As of September 2, 2019, one of the biggest federal programs to help home buyers in many decades is now in effect. The First Time Home Buyer Incentive, or FTHBI, offers eligible buyers up to 10% of a home’s purchase price (money towards the down payment).
This program will lower the borrowing costs of a hefty mortgage, and gives homeowners slightly more flexibility and options in purchasing their first property. To be eligible, your household income should not exceed $120,000. Second, you should have at least 5% of the purchase price of up to 500K and 10% for more than 500K ready. Third, you should not be borrowing more than four times your qualifying income. And finally, you must be a first time home buyer.
If you’re buying a $700K home, and you have $70K, the federal government will provide you with $70K so you manage a 20% down payment and so you avoid a stress test or extra mortgage insurance. The $70 the federal government gives you as part of the incentive is not a grant, it’s a loan but with special conditions. You pay no interest and no monthly payments on the incentive. However, after 25 years, or if you sell the house, you have to pay the federal government back 10% of the home’s equity. This is where the incentive may complicate matters for those who qualify and have to decide on going ahead with the money. Over the last 25 years, property values have appreciated by almost 220%, or over 8.5% a year. Let’s say that $700K home appreciates at the very conservative rate of 5.5% a year over the next 25 years just to be safe; that would result in a home value of roughly $2.8 million by 2044.
That means you’ll be sending the federal government a cheque of $280K in 2044. Yes, you had some assistance along the way and got a bigger, better first time purchase, but it’ll cost you in the long term. The incentive can be repaid early, however, and a smart homeowner will repay the incentive before making significant renovations or structural changes to a home that would boost equity. The monthly savings in mortgage payments can also be invested over time which would generate a fair amount of cash ready to repay the incentive. As is always the case with financial leveraging, the first time home buyer incentive comes with advantages and disadvantages but offers first time buyers an option to manage the huge costs of a real estate purchase.