Arguably the most talked-about measure of the Liberals’ latest federal budget is the First-Time Home Buyer Incentive.
Under the plan, the government would help some first-time buyers by advancing up to 10 percent of the purchase price of a home so they can take out a smaller mortgage and keep monthly payments lower.
The program would be administered by Canada Mortgage and Housing Corp. (CMHC), the crown corporation that insures most Canadian mortgages on homes purchased with a down payment of less than 20 percent of the price. Indeed, the new incentive would only be available for CMHC-insured mortgages.
There are a number of other caveats. Buyers must pony up their own cash for a down payment — at least five percent of the home price. And they must have a household income below $120,000 a year. Also, the amount of the insured mortgage plus the CMHC incentive would be capped at four times the home buyers’ annual incomes, or up to $480,000.
That means the most expensive home you can hope to buy under the plan would be worth somewhere between $500,000 and $600,000, depending on the size of your down payment.
The CMHC would give out up to $1.25 billion in incentives over three years starting in September. Buyers of newly-constructed homes would get 10 percent of the home price, while those purchasing an existing property would get five percent.
That’s what we know about the program for now. But there are a number of missing details and bigger questions surrounding the proposal:
How exactly will you need to repay the money?
Home buyers would eventually have to repay the CMHC, either when the home is sold or, if they wish, sooner. It’s not clear, though, whether homeowners would simply repay the sum the CMHC originally advanced — which would make the money an interest-free loan — or whether the government would get a share of the sold price — five per cent or 10 percent, depending on the equity share it originally contributed.
This is an important detail, and some simple math shows why. Say you’re buying a $400,000 home with a 10 per cent CMHC incentive worth $40,000. If your home value rose to $600,000 over the years, a zero percent loan would mean that you’d still have to return only $40,000. An equity-share type of arrangement would mean you have to return $60,000, which is a much better deal for the government and taxpayers.
If your home value dropped, say from $400,000 to $300,000, you’d still be on the hook for the original $40,000 at resale with a zero per cent loan. On the other hand, a shared equity arrangement would mean that the government’s 10 percent slice of your home is now worth just $30,000 — better for you but a loss for taxpayers.
How exactly will your income be assessed?
Another hazy part of the plan is how that $120,000 household income cap will be applied. Presumably, the government will do more than just assess your income in a single year. Otherwise, there would be a strong incentive for some buyers to stay below the cap just so they can get the housing incentive, as personal finance commentator Preet Banerjee noted in a tweet.
Having a sharp income cut-off also means that home buyers with incomes just under $120,000 would have a significant advantage over those just above the threshold, who would not qualify for the CMHC incentive.
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