For many people, buying a first home seems like an unreachable dream, especially in hot Canadian real estate markets. It’s not just the stress of finding something suitable, but actually being able to save for a decent down payment. But, if this is your first time buying a home, you should know that making a larger down payment might not be as unreachable as you think.
The government of Canada offers a shared-equity incentive that lends you 5% or 10% of the purchase price of your home through the First Time Home Buyer Incentive (FTHBI). This incentive is used to help first-time buyers make a larger down payment. By helping you increase your down payment, the government makes buying a home more affordable, since it lowers your mortgage amount and your monthly payments.
How do you know whether you qualify for a 5% or 10% incentive ?
It all depends on the type of property you’re hoping to purchase as your first home:
For newly constructed homes, you can apply for either a 5% or 10% incentive.
For the purchase of an existing home, you can apply for a 5% incentive.
For mobile homes or manufactured homes, you can only apply for a 5% incentive, regardless of whether the home is new or being resold.
Also, keep in mind that the property can’t be used as an investment property; it has to be suitable and available for you to live in year-round.
Once you figure what type of property you want to buy and what percentage you qualify for, it works like this:
If you’re buying a home outside of the Metropolitan Census Areas in Toronto, Vancouver, or Victoria, you can ask for an incentive worth 5% or 10% of the purchase value of your home (depending on the property type) – up to four times your annual qualifying income (more on that below). If you’re purchasing inside of any of these metropolitan census areas, you can ask for an incentive worth 5% or 10% of the purchase value of your home – up to 4.5 times your annual qualifying income.
What does this mean? Well, it means that if you want to buy a home in Regina and your annual income is $75,000 (before taxes and other deductions), you can ask for 5% or 10% of $300,000 (4 x $75,000) to add to your down payment.
Now, using simplified figures (not accounting for taxes, insurance, or closing costs), let’s imagine you have saved 5% ($15,000) for a down payment on a $300,000 home. Without the incentive, you would owe your lender $285,000 on your mortgage loan. But if you apply to receive an additional 10% (or $30,000) through the FTHBl, you could reduce the total amount you need to borrow from $285,000 to $255,000 and significantly reduce your mortgage payments and overall costs.
Keep in mind that this incentive is for people who earn $120,000 or less annually (or $150,000 for purchases within the metropolitan areas of Toronto, Vancouver, or Victoria). And, since the incentive is meant to help people who can’t afford a large down payment, it sets restrictions on
what percentage you can put down yourself. To qualify for the first mortgage incentive, your contribution towards the down payment must at least be 5%*, but it can’t equal 10% or more of the purchase price.
So in the above example, you could apply for the incentive by contributing between $15,000 and $29,999.99 for your down payment. The incentive would give you additional funds to put towards your down payment.
Another thing to consider is that applying for the incentive limits the price of the home you can buy. Let’s say you inherited $25,000 and you want to use it as a 5% down payment for a $500,000 home in Regina. If you earn $75,000 annually, you wouldn’t qualify for the incentive on this home.
In traditional loans where you can only cover the minimum amount required by law, the incentive calculates your maximum purchase price by multiplying your annual income by four (or 4.5 in the metropolitan areas mentioned above). But, if your down payment is more than the minimum required and falls below the 10% threshold, it will increase your maximum purchase price.
You don’t really need to worry about the nitty and gritty details of how this is all calculated. The government of Canada has a calculator that will help you with all that. But, it is important to understand that there’s a range within the parameters of this incentive, that will help you maximize your purchasing power, and reduce your mortgage costs.
How does contributing more than 5% towards the down payment increase your maximum purchase price?
For example, using the parameters from above, if you earn $75,000, the maximum incentive you can apply for is 10% of $300,000 (outside of Toronto, Vancouver and Victoria). This would give you an extra $30,000 to put towards your down payment. If you contribute 5% yourself for a down payment, the maximum home price you purchase is also $75,000 x 4 ($300,000).
So far so good, right?
But, what happens if you choose to make a down payment that falls between the 5-10% range? For example, you could put down 8.3% with the $25,000 you inherited.
|Maximum purchase price with 5% down payment contribution (4x income)||$300,000|
|Property Type:||New Construction|
|Max Incentive (10% of 4x income)||$30,000|
|Your contribution to the down payment at 8.3%||$25,000|
|Is your contribution more than 5% but less than 10%||Yes|
Your annual income hasn’t changed, so your incentive maximum doesn’t change. But suddenly, the government takes into account that you’re contributing more than the minimum, and sets your maximum purchase price at 4x your income, plus your portion of the down payment amount. So, instead of purchasing a home of $300,000, it adds the $25,000 you contributed, and you’d qualify to buy a $325,000 home.
*5% up to a value of $500,000. For homes above this price, it’s 5% for the first $500,000 plus 10% for the remaining value.
One last thing to remember: There’s no such thing as free money
As we mentioned, the incentive is a shared-equity mortgage with the government. That means that as property values change, so does your loan balance – for better or worse.
You have to repay the incentive after 25 years or when your property is sold, whichever comes first. But note, just because the government lent you $30,000, that doesn’t mean you owe them $30,000. This is where the shared-equity part comes in.
As a recipient of this incentive, you will have to repay your loan as a percentage of your property’s fair market value. So, if you received 10% of your purchase price, you will pay back 10% of your sale price (or current value of your home at the time of repayment). This can be advantageous or disadvantageous depending on whether your property value went up or down. If your property value went down, you will owe less, and vice versa. It also means that you can take advantage of a temporary devaluation of your property to pay back the incentive in full – without a prepayment penalty – even if you’re not selling.
For example, if after 10 years your property value decreased 15%, it might not be a good time to sell your home. But, you could choose to pay back your incentive for 15% less than it was originally worth ($25,500 instead of $30,000). The only catch is that you do have to repay it in full.
If you want to learn more about mortgages, check out our different topics here.