Read this before applying for the First-Time Home Buyer Incentive
Before you begin a Whatsapp chat with your real estate agent and start browsing available listings, there are a few things you should know about the FTHBI. First, not everyone qualifies, since the program is limited to a specific subset of first-time homebuyers. Second, the incentive is not free money, but a form of loan from the Government of Canada which will eventually need to be paid back, possibly at a large premium.
We break down the specifics of the FTHBI, how accessible it is and, most importantly, the potential pitfalls you should know about.
Who’s eligible for the First-Time Home Buyer Incentive?
For the FTHBI, “first-time home buyers” are not only those who have never owned a home before, but it can also include previous homeowners who have gone through a divorce or breakdown of a common-law partnership, or people who have not lived in a home that they owned (or that was owned by their spouse or common-law partner) for the past four years.
To be eligible for the program, however, you also need to meet the following criteria:
- Your qualifying household income is less than $120,000. Qualifying income includes money earned from investments and rental income, not just your job(s).
- You have at least the minimum down payment. The minimum down payment is 5% of the first $500,000 of the home’s purchase price, and 10% for any amount above that. However, the total amount you put down (including the FTHBI amount) must be less than 20% of the home’s purchase price. This maximum down-payment rule also assures that the FTHBI applies only to the Canada Mortgage and Housing Corporation (CMHC)mortgage-default-insured mortgages.
- You are borrowing less than four times your qualifying income. Since the maximum qualifying income is $120,000, the most any eligible buyer can borrow (and still be able to apply for the incentive) is $480,000—including the mortgage, mortgage insurance and the FTHBI amount. Lower-income earners who want to apply for the incentive are limited to borrowing even less, which would be challenging considering that the average price of a home in Canada in October 2021 was $716,585, according to data from the Canadian Real Estate Association.
For those looking to buy in Toronto, Vancouver or Victoria
In May 2021, the federal government and the CMHC, which administers the FTHBI program, expanded the eligibility rules for home buyers in three of the country’s most expensive markets. So, if you’re buying a home in the census metropolitan areas of Toronto, Vancouver and Victoria, you must meet these amended criteria:
- Your qualifying household income is less than $150,000. Again, this includes annual earnings from all sources, not just employment income.
- You have at least the minimum down payment. These requirements are the same as above.
- You are borrowing less than 4.5 times your qualifying income. In this case, because the maximum qualifying income is $150,000, the most any eligible buyer can borrow (including mortgage, mortgage insurance and FTHBI) is $600,000. While that raises the maximum qualifying purchase price in these cities to $722,000 (from the previous $505,000 maximum purchase price, which still applies in the rest of Canada), it still falls short of the $1.13 million, $1.2 million, and $871,000 average selling prices in Toronto, Vancouver and Victoria, respectively, in October 2021.
“For people who live in larger cities, these limits probably seem ridiculous,” says Sandi Martin, a fee-for-service Certified Financial Planner and partner of the virtual services firm Spring Financial Planning. “But in smaller city centres, where incomes and home prices are lower, this incentive may be the difference between someone being able to afford a home or not.”
What to know about repaying the incentive
If you meet the eligibility criteria, you can apply for the incentive, which comes in the form of a shared equity mortgage with the Government of Canada. (It’s called a shared equity mortgage because the government shares in any gains or losses on the home’s equity. More on this below.)
The government will loan buyers 5% of the purchase price for a resale home, or 10% for a new one. That works out to a possible $50,000 on a new $500,000 home, or $25,000 on a $500,000 resale property. That could save you a little bit on your mortgage payment and monthly insurance premium—somewhere around $100 to $300 per month, according to the federal government’s calculations.