Down payment for a home can be many thousands, and most people find it difficult to put together even a few hundred dollars for everyday things. That is why the government launched the First-Time Home Buyer Incentive (FTHBI) program in 2019.
Buying your first home can be a daunting prospect, especially if you are finding it difficult to put together a down payment large enough to make your monthly mortgage payments reasonable. There are all sorts of costs and percentages to think about, not to mention all the forms and credit checks that go into the process.
The goal of this program is to help make the initial costs of buying a home more approachable, though the program can be complex and confusing, offering a few potential difficulties for those who skip steps. We’ve provided this guide to help you understand who is eligible, how the program works, and how to avoid missteps during the process.
Benefits of the First-Time Home Buyer Incentive
As mentioned the program was developed to make the initial down payment more approachable. Families who have not yet bought a home could potentially claim up to 10% of the purchase price towards the down payment on a home.
There are obviously limitations on this because the intention is for the program to help people who have never bought a home before, have recently divorced, or have not lived in a home they owned for four years.
The first step is to confirm whether you meet the requirements for eligibility below:
- Household income is less than $120,000
- Must have at least the minimum down payment (usually 5% of the purchase price)
- Total mortgage is less than four times of the qualifying income.
This obviously may not help much if you’re living in some of the most expensive cities, such as Toronto. For this reason, the requirements were raised to a household income limit of $150,000 and a maximum mortgage of 4.5 times the qualifying income. This applies to home buyers in Toronto, Vancouver, and Victoria because of the significantly higher average home prices.
A Big Boost With Easy Numbers
If your family meets the requirements, the next question to ask is whether you’re planning to buy a new construction home or one that is already built. If you plan to buy a new construction, this allows for the maximum possible benefit of 10% of the purchase price. If, however, you plan to buy a resale home, then the maximum benefit is only 5%.
That 5% may seem like a huge hit if you were planning on buying a resale. However, consider a home that costs $400,000. If you’re buying a new construction, you could be eligible for up to $40,000! Even if this same $400,000 is going toward a resale, you still could receive up to $20,000 toward your home. Because you’re required to already have at least the minimum 5%, the program could still bring your monthly mortgage payments down by a few hundred dollars.
A Complex System For A Simple Need
Now for the truly complex part of the FTHBI – the government is not simply handing over 5-10% of the price of your new home in cash. The incentive is technically a loan, and the expectation is that the loan will be paid back in the future. The official pay-off requirement is that the loan must be repaid either upon the sale of the home or after 25 years, whichever comes first.
Just to make things even more complicated, the amount you are required to pay the government once the repayment time comes may not be the same amount you borrowed. This is because the government will require you to repay the loan at 5% or 10% (whichever applies to you) of the fair market value of the home at the time repayment comes due.
As an example, if your new construction home cost $400,000 when you bought it, you received $40,000 from the FTHBI. If you sell your home for $500,000, you will have to repay $50,000 as a requirement of your benefit. However, bear in mind the opposite holds true as well. If you sell your home for $300,000, then you only owe back $30,000 for repayment.
The Right Numbers At The Right Time
We feel a bit bad about getting your hopes up about free money only to surprise you by giving you the bad news. Here, we’ll focus on everything we talked about to help you decide whether the FTHBI is right for you.
First of all, consider that it’s entirely possible for home prices to appreciate in the next 25 years as much as if not more than they have in the last 25 years. For reference, home prices appreciated 219% between 1994 and 2019. Assuming you stay in the house for 25 years, the incentive of $40,000 on your newly-built $400,000 house would require you to repay the appreciated value of almost $88,000 once that time has passed.
If you might be in the midst of retirement after the 25 year period and you qualify for the incentive, you may need to consider making preparations to repay that amount, which may prove difficult.
Of course, if your home value increases before 25 years and you sell, you’ll still need to prepare to repay the loan after considering the other costs that go along with closing on a new house.
If you’re only able to come up with 5% of the down payment on a house, we think that’s a great start! However, bear in mind that even after you get into your new home, you still have all of the other costs that come with home ownership, which can be difficult at best and disastrous at worst.
Unfortunately, deciding if the FTHBI is right for you means sitting down and calculating out some numbers. It may even require you to already have a specific home in mind. In this market, that doesn’t give you much time because homes are flying off the market.
Decide whether you can reasonably pay off the loan before the house appreciates too much. This also means holding off on renovations, which could raise the value of the house easily and cause you to owe more once the appraisal comes through.
Conclusion – A Great Benefit To Those Who Prepare
The FTHBI is undoubtedly a wonderful incentive for those hoping to get into their first house, start building equity, and lay down some roots.
However, it is decidedly not a one-size-fits-all incentive program for everyone who meets the minimum eligibility requirements. Be proactive in planning where you want to live and how you can use the loan to put you and your family in a better position to be happy and thrive.