Understanding the First Time Home Buyer Incentive

Have you ever considered what the First Time Home Buyer Incentive (FTHBI) entails? This new initiative created by the government aims to assist you in becoming a homeowner. However, it can be quite perplexing. Essentially, it’s designed to lower your monthly mortgage payments, while the government retains a portion of your equity.

Although the First-Time Home Buyer Incentive offers clear advantages for aspiring homeowners, it’s important to note that not everyone is eligible. Additionally, with the Home Buyer’s Plan in place, you may find that you don’t even require this assistance. Here’s a straightforward breakdown of everything you need to know about the FTHBI.

What is the First Time Home Buyer Incentive?

The First Time Home Buyer Incentive (FTHBI) is a governmental program in Canada that provides a contribution of 5% to 10% of your home’s purchase price toward your down payment. Essentially, the government offers you financial assistance to facilitate your home acquisition. The specifics of how much you receive depend on the nature of your purchase, broken down as follows:

• 5% to 10% for newly constructed houses
• 5% for previously owned homes
• 5% for new or used mobile/manufactured houses

Though receiving free money sounds appealing, there is a trade-off. You share equity with the government; if you accept a 5% assistance, the government, in return, takes 5% equity in your home. A silver lining is that should market values decline, the government will share in those losses too.

A significant benefit of the FTHBI is the reduction of the amount you need to save for your down payment. For example, if you wish to purchase a new home valued at $500,000 and plan for a 20% down payment, you need to save $100,000. However, with the 10% FTHBI, you would only need to save $50,000, thanks to the $50,000 contribution from the government.

Keep in mind that this financial assistance is not entirely free; repayment is required in the future. However, the assumption is that your home’s value would have escalated by the time you sell, making the incentive worthwhile.

First-Time Home Buyer Incentive eligibility

Determining eligibility for the First-Time Home Buyer Incentive can be a bit convoluted. Several stipulations are in place to ensure that the program assists individuals who genuinely need help. To qualify for the FTHBI, you should meet the following criteria:

• You must be a Canadian citizen, permanent resident, or a non-permanent resident with authorization to work in Canada.
• Either you or your partner must be a first-time homebuyer.
• Your total annual income should not exceed $120,000 (for Toronto, Vancouver, or Victoria, it should not exceed $150,000).
• The mortgage amount cannot be more than four times your income (or 4.5 times in specified regions).
• Your property must be located in Canada.
• Your portion of the down payment should not be borrowed funds.

It’s crucial to understand the definition of a first-time buyer: You qualify as one if you haven’t owned a home in the past four years. Thus, even if you had a home in the past, you may still qualify as a first-time buyer. With the FTHBI, only one partner needs to meet this first-time buyer criterion, unlike the Home Buyer’s Plan, which requires both partners to be first-time purchasers.

Think of the FTHBI as a secondary mortgage; hence, your primary mortgage must not exceed 80% of the property’s value. Given that you will manage two mortgages, your real estate lawyer may impose additional fees.

How the First Time Home Buyer Incentive works

With an understanding of what the First Time Home Buyer Incentive entails and the eligibility requirements, you might be curious about how the program operates in real life. Let’s say you’re looking to purchase a home priced at $500,000 and meet the requirements for the FTHBI.

You must still save a minimum down payment of 5% independently, amounting to $25,000 in this case. If you leverage the FTHBI, you can receive an additional 5% or 10% to enhance your down payment. For instance, opting for the 10% incentive would mean getting $50,000 from the government, raising your total down payment to $75,000.

With a larger down payment, your mortgage payments will be diminished, which can ease your financial management. The application process requires you to complete and submit two specific forms as part of your application:

• FTHBI – SEM Information Package (PDF)
• SEM Attestation and Consent Form (PDF)

After you’ve filled out and signed these forms, submit them through your lender or mortgage broker, as they will handle the submission for you. Once finalized, ensure you receive a signed copy for your records; it’s also advisable to provide this to your real estate lawyer.

While the program seems advantageous, the income and purchase price limitations will restrict the individuals who can actually access the FTHBI. Although it can lower your monthly payments, you may have to scale back on your buying power, which could pose challenges for some prospective buyers.

First-Time Home Buyer Incentive repayments

Typically, the First-Time Home Buyer Incentive must be repaid under two key scenarios:

• Upon selling your home
• After a duration of 25 years

Whichever of these occurs first dictates when you will need to repay the incentive. It’s important to remember that the FTHBI operates on a shared equity model; if you accepted a 10% incentive, then you would be responsible for 10% of the capital gains when selling your home.

Even in cases of no sale or depreciation in value, the full repayment of the FTHBI is required after 25 years with no options for partial payments. Several other circumstances can also necessitate immediate repayment, such as:

• Ending a relationship and buying out your partner. If additional insured funds are required, repayment of the FTHBI is mandatory.
• Transferring your mortgage to a different lender triggers repayment obligations.

The repayment procedure may be cumbersome, as it involves contacting the FTHBI program administrator. In the case of paying back due to the sale of your property, you must provide evidence of the home’s current market value. This could be through sale documents or an appraisal. If you are repaying after the 25-year mark, the home will be evaluated at that time to calculate the amount owed. Following the review of your documentation, an invoice with payment instructions will be sent to you.

Is the First Time Home Buyer Incentive worth it?

On the surface, the FTHBI appears to be an advantageous option: lower monthly mortgage payments and shared losses if the market dips. While this is accurate, there are drawbacks to consider.

• Potentially higher repayment amounts – As this program involves shared equity, you’ll owe the government an equivalent amount when you sell. For instance, if your home was purchased at $400,000 with a 10% incentive (borrowing $40,000) and you sell it for $600,000, you’ll need to repay $60,000 (10% of the selling price), which is significantly more than what you initially borrowed.
• Limited qualification – Despite recent expansions to eligibility, the rapidly increasing home prices render the FTHBI ineffective for many regions in the country.

Using the Home Buyers’ Plan instead

Alternatively, you might want to explore the Home Buyers’ Plan (HBP), which could be more beneficial for your situation. Under the HBP, each participant in a joint home purchase can withdraw up to $35,000 from their Registered Retirement Savings Plan (RRSP), allowing a couple to collectively withdraw up to $70,000.

The HBP presents several advantages over the FTHBI, such as retaining full equity ownership, no limitations on income or purchase price, and no taxation on the withdrawals. However, it’s essential to have the funds in your RRSP for a minimum of 90 days before withdrawal since you are borrowing from your own funds.

As for repayment, you are granted a 15-year period, starting from the second year following your withdrawal. You would need to repay at least 1/15th of the withdrawn amount yearly. For instance, if you withdrew $30,000 as part of the HBP in 2021, first payment would be due in 2022, amounting to $2,000 annually. You can repay earlier without penalties, but if you miss any payment, it becomes taxable income, and you lose that RRSP contribution space permanently.

Final thoughts

The First Time Home Buyer Incentive is an intriguing initiative from the government, yet its effectiveness is questionable due to restrictive eligibility criteria. Many potential participants may find the alternative Home Buyers’ Plan to be more advantageous. Nonetheless, the FTHBI can potentially be paired with the First-Time Home Buyer’s tax credit for additional benefits.

As real estate prices continue to rise, the accessibility of the program in its current format may dwindle further. If you hold ownership stakes in a property through entities such as Willow or Addy, rest assured that this does not constitute home ownership under the program’s guidelines.