Posted by John Doe
For Canadians hoping to purchase a home, it’s important to budget for your mortgage. Using a mortgage affordability calculator in Canada is one way to do this. You can also exhaust options for tax rebates and government incentive programs.
One such program became available on September 2, 2019. The First-Time Home Buyer Incentive (FTHBI) is a program aimed at helping first-time homeowners receive up to 10% of the purchase value of a property. This money is used towards a downpayment, reducing mortgage costs for more affordable housing.
With the housing crisis cresting across the nation, the FBI couldn’t have come sooner. Of course, this isn’t some miraculous freebie solution. Like all good things, there are strings attached.
At Mortgages, Mortgages, we specialize in Canadian mortgages, mortgage insurance, debt consolidation, investment properties, and more. One of the ways we best serve our clients is by keeping them informed, which is why we thought it was worthwhile to share some information on the FBI for buyers in 2020.
Here’s what you need to know if you’re planning on purchasing a home for the first time in Ontario this year.
Understanding the FBI
The FBI is an incentive program for first-time buyers, but it isn’t free. The money you receive for your down payment is a type of specialty government loan. This means that those funds will eventually need to be repaid.
The loan doesn’t need to be repaid in installments, and there’s no interest. Rather, after 25 years of owning the home, or when the home is sold, the owner must repay the amount borrowed with the FBI, which is calculated as a percentage of the total value of the home.
The amount to be paid back is dependent upon the current fair market value, not the market value paid at the original time of sale. This could mean paying back a fair amount more than you paid in the first place. Of course, it could also mean saving some money should the value decrease. If you borrowed 10% of the value of your home, the government essentially owns 10% of your property.
While the name suggests the program is only for those buying their first home, it also applies to individuals who are buying following the breakdown of a common-law relationship or marriage. After 4 years of living on your own outside of a shared purchased property, you may qualify for the incentive.
Applicants must also meet some minimum requirement guidelines regarding money. For example, the household income of applicants must be under $120,000, and the down payment must be at least 5% for homes costing up to $500,000 and 10% for amounts over this initial price. No more than 19% of the purchase price may be paid as a downpayment at this time.
Other Qualifying Factors
The qualification process for the FBI doesn’t stop at income and payment restriction. The amount borrowed for the incentive also has a cap. No more than 4x the amount of an applicant’s qualifying income can be borrowed as a mortgage.
This means that no more than $480,000 could ever be borrowed if you want to qualify for the FBI. For rural Ontarians, this may not be as problematic, but those seeking new homes in Ottawa, Toronto, and other large cities could have problems qualifying for the incentive.
Is the FBI right for you?
This is a personal question and one that the mortgage affordability calculator and a consultation with a mortgage specialist can help answer. The choice ultimately depends on your ability to qualify, and your preference of repaying such a loan, which will inevitably be the case.
Some professionals are cautioning on the side of safety in taking the FTHB loan. In terms of affordability, the question remains whether an individual should accept a loan of 5% of a home if that 5% down payment is too much to pay without help.
Extra Costs to Consider
Homebuyers have a variety of costs to consider when purchasing aside from the mortgage payments. When you provide a downpayment on a home in Canada, any payment less than 20% requires mortgage insurance. This is different from the homeowner’s insurance you’re required to pay on your home.
Mortgage insurance is there to protect your lender from a potential default on the loan they’ve provided. For Canadians paying between 5% and 19.99% of the purchase price as a down payment, this cost is paid continually over the amortization period, which for Canadian lenders is usually maxed out at 25 years.
Other Incentive Plans for Canadians in 2020
Although the FBI is the latest and greatest incentive program to hit the real estate market, it isn’t the only plan offered in Canada.
Home Buyer’s Plan
To help you achieve your homeowner goals, there’s also the HBP, or the Home Buyer’s Plan, which is geared toward individuals with RRSPs.
An RRSP — or Registered Retirement Savings Plan — is a financial account type used to maintain investments and holdings until retirement. For first time homebuyers, the HBP allows you to take money from your RRSP to help with the purchase of a house. There are no financial penalties associated with this program, which is great seeing as any other withdrawal from an RRSP would result in hefty taxes.
Again, with the government, there’s rarely any funding for free, even when it’s from your own savings account. The money taken from your RRSP must be returned within 15 years.
Home Buyers Amount
There are also the potential tax credits associated with being a first-time homeowner. Through the Home Buyer’s Amount program, Canadians who are purchasing a home for the first time receive a $5,000 non-refundable tax credit, which could lead to a potential $750 savings at tax time.