I get asked a lot of questions about the new first-time home buyers’ incentive (FTHBI) introduced last September. I thought it would be good to outline the program and discuss the benefits and drawbacks of the program. I’ll add some of my own commentary about the program at the end.

What is it?

The first-time home buyers plan can provide you with one of 2 things:

·         5% additional down payment on top of your original amount for pre-existing homes (5-15% down of your own funds)

·         10% grant on brand new homes (5-10% down of your own funds)

That’s all there is it. You have access to additional down payment from the government. It isn’t free money, but more on that later.

Do you Qualify?

Okay, so into the nitty gritty, we know what the grant is, but can I receive the grant?

·         Are you a first-time home buyer?

·         Is your household income less than 120,000? This includes a spouse or partners income, even if they are not on the mortgage application.

·         Is the mortgage you are applying for less than 4x your household income? Ex. Household income =100,000/year means max mortgage of 400,000 under the program.

If the answer is yes to all 3 questions, then you qualify!

Shared Equity Program

Remember how I said it wasn’t free money? The lent money is fully repayable on either the sale of your home or if 25 years have passed. How this works, is CMHC (crown corp.) will register a second mortgage charge on your property for 5% or 10% of the value depending on how much you borrowed. They now own your property too. Any increases in value will increase the repayment on the funds and vice versa about decreases.

Example Time

You can see here the savings you would be looking at on your monthly mortgage payment. $95.84/month which ends up being $5,750.40 over 5 years. You also save a bit on the default insurance in the amount of $3,220 in this example. $8,970.40 in savings over the first 5 years, this is the upside to the program.

Now to the other end of things and the costs involved. The money lent is advertised as interest free, which it is, but your home value does not stay stagnant. So, here’s how the home value changes over time. If we base it on short term historical averages, Saskatchewan falls just shy of 3% a year increases, so let’s use 2% a year just to be safe.

Home value after 5 years – $378,603.42

Government share (5%) – $18,930.17

Initial investment – $17,500

Total savings – $7,540.23

At this point 5 years in you’ve come out ahead with all other things being stagnant. Let’s look at things from an interest savings view, which shows a better picture.

Interest savings after 5 years = 2,668.38

Interest savings after 10 years = 4,879.19

Interest savings after 25 years = $8,030.80

Over 25 years you save 8k on interest. The numbers look skewed from just a payment standpoint because you’re simply deferring a $17,500 payment you still need to make. Adding in the initial savings on Default insurance you’re looking at total 25 years savings of $11,250.00. This is the math behind the initial payment numbers that the bank of Justin doesn’t show you. Historically housing increased by 215% over 25 years, so your home is roughly worth $752,500 if you haven’t done any work to it during the 25 years.

Your grant is now repayable as 25 years are up.

That’s $37,625.00 you need to pay upfront, which you will either need to take from your savings… or another mortgage on your property.

The draw backs

Savings are clearly available from the program as outlined above. But here are some risks and drawbacks with the program:

·         Your legal bill will be higher since your lawyer has to complete two mortgages instead of one. About $300.

·         Increased home insurance. More charges on the title means more risk which leads to higher premiums.

·         You can’t refinance the property without first repaying the grant.

·         If you do reno’s you will be paying a 3^rd tax on the property. GST, PST, and FTHBI. For example, you redo the basement. The cost is 25,000. Your home value increases by 30,000. Your grant repayment has now gone up 1,500 and your home value will also increase at a faster rate. This eats into the savings.

·         Your maximum approved amount drops. You can qualify for a larger home by not using the program which makes it especially difficult in many client situations. It’s strange that the government would introduce it as a program to help people afford more, by making them qualify for less.

·         When you’re counting on using the equity in your home for making down payment on your next purchase it’s a tough pill to swallow after you’ve just paid legal fees, land transfer costs, realtor fees, and all the other little intricacies in the sale to then have to for over an additional 5% of the sale price.

·         If your argument is housing is going to go down over 25 years, I’ll tell you you’re wrong.

Closing thoughts

I don’t support the FTHBI in 95% of cases. Especially on detached homes. You’re shackling yourself in your mortgage with this grant. I haven’t met a broker who supports the program yet, and after 4 months of data in, the program has been extremely underwhelming. Big markets can’t use it because of the qualifications, small markets still don’t make sense if you look at the math and restrictions it puts on you. It doesn’t achieve it’s goal by making it easier for people to get into houses simply because it restricts your buying power by about 10%.

Unless some changes are made to this program, I stand behind not recommending it to my clients. I talk about it with everyone, but if we don’t need to use it, we avoid it. If you have more questions about the program or want to see if it’s right for you give me a call, text, or email