Housing prices remain strong in Canada, especially in major metropolitan areas like Vancouver and Toronto. Comparatively speaking, Montreal remains a good value among major Canadian cities, with an average home price of about $366K. But just because Montreal homes are affordable relative to other urban locales, that doesn’t mean they’re affordable for a first-time home buyer in Quebec. For many would-be city-dwellers, high real estate costs have meant these buyers have put their dreams of homeownership on an indefinite hold.
As a mortgage lender, new buyers turn to you to find solutions that can help them make the cost of a home more affordable. It can be challenging — but the good news is, a new incentive program backed by Canada’s National Housing Strategy initiative could make it a lot easier.
First-time home buyer incentive program
Pulling together a down payment is one of the first major financial obstacles facing first-time home buyers, but once the closing comes and goes, the financial strain is far from over. For the next 30 years or so, buyers need to make those monthly mortgage payments. That’s a huge financial commitment, and it can wind up unnerving a lot of buyers with more moderate incomes. Sure, your buyers can arrange to have lower monthly payments — but that typically means providing a much bigger down payment.
Under the new First-Time Home Buyer Incentive introduced earlier this month, those monthly mortgage payments are reduced — up to $286 in some cases. And the best part is, buyers don’t need to make a bigger down payment to lock in those lower rates.
The new incentive makes $1.25 billion in incentives available over the next three years, and the terms and qualifications are pretty straightforward. Buyers need to meet three criteria:
Their qualifying income can’t exceed $120,000.
The amount they borrow is limited to four times their qualifying income.
They need to have the minimum down payment on hand.
Buyers who meet these criteria can apply for a shared equity mortgage with the Canadian government — either 5% for the purchase of an existing home and up to 10% for the purchase of new construction. The incentive needs to be paid back within 25 years or when the home is sold, whichever happens first. There’s no prepayment penalty, and there’s no interest.
What’s a shared equity mortgage?
Good question. In the incentive’s shared equity mortgage, the Canadian government shares in the home’s equity — whether the home increases or decreases in value. The amount of the buyer’s repayment is based on the amount of the incentive (5% or 10%) and the value of the property at the time the incentive is repaid. Here’s an example:
The buyer purchases a home for $200,000 and receives a 5% incentive, or $10,000. The home increases in value to $300,000, so the pay-back is 5% of $300,000, or $15,000.
The buyer purchases a home for $200,000 and receives a 5% incentive, or $10,000. The home decreases in value to $100,000, so the pay-back is 5% of $100,000, or $5,000.
Under the incentive, there’s no prepayment penalty and there’s no interest. Plus, there are no ongoing payments; the entire amount can be paid back at any time within the 25-year period — ideally, once your buyer is enjoying greater earning power or when the home has built enough equity to support loan pay back.
The flexibility of the First-Time Home Buyer Incentive program means more buyers can fit those monthly mortgage payments into their budgets without compromising their financial future. As a loan officer, you can help your buyers take advantage of the new program, starting with home purchases this fall. To learn more about the First-Time Home Buyer Incentive program and to get a look at the application process for your buyers, visit the National Housing Strategy website.