First Time Home Buyer Incentive

How does the FTHBI work?

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 later.) 

The government will loan buyers 5% of the purchase price for a re-sale 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

Buyers don’t have to make ongoing payments and are not charged interest on the loan. But they do have to repay the incentive, either when they sell the house, or after 25 years—whichever comes sooner. 

But here’s where it gets tricky. The repayment is not based on the dollar amount borrowed. Instead, borrowers must repay the same 5% or 10% share that they received through the FTHBI, but calculated as a percentage of the home’s fair market value at the time of sale, or at the 25-year mark. That’s because, as mentioned above, the government benefits from any increase in equity of the home and loses out if equity goes down.

In other words, if the home has increased in value, you will need to pay back more than you borrowed. If the home has decreased in value, you’ll pay back less than you borrowed. 

What does that mean in real terms?

Assuming that Canadian housing prices increase to the same degree over the next 25 years as they did in the previous 25 (that’s 219%, since the average home in 1994 was worth $158,299), your $500,000 home in 2019 could be worth nearly $1.1 million in 2024. In that case, the repayment on the $50K you borrowed would balloon to nearly $110K (or 10% of the value of the home) in 25 years. 

And that’s just considering normal appreciation of the home as it was when you bought it. What if over the 25 years you made significant renovations, adding to the base value of the home? It could now be worth even more—and so will that 10% slice you owe the government. 

That sounds off alarm bells for Martin, the financial planner. “Will you have the money somewhere to pay that off?” she asks. “Lots of people choose to stay in their homes and, after 25 years, they’re getting close to retirement. I’d be concerned that this repayment would come as a surprise 25 years after you buy your house.”

As for the possibility that the property value could go down and you’d have to pay back less, Martin’s not buying it. “I would be interested in seeing data on the likelihood of property values going down after 25 years. If there’s a house that is worth less on the 25th anniversary of purchase than the day you bought it, that’s got to be an outlier.” 

Even those who sell well before the 25-year limit and must repay the Incentive at the time of sale could be in for a shock. “Whenever you sell this house, you need to count on giving back the percentage of your equity—and that’s on top of closing costs, legal fees, land transfer taxes and real estate commissions,” she says.

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