The federal government released their budget yesterday and honestly, we are shaking our heads. In the continuing saga of our nation’s housing discussion is the announcement of the First-Time Home Buyer Incentive Plan.
Under the direction of the Canada Mortgage and Housing Corporation (CMHC), $1.25 billion is going to be used over three years to help first-time home buyers through a shared equity mortgage. First-time home buyers contribute the minimum five per cent down payment while the government will also contribute up to 10 per cent making the total mortgage amount less.
Here is the example from the Budget Plan:
A first-time home buyer wants to purchase a $400,000 home. The borrower must put five per cent ($20,000) down to receive an insured mortgage of $380,000. If the home is new, the borrower can apply for 10 per cent of the cost of the house which is $40,000. Now, the insured mortgage is $340,000.
When the home buyer decides to sell their home, the amount loaned from the government will be repaid.
WHAT DOES THE INCENTIVE PLAN MEAN FOR YOU?
It’s a great question and one we don’t have the answers to yet. We don’t know if the amount given to first-time home buyers will be interest-free and there are looming thoughts about repayment time and if your home sells at a loss; how do you repay the amount? Also unknown at this time is whether upon sale if CMHC is paid back just the borrowed amount or a prorated amount of equity gained on the property.
The incentive plan may benefit first-time home buyers in the hot markets of Canada, mainly Vancouver and Toronto where housing costs are still some of the highest in the country. The plan is also encouraging new building development as the incentive plan amount is higher (10 per cent) for new builds compared to resale homes (five per cent). All good things but why is the government spending money when changes could have been made that benefited all home buyers, not just first-time buyers?
CANADIANS STILL HAVE TO QUALIFY AT BENCHMARK RATE
The housing industry was ready to see a change to the stress test rules and benchmark rate in this budget but we are going to have to keep waiting. The theory behind the new stress test for mortgages was to add a buffer for financial changes, making it more likely that buyers would still be able to pay their mortgage if their budget tightened.
However, qualifying for the highest between the Bank Rate (5.34 per cent as of March 19, 2019) or two points over the pre-approved is not realistic. Essentially, the government is asking home buyers to qualify for a rate five years from today assuming everything stays constant (which it doesn’t). In our experience, qualifying for one per cent over Canada’s benchmark represents an accurate qualifying rate.
LONGER AMORTIZATION PERIODS
Again, the industry was disappointed that the 30-year amortized mortgage was not brought forward in the federal budget. A 30-year mortgage would lower monthly payments, which in turn would help home buyers qualify for the same home with less income required. Now, over 30 years home buyers would pay more interest but the monthly payments would still be less than under the new incentive plan.
INSTEAD OF MORTGAGES, FOCUS ON CREDIT CARDS
It’s too easy to walk into the nearest retail stores like Best Buy, Sleep Country, Home Depot and apply for an in-store credit card. As a result, Canadian wallets are bulging with plastic. We would prefer to see more regulation around credit cards. One of the hardest things for us to tell clients is that they don’t qualify for a mortgage because their credit score is too low or they need to pay off that debt before buying a home.
There are still more details to come about these changes and with the election this Fall we anticipate further discussion about the First-Time Home Buyer Incentive Plan, the Benchmark Rate, and amortization periods. What are your thoughts? Engage with us on Facebook.
Original published via qmortgage.ca.