It’s 2019! We live in a technology-driven world. We have witnessed major disruptions even in traditional sectors like transportation, infrastructure, business transactions, and the likes but our basic needs i.e, food, clothes, and shelter have not changed yet.

For an average citizen, with a steady job and sufficient savings, the first 2 basic needs are always stable but the shelter – a home to call as their own is still a dream, something they aspire to achieve one day. 

When a government takes a step to help its citizens achieve a dream of having their own place to live, it is much appreciated. That is what happened when the federal government of Canada announced ‘First time home buyer incentive(FTHBI)’

With less than a month to the launch of FTHBI, let’s analyze the Pros and Cons of it. 

The purpose of FTHBI is to reduce the burden of the monthly mortgage payment on the buyers by providing an incentive without interest and monthly recurring payment. 

The Canada Mortgage and Housing Corporation (CMHC) contribution will be, 

  • 5% for a first-time buyer’s purchase of a resale home
  • 5% or 10% for a first-time buyer’s purchase of a new construction

The incentive amount needs to be repaid only after 25 years or when the property is sold, whichever event happens first.  Through this contribution of CMHC, the monthly mortgage of an individual can be reduced up to $286. Here is an example of how FTHBI works,

Targeted at Millennials, middle-class citizens and immigrant population, the FTHBI seems to be the need of the hour. But it does come with certain restrictions and critiqued that this incentive might not be the one for all. 

Apart from being a first-time home buyer, the household income of the buyer should be less than $120,000 a year. Also, the accumulated amount of mortgage plus the CMHC incentive would be surpassed at 4x the buyers’ annual income or up to $480,000. This means the maximum value of a house one can go for will be in the range of $500,000 and $600,000. 

Though this price-cap might look like a weighing scale for the right people to get the incentive, one might not be able to make use of this incentive in major cities like Canada/Vancouver where the minimum price for a house is at least $800,000. The targeted citizens’ desired place to live can be such major cities provided there are lots of opportunities for their economic growth and this price cap sort of makes the FTHBI not useful for them.  However, the federal government defended this decision stating the optimal housing price of all the cities was considered while fixing the price cap. 

There is another catch in the loan repayment. The repayment of the incentive should be done at the market value of the property. For example, let’s say you have purchased a property worth of $400,000 with an incentive of $40,000 (10%) from the government. If the property value is increased to $450,000 at the time of repayment, the incentive to be paid is $45,000 and not the initial incentive of $40,000. On the other hand, if the property value depreciates, let’s say to $350,000 then the repayment value is just $35,000. 

There is some opposition from the realtors/sellers for FTHBI as it can result in inflation of housing prices but there was an official statement from the government which said “ The program is capped at $1.25 billion over three years. We do not expect the FTHBI’s inflation effect to be beyond a maximum of 0.2-0.4 percent.”

Hope this article was helpful to make an informed decision regarding the first time home buyer incentive. Do subscribe to our blog for more such informative real estate articles.