market, it is becoming increasingly more difficult for first-time home buyers to find and secure an offer on a property. Low mortgage rates and a limited supply of properties has led to an increase in multiple offers situations and properties being sold for well over the list price. This can be discouraging to many buyers; however, there are some programs available to assist first-time home buyers, one of which is the First-time Home Buyer Incentive Program.
The program
On September 2, 2019, the Government of Canada launched its new First-Time Home Buyer Incentive program, with the first closings occurring on November 1, 2019. The program is aimed at making home ownership more affordable, by helping qualified home buyers to reduce their monthly mortgage payments, without increasing the amount they must provide for a down payment.
How does it work?
The program involves the Government providing first-time home buyers with funds to increase their down payment, which are secured by a second ranking mortgage on the property’s title. Buyers receive 5% of their down payment when purchasing a re-sale home; and 5-10% of their down payment when purchasing a new construction.
Buyers are not required to make on-going repayments and the mortgage does not bear interest. They are also free to repay the incentive amount at any time without a pre-payment penalty. The incentive must be repaid after 25 years or if the property is sold, and the repayment is based on the fair market value of the property at that time.
Essentially, buyers are sharing the equity of the property with the government, based on the amount of down payment provided when the property was purchased. If a buyer received 5% down payment when purchasing the property, the repayment would be 5% of the property’s fair market value. If the property’s value has gone up, the government would receive its share of that growth; but if the value has decreased, the government shares in the loss of equity as well.
Who is eligible for the program?
Applications can be made by Canadian citizens, permanent residents, and non-permanent residents who are legally authorized to work in Canada. Buyers’ qualifying income must not be more than $120,000 per year, and is subject to the income requirements set out by lenders and mortgage loan insurers. The incentive amount must be used to purchase a home that the buyer intends to occupy as their residence, investment properties do not qualify. Also, at least one of the borrowers must be a first-time home buyer.
A first-time home buyer is someone who meets one of the following requirements:
- Has never purchased a home before
- Has gone through a breakdown of marriage or common-law partnership
- Has not occupied a home, in the last 4 years, that they or their spouse or common-law partner owned
What are other requirements?
The mortgage must be eligible for mortgage loan insurance, and the first mortgage must be greater than 80% of the value of the property.
The total borrowing amount (i.e. the first mortgage and the incentive amounts) cannot be higher than four times the borrower’s qualifying income.
The minimum down payment is 5% of the first $500,000 of loan value, and 10% of the loan value over $500,000. The down payment must come from traditional sources, such as:
- A Borrower’s savings account,
- A Borrower’s RRSP plan,
- A gift or unsecured loan/line of credit
The properties that are eligible include 1 to 4 unit residential properties, both resale and new construction, and new or resale mobile homes. The property must be located in Canada and must be suitable for year-round occupancy.
Limit of the program?
The government of Canada has allocated $1.25 billion over 3 years, starting in 2019, for this program. This means first-time home buyers have until late 2022 to take advantage of this incentive program.
This blog post was written by Daniella Sicoli-Zupo, a Partner in the Real Estate team. She can be reached at 613-369-0378 or at daniella.sicoli-zupo@mannlawyers.com.
