The program's users are expected to be much lower than the number bandied by the federal government
The First-Time Home Buyer Incentive is a week old, but don’t expect skyrocketing demand for a program expected to help fewer Canadians than the number bandied by the federal government.
“If I’m a betting man, I’m going to suggest this thing has smaller uptake than the 100,000 number the government keeps waiving around,” said Robert McLister, mortgage editor of Rates.ca and founder of Ratespy.com. “In the majority of cases, you qualify for less—with a regular down payment, the typical borrower qualifies for 4.5 times their income, but now it’s capped at four times their income. Under the regular 5% down, vanilla CMHC mortgage, you can qualify for up to $60,000 more.”
The First-Time Home Buyer Incentive—in which the Canada Mortgage and Housing Corporation will provide up to 10% on the purchase price of a new build and 5% on a resale—caps household income at $120,000. The policy states that “participants’ insured mortgage and the incentive amount cannot be greater than four times the participants’ annual household incomes.”
According to calculations provided by Ratehub.ca, a household with $100,000 of income that puts a 5% down payment qualifies for a $479,888 home. This leaves a mortgage amount of $474,129 after down payment and the CMHC insurance premium. The household qualifies for a mortgage of 4.74 times their income.
If the same household elected to participate in the First-Time Home Buyer Incentive their maximum purchase price drops to $404,858, because this is the maximum they can afford while keeping the total between their mortgage and the government incentive below four times their income.
“The number one issue facing first-time homebuyers is how much they qualify for, not the monthly payment after the home closes, and that’s what this is aimed at,” said James Laird, co-founder of Ratehub.ca. “They qualify for less if they use this program.”
The program is suitable for homebuyers in markets with weak housing demand and economic fundamentals. McLister added that borrowers who use the First-Time Home Buyer Incentive, and plan on living in the home for around five years, could potentially save more on interest and default insurance premiums than they’d give back to CMHC.
“Who it’s not for is someone who plans to live there for a long time, especially in a housing market that’s hotter and has stronger fundamentals,” he said. “In that case, it could cost you more in the equity you give up than what you save on interest and default insurance premiums.”
So why was it introduced in the first place?
“If you’re running for election in the fall and one of the hottest button issues is housing affordability and you don’t do anything to help millennial voters, your odds of winning the election are lower,” said McLister. “So they have tried to appear like they’re coming to the rescue with a program that has very little impact.”