Here’s a plain language breakdown of the proposed Mortgage rule changes from the proposed Liberal 2019 budget:
RRSP Allowance For First Time Home Buyers:
The Home Buyers Plan in Canada allows first time home buyers the opportunity to use their RRSP’s toward the down payment of a home without penalty.
Today the maximum amount of money eligible to be withdrawn, penalty free for down payment, is $25,000 per buyer. This limit is proposed to be increase to $35,000 per buyer.
I think this is helpful for those who have been directing their funds toward RRSP’s. I do have experience where first time buyers retain some RRSP money in their accounts, after withdrawing the maximum limit of $25,000.
Let’s get to the more convoluted proposed Mortgage rule change: Equity stake in the subject property.
Equity Stake In The Subject Property:
I’m sure to field questions about this program. I have questions of my own too. And nobody has the answers. Our policy makers have not released all details around execution of this program.
In light of that, let’s cover what has been released, and then ask questions together:
“The first time home buyers incentive program enables homebuyers to reduce the amount of money required from an insured Mortgage without increasing the amount they must save for a down payment”.
Here are the basic details released:
- Once a participant, the Government will share in the price gains or losses when you sell. (No additional details around this important point have been released).
- You must be a first time home buyer. The current definition of a first time buyer allows repeat buyers to be classified as first time buyers again, if they have not been owners of a home for four years. Will this stay the same for this program?
- You must pay for Mortgage default insurance (insured Mortgage).
- Canada Mortgage and Housing Corporation (CMHC) would give you either 5% of the purchase price if buying a re-sale (existing) home. OR 10% of the purchase price if buying a new construction home. There are no payments required for this loaned money.
- You would have to pay the money back when selling the home.
- Only eligible for families with household income is less than $120K annually.
- The combined total of the insured Mortgage plus incentive cannot be greater than four times the participants combined annual household income. This makes this program targeted for homes around $500K.
- Ratification of this budget is planned for September 2019.
An Example Of This First Time Buyers Incentive:
Resale Purchase Home
Purchase price: $400,000
Your down payment: 5% ($20,000)
Incentive for first time buyers: 5% ($20,000)
Total down payment: $40,000
Mortgage insurance premium: 3.10% or ($11,160)
Total loan: $371,160
Mortgage payment: $1,812.19/month
In the same example, here is the Mortgage payment without the incentive: $1,929.57/month.
The buyer would enjoy savings of $117.38/month and have a difference in Mortgage balance of $20,660.97 at the end of 5 years. The difference in balance seems impressive, however, this is the home equity that the buyer would have to repay to CMHC upon sale.
Questions About The Buyers Incentive Plan:
- If the buyer(s) sell and repurchase, is the incentive portable to the new home? Or does the incentive money HAVE to be repaid upon sale no matter what?
- Will the Mortgage default insurance premiums be the same for buyer incentive programs as non-incentive buyers?
- How will the share in percentage gain/loss be calculated?
- Will all Mortgage lenders be onboard with this program?
- Will Canada’s other two Mortgage insurance companies also offer this incentive (Genworth Canada & Canada Guaranty)?
- Will the Mortgage insurance company be on the title of the subject property? Will this be classified as a second Mortgage with no repayment terms?
- What if the buyers purchase a new primary residence, leaving the original subject property behind as a rental property? Will the incentive ever have to be repaid?
- What if there is a significant price appreciation OR additional Mortgage prepayments (or both) and the owner refinance equity out of the home? Will the incentive have to be repaid then?
- If I wanted to pre-pay the buyer incentive money, how do I manage that repayment? What repayment parameters are their, if any?
British Colombia Had A Similar Program.
It’s Now Cancelled.
The B.C Government launched a same-same-but-different program for first time home buyers in B.C. It’s now cancelled. I’ve heard that not many B.C home buyers even took advantage of this incentive (not a data driven comment for the record).
https://www.bchousing.org/housing-assistance/home-partnership
Conclusion:
What do you think? Would you hold off on purchasing a home to see if this program becomes ratified and available to you?
What do you think this will do to the market of homes priced below $500K? Will this actually increase first time home buyer demand, limiting supply and driving up prices?
A annual family income of $90,000, with no consumer debt and a 5% down payment can afford to purchase a $460,000 home.
In the same scenario, with this new proposed incentive, their maximum purchase price increases to $485,000 (growth of 3.26%).
Do you want the Government to have a equity stake in your home to increase your affordability?
If you have questions about your home shopping budget, or this program and how it might specifically relate to your future home purchase, connect with me via email OR direct call.
Cheers,
Chad Moore
