The government’s federal budget was released, and with it — some interesting incentives for real estate buyers. The government is prepared to help some first-time home buyers by advancing up to 10% of the purchase price of a home. The idea? To help them take out a smaller mortgage with lower monthly payments.
Sounds to good to be true? Yup. It really depends on where you live.
When you dig into the details of this program, you start to realize that it isn’t really designed to help every first-time home buyer, just a small percentage of the Canadian population.
And if you’re asking whether or not it will help you, here’s the quick way to find out. Do you live in Toronto? Or Vancouver? If so — this program is not for you. We’ll go into why — but first, here are the details of the program.
First — the qualification. In order to be qualified for this program, you still need to have your 5% downpayment handy. Your household income needs to be below $120,000 per year.
Great — now let’s talk about the purchase price of your home. The insured mortgage amount plus the government incentive through CMHC is capped at four times the household annual income. So if you’re earning at the maximum of $120,000, that would amount to $480,000. Add to that your downpayment of at least 5% and the property you can buy amounts to about $500,000 to $600,000.
Which isn’t the typical price of a property in Toronto, nor Vancouver, nor any of the larger suburban cities in their immediate surroundings.
But wait! There’s more!
The amount of the incentive (which is up to 10%) really depends on the type of home you’re planning to buy. You see — the maximum 10% incentive is for… are you ready for it… newly-constructed homes. If you’re planning to buy a resale home, you only get a 5% incentive.
So think about it. Your purchase price can amount to $500,000 to $600,000. The government will give you up to $480,000, meaning your downpayment would have to be up to $120,000 to afford the absolute highest purchase price. But your incentive would only amount to 5% if you’re buying a resale home, and 10% if you’re buying a newly built home.
The question is: where you will buy?
The average price of a home in the Greater Toronto Area sits at $780,397. In Toronto specifically, the lowest average price of a home you could realistically pursue would be a condo — and still the average price is a touch over $600,000.
Sure, you could go into great areas outside of the city and look at condos in Scarborough, Pickering, Markham, Vaughan, Richmond Hill, Mississauga… but wait, those condo prices are pretty high too. And if you’re looking to buy a new condo, the government program will barely touch the prices of newly built condos even with a 10% incentive. Just look at the price list when you visit a sales centre.
It’s clear to see that this program is intended to benefit every homebuyer who isn’t living in Toronto, or Vancouver. It will mostly benefit smaller towns and areas where prices are still averaging in the $500k to $600k range.
And what it’s going to do isn’t promote affordability. In fact, it will create such a huge demand for homes in that price point that you’ll see home prices actually start to go up.
There are more details which haven’t been clarified yet. For example, is this government incentive offered by the CMHC an interest-free loan? Or is it a ‘joint venture’ equity sharing initiative where the government gets a slice of the action (if the price of the home goes up or goes down)?
Allow me to illustrate.
If the incentive is an interest-free loan and you pay zero interest on it, let’s say you buy a $400,000 home. And let’s assume it’s a newly built one. You’ll get 10% or $40,000 for the purchase. If you’re home value goes up to $600,000, you’d only have to pay back $40,000.
But let’s say this government program is an equity sharing program. Using the same example, you’d have to pay back $60,000 (the original $40,000 plus a percentage of the appreciation, which would amount to $20,000). This would be better not only for the government, but for the taxpayers who are funding this program to begin with.
On the other hand, if home prices declined, and your $400,000 home is now worth only $300,000, you’d still have to pay back $40,000 if the program is a no interest loan. With the shared equity structure, you’d only have to pay back $30,000 (a 10% slice of your home belongs to the government).
When you look at all of Canada, the average price of a home amounts to around $370,000. This certainly falls into the scope of the program, but whether or not it will benefit you depends on where you live and how much home prices are in your area.
Sure, it takes the edge off the mortgage stress test a little bit, but wouldn’t it have been more prudent to either eliminate the stress test, or tweak it based on individual income and other characteristics of an applicant?
This incentive won’t improve affordability. In fact, home prices will go up as demand rises at the lower price levels of real estate markets where first time buyers will embrace this program.
If you are planning to buy a home this year, how do you take advantage of this program? Simple. Make sure you have saved up at least a 5% downpayment. Start looking where homes are less than $500k to $600k. And keep your household income below $120k.
But be prepared for the uptick in demand as other first time homebuyers like you start doing the same thing. And watch as prices start to go up at these price points. Stay on the lookout for more details of this government incentive as they continue to put it together.