Is the First-Time Home Buyer Incentive helpful at all?
On September 2nd, the federal government implemented the First-Time Home Buyer Incentive, which is a program they had announced in the federal budget this spring. It’s aim is supposed to be to help first-time home buyers to get into their first home.
It is curious timing that they would call an election 9 days later, but I will get to that later. For now, more about this new program.
About the First-Time Home Buyer Incentive
This program is deemed to be a “shared equity mortgage” that will provide 5% of the purchase price, or up to 10% for new construction, towards the purchase of an owner occupied residence for the first time. In order to be eligible for this program, you must meet the following criteria:
- you need to have the minimum down payment to be eligible
- your maximum qualifying income is no more than $120,000
- your total borrowing is limited to 4 times the qualifying income
If you qualify for these criteria, then you can participate in the program. What do you get for this entry? You get to have the government effectively own a piece of your home, and if your home goes up in value, then they get to share in the profits.
For example, if you buy a house for $500,000, and the government contributes $25,000 to that purchase, and you sell the house in 10 years for $800,000, then the government gets back $40,000. They get back 5% of the sale price. If the price goes down, then they absorb their share of the loss. So if the house went down to $400,000, they would just take 5%, or $20,000, back.
In basic terms, this means that you still need the basic down-payment in order to purchase a home. It does not make it ANY easier for you to obtain a down-payment.
What does this mean to you as a first-time home buyer?
Let’s set some objective criteria when determining whether this is a helpful and effective program to participate in. The criteria for me are:
- Does it make it easier to buy a home?
- Does it make it easier to pay the bills each month?
- Does the program result in an overall financial gain after selling?
Does it make it easier to buy?
As already mentioned, it does not help to serve as part of the down-payment, so it does not help from that perspective. Does it help with the overall debt servicing when the lender is looking to approve the purchase?
When I do a quick calculation in my head of a qualifying purchase price for someone based on their income, my VERY rough initial calculation in my head is $20,000 income = $100,000 of mortgage.
With this in mind, the criteria for qualifying for the program is a maximum of 4 times income. To buy a home for $500,000, I would need about $100,000 of income to qualify. However, by the criteria of the program, the maximum purchase price that the people could qualify for would be $400,000.
That would probably be OK in Medicine Hat, but for Greater Vancouver and much of BC, it would not likely be enough for most people. In my experience, the only people who are not going to their very maximum qualifying ratios in buying a home are people whose incomes are far higher than this program allows.
If you are buying a property that qualifies for this program, you are buying something where debt servicing is not a concern for you, so from this test of the program, it is of NO help at all.
What about cashflow and financial gain?
Here is a table showing an example using a 3% interest rate and a 25 year amortization. For the purpose of this example, let us assume that you sell in 5 years for $480,000.
|Without FT program||With FT program|
|Difference in premium||+$1,000|
|Difference in payment||-$89.92|
|Payment difference over 5 years||$5,395.20|
|Mortgage balance at sale||$337,795.64||$321,555.47|
|Repayment of FT program||$24,000|
|Net sale proceeds*||$142,204.36||$134,444.53|
|Total difference in financial position||+2,364.63|
*Note: not including items such as legal fees, real estate marketing costs etc. Calculated by adding the payment savings into the net sale proceeds.
A few things to note about this. The mortgage insurer charges a premium of 4% with just 5% down, but if you participate in this program, they charge 4.5%. You are paying a HIGHER premium to participate in this program.
The savings on the monthly payment on this program are $89.92 in this example. It helps a little, but frankly, this is a relatively small benefit considering you are paying almost $1,800/month regardless.
The net result of this program is that overall, it COSTS you money to participate in this program, unless the property would lose money, and if you got into a home with the expectation that the market would lose money, you would be highly unlikely to want to buy a all.
Is this first-time incentive a helpful program?
Can we answer the criteria as to whether this is a useful and helpful program to participate in? I think we can.
- Does it make it easier to buy a home? NO, it does not decrease your down-payment requirements at all.
- Does it make it easier to pay the bills each month? To a very minor extent. It reduces your monthly payment by just under 5%, which is not a big deal because you are already buying far less house than you can qualify for with the very stringent guidelines already in place! Simply put, you can qualify for about 25% more house with the regular guidelines than you can under this program.
- Does the program result in an overall financial gain after selling? No, you lose money unless the housing market goes down, in which case both you and the government lose money on the deal. Either way, you lose.
So overall, it is my belief that VERY few buyers will be able to participate in this program due to the restrictive nature of how much your maximum qualifying income can be, the maximum amount you can borrow, and the fact it does not help with the down-payment requirements whatsoever! The establishment of this program is, I believe, a HUGE waste of time, money and effort. It is a USELESS program.
Bonus: Why would the government make a useless program?
Let’s understand the government’s motivation behind offering this program. Since 2015, the government has enacted measures that reduced the ability of mortgage borrowers to qualify for a mortgage by 20%, and have also made bank act changes that increased banks borrowing costs, which were then passed on to the consumer.
They have claimed to do this to help protect the housing market, but then they did ABSOLUTELY NOTHING to make it more difficult for wealthy borrowers to be approved for equity lending from chartered banks, and have not made any significant efforts to curtail money laundering that has led to significant upwards pressure on real estate prices.
Even the BC government has launched an inquiry, but the federal government has not. They have made it clear to me and to anyone in our industry that they do not care about the average Canadian borrower.
So now, 9 days before an election, this program is officially launched, and the ruling party can say “You see? we care about the average Canadian.”
It is not my intent to make this a political post, it is not to say “elect party x or y.” However, I feel it is appropriate, given the government’s record on the regulation of the housing market, to point out the cynical ploy that they are promoting in the attempt to get re-elected.
Could they have cooled the market by making it harder for foreigners with no income or credit in Canada to obtain a mortgage, like they are making it for residents who live and work here to do so? I believe that they absolutely could have. They did not. They took it out on the average Canadian by taking away 20% of their purchasing power.
It is enough for me to wonder whether it is by design, as the housing market has been a major item propping up the Canadian economy in recent years, and they enjoy the foreign capital infusion that has largely contributed to making the real estate market more inflated and less affordable than it otherwise would have been.
Bribing the electorate at the polling stations was made illegal in the early days of Canada’s history. The current government attempts to offer vapour as a bribe in the most hypocritical manner possible.
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