What is the First Time Home Buyer Incentive?

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Have you wondered what is the First Time Home Buyer Incentive (FTHBI)? This new government program is meant to help you become a homeowner, but admittedly, it’s quite confusing. Essentially, it’ll help you reduce your monthly mortgage payments, but the government takes a share of your equity.

While there’s no denying that the First-Time Home Buyer Incentive can be beneficial to potential homeowners, not everyone qualifies for it. Also, with the Home Buyer’s Plan available, you may not even need the assistance. Here’s everything you wanted to know about the First-Time Home Buyer Incentive in plain English.

What is the First Time Home Buyer Incentive?

With the First Time Home Buyer Incentive (FTHBI), the Canadian government will provide you with 5%-10% of the purchase price of your home which gets added to your down payment. That’s right, they’ll literally give you money to buy a home. How much you get depends on what you’re purchasing, but it breaks down as follows:

  • 5% or 10% for the purchase of a newly constructed home
  • 5% for the purchase of a resale home
  • 5% for the purchase of a new or resale mobile/manufactured home

While free money is great, there’s a catch. You’re sharing the equity with the government. If you borrow 5%, then the government gets 5% of any equity that you gain. On a positive note, if there’s ever a downturn in the market, the government also shares the losses. 

The obvious advantage of the FTHBI is the fact that you won’t need to save as much for your down payment. Let’s say you want to buy a new home that has a value of $500,000. If you’re aiming for a 20% down payment, then you would need to save $100,000. Since the FTHBI gives you up to 10%, in this case, $50,000, you’d only have to save $50,000.

This isn’t a completely free ride as the money does need to be paid back eventually. That said, the hope is, the value of your home would have gone up when you decide to sell, so it would have benefited you to take advantage of the FTHBI.

First-Time Home Buyer Incentive eligibility

The First-Time Home Buyer Incentive eligibility is where things get tricky. There are quite a few rules in place to ensure that the money is provided to people who actually need it. Here’s what it takes to qualify for the FTHBI.

  • You must be a Canadian citizen, permanent resident or non-permanent resident authorized to work in Canada
  • You or your partner must be a first-time homebuyer
  • Your total annual income can’t exceed $120,000 (If you’re buying in Toronto, Vancouver or Victoria, your income can’t exceed $150,000)
  • The amount you’re borrowing is no more than 4 times your income (If you’re buying in Toronto, Vancouver or Victoria, it’s 4.5 times your income)
  • The property you’re buying must be in Canada
  • Your portion of the down payment is not borrowed

One thing that’s worth noting right away is the definition of a first-time home buyer. You’re considered a first-time home buyer if you haven’t owned a home in the last four years. That means if you were a previous homeowner, you could still qualify as a first-time homebuyer. In addition, with the First-Time Home Buyer Incentive, either you or your partner need to be a first-time homebuyer to qualify for the First-Time Home Buyer Incentive. That’s relevant because the Home Buyer’s Plan requires both partners to be first-time buyers. 

You need to think of the FTHBI as a second mortgage. That means your first mortgage can’t be greater than 80% of the value of the property. Since you’re dealing with two different mortgages, your real estate lawyer may charge you additional fees.

How the First Time Home Buyer Incentive works

Now that you know how the First Time Home Buyer Incentive works and what the eligibility requirements are, you might be wondering how it works in a practical setting. Let’s assume for a second that you want to buy a new home that costs $500,000 and you meet all the qualifications for the FTHBI.

You still need to save the minimum down payment of 5% on your own, which is $25,000 in this scenario. If you were to take advantage of the FTHBI, you could get another 5% or 10% to increase your down payment. Let’s say you decide to take the 10% incentive. That’s $50,000 the government would give you, so the total amount of your down payment is now $75,000.

Since you have a greater down payment, your mortgage payments would be lower. That’s good for you since it could help you manage your finances. You do need to fill out the following forms when applying for the FTHBI.

Once you’ve completed and signed those forms, send them over to your lender or mortgage broker as they’ll submit it for you. Once everything is completed, you should get a signed copy. It’s a good idea to send that over to your real estate lawyer so they have a record of it.

While this program sounds great in theory, the income and purchase price restrictions will limit the number of people who can actually use the FTHBI. While it’s true the FTHBI will help you lower your monthly payments, you might be forced to lower your purchasing price to do so. For many potential buyers, that’s not a realistic scenario.

First-Time Home Buyer Incentive repayments

Generally speaking, the First-Time Home Buyer Incentive needs to be repaid under two conditions.

  • When you sell your home
  • After 25 years

Whichever scenario comes first is when you need to pay the money back. Remember, the FTHBI is a shared equity program. If you took the 10% incentive, then the government would get 10% of the capital gains from the sale of your house.

Even if you don’t sell your home, or the value doesn’t increase, you still need to pay back the FTHBI in full after 25 years. There are no partial payments.  There are also a few other scenarios where you may have to immediately pay back the FTHBI including:

  • You go through a breakup and you’re buying out your partner. If you need additional insured funds, then you need to pay back the FTHBI
  • Porting your mortgage to another lender would trigger the pay back

The actual repayment process can be a pain as you need to contact the FTHBI program administrator. Assuming you’re repaying due to the sale of your home, you need to provide proof of the current property value. That could be the sale documents or an appraisal. For those who are waiting 25 years to make a repayment, your home would be appraised at that time to calculate what you owe. Once the program administrator has reviewed the documents, you’ll be sent an invoice and payment instructions.

Is the First Time Home Buyer Incentive worth it?

At a quick glance, you would think the FTHBI is a win-win situation. Your monthly mortgage payments are lower and if the value of your home decreases, so does the amount you have to pay. While both of those points are true, there are some cons to consider.

  • You could owe much more – Since this is a shared equity mortgage, you have to pay back the government an equal amount when you sell. Let’s say your home’s purchase price was $400,000 and you took advantage of the 10% incentive. That means you would have borrowed $40,000. Now let’s say you sold at $600,000. You’d have to pay bac; 10% which is $60,000. That’s quite the premium.
  • You may not actually qualify for the FTHBI – Even though the rules of the FTHBI were expanded recently, it really hasn’t helped many more people. That’s because home prices have increased at an alarming rate. Basically, the FHTBI is useless in many parts of the country.

Using the Home Buyers’ Plan instead

Instead of focusing on the First-Time Home Buyer Incentive, you may want to consider the Home Buyers’ Plan (HBP) which may be more appealing to you. Under the HBP, each partner purchasing a home can withdraw up to $35,000 from their Registered Retirement Savings Plan (RRSP). That would give a couple a combined total of up to $70,000 that they could withdraw.

Using the HBP is more beneficial compared to the FTHBI since you’re not giving up any equity, there’s no maximum income or purchase limit, and you don’t pay tax on the withdrawals. The only catch is that you need to have the money in your RRSP for at least 90 days before you make the withdrawal since you’re borrowing from yourself.

When it comes to repaying the HBP, you have 15 years to do so starting from the second year after you made the withdrawal. Each payment would be 1/15th of what you took out. Let’s say you withdrew $30,000 from your RRSP in 2021 as part of the HBP. Starting in 2022, you’d have to pay $2,000 every year. You’re allowed to pay back the HBP at any time without penalty. If you miss an HBP payment, it’ll be considered taxable income and you’ll lose that RRSP contribution room permanently. 

Final thoughts

The First Time Home Buyer Incentive is an interesting program from the government, but I’m not sure what the purpose is. Not many people will be able to take advantage of it since there are quite a few restrictions, and the Home Buyers’ Plan is arguably better. That said, the First Time Home Buyer Incentive can be combined with the First Time Home Buyer’s tax credit.

Plus, with real estate prices continuing to climb, even fewer people will be able to use the program in its current form. Don’t worry if you own a portion of a home through a company such as Willow and addy, as that doesn’t qualify as home ownership.

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About Barry Choi

Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Money We Have is one of Canada’s most trusted sources when it comes to money and travel. You can find him on Twitter:@barrychoi

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