How the First-Time Home Buyer Incentive Can Assist You in Purchasing a Home
First-Time Home Buyer Incentive refers to a shared-equity program that offers a loan of 5% or 10% of a home’s price to buyers, thereby reducing their mortgage expenses.
If you’re struggling to save up enough money for a down payment on your first home, the First-Time Home Buyer Incentive (FTHBI) may be the answer you’re looking for. The FTHBI is a program that offers shared equity, giving you access to 5% or 10% of the cost of the home from the federal government. Since this is a unique agreement, it’s important to gather all the information you need before applying for an FTHBI loan.
How the First-Time Home Buyer Incentive Works
Individuals who meet the eligibility criteria for an FTHBI loan will be granted one of the options mentioned below:
- For an existing home, the fee is 5% of the purchase price.
- In the case of a new construction home, the fee is either 5% or 10% of the purchase price.
- For a new or resold manufactured or mobile home, the fee is 5% of the purchase price.
The loans provided by FTHBI are free of interest and need to be completely paid back within 25 years or upon the sale of the house, whichever happens first. However, as FTHBI follows a “shared equity” model, each individual who takes part in it possesses a certain percentage of the property. This implies that when the property is eventually sold, you will have to repay a corresponding portion of its market value instead of the exact amount you borrowed.
The FTHBI appears to be a great chance for first-time homebuyers to receive essential assistance. Utilizing the funds from FTHBI to strengthen the down payment will result in borrowers having more initial equity in their mortgage. This will reduce the amount of funds they need to borrow and increase their chances of meeting the minimum down payment requirement or exceeding it.
Before deciding whether the program is suitable for you, it is important to comprehend the shared equity aspect and the qualifications that are needed.
What are the conditions to be eligible for FTHBI in Canada?
To qualify for the incentive for first-time home buyers, you must meet certain criteria:
- You must be a Canadian citizen, or permanent resident, or have the legal right to work in Canada.
- You must be a first-time home buyer, meaning you have not owned a home previously. Additionally, those who have gone through a divorce or separation from a common-law partner and those who have not lived in a home they or their partner own for the past four years also qualify.
- Make sure you possess enough money to pay the required initial payment.
- Make sure you possess enough money to pay the required initial payment.
Submitting an Application for the First-Time Home Buyer Incentive
Once a mortgage lender has pre-approved eligible home buyers and they have selected the property they wish to purchase, they may apply for the FTHBI.
The approval of your FTHBI application and its usefulness to you is determined by two essential factors:
- Income: The maximum household income allowed is $120,000, except in Toronto, Vancouver, and Victoria where it is $150,000.
- Location: The maximum mortgage amount is typically restricted to four times your qualifying income in the majority of the country, but in Toronto, Vancouver, and Victoria, the limit is increased to 4.5 times your income.
Presented below are two brief illustrations that demonstrate the highest borrowing limits that can be availed through FTHBI in diverse situations.
1ST Location: Ottawa
- Household income: $120,000.
- Maximum FTHBI loan (4 times income): $480,000.
2ND Location: Vancouver
- Household income: $150,000.
- Maximum FTHBI loan (4.5 times income): $675,000.
Your FTHBI loan will not be approved if your household income exceeds the income thresholds by even a dollar or if there are no homes available for purchase within the government-established price limits.
Once you have finished the pre-approval process, you should proceed to complete the forms available on the FTHBI website. Then, hand over the forms to your lender, who will be responsible for submitting them on your behalf.
Once your application is approved, you will need to contact the closing service provider, FNF Canada, at 1 (855) 844-4535 to begin the process of receiving your Incentive. It is important to do this at least two weeks before the closing date of your home purchase and have the contact details of your lawyer/notary ready to provide.
Repayment of FTHBI Loan
As the First-Time Home Buyer Incentive (FTHBI) involves a shared equity arrangement with the government, they have a stake of 5% or 10% in your property, which implies that they are entitled to a proportionate share of the property’s value when you repay the FTHBI loan. The amount you need to pay back will increase as your home’s value increases.
In case the value of your residence rises, the amount you have to repay will be the lesser of the two options:
- The percentage of the initial loan that was based on the present market value of the house.
- The equivalent of 8% annual appreciation of the initial loan amount.
If the value of your home falls, you must repay the greater of the two amounts.
Let’s delve a little bit deeper. In this instance, you buy a $600,000 property with a $30,000 FTHBI loan. You sell it for $1,000,00 after ten years.
- $50,000 would be 5% of the prevailing sale price.
- The annual appreciation limit would limit your debt to $2,400 per year, for a total of $24,000. Add $24,000 to the initial loan amount and you get $54,000.
- You’d have to repay the lesser of the two amounts, $50,000.
To avoid overpaying, paying off your FTHBI loan as soon as possible is advisable. You have the flexibility to repay it at any time without facing penalties or being forced to sell your home. A professional appraiser will determine the current market value of your home, and you will be required to repay 5% or 10% of that amount.
Will the First-Time Home Buyer Incentive Assist You in Purchasing a Home?
If you’re having trouble saving for a down payment, the FTHBI program can assist you. By creating a larger down payment, you can apply for a smaller mortgage, resulting in reduced interest charges, more affordable monthly payments, and improved affordability.
The FTHBI program could potentially help you save money. When we tested the program using the Government of Canada’s FTHBI calculator, the results were generally positive, if not incredibly significant.
- For example, a first-time homebuyer in Ontario who purchases a $725,000 home with an $80,000 down payment and a 25-year mortgage at a 5.5% interest rate could save approximately $264.11 per month by using the FTHBI.
- First-time homebuyers in Calgary who purchase a $500,000 home with a $30,000 down payment and a 25-year mortgage at a 5.5% interest rate could save approximately $183.14 per month by using the First-Time Home Buyer Incentive (FTHBI).
Now, let’s compare the monthly savings you’ll enjoy with the FTHBI to how much you might have to repay in five years.
- Suppose you sell your Ontario home for $950,000. You have to pay back the government 5% of the sale price, which is $47,500. Although you borrowed $11,250 more than you did five years prior, you saved $15,846 in mortgage payments during that time. So, you still have more than $4,000 in savings — and you own a house.
- When the Calgary home sells for $600,000, you have to pay back the government 5% of the sale price, which is $30,000. That’s $5,000 more than what you borrowed at first. But you also saved $10,988 in mortgage payments, therefore, in this scenario, you have almost $6,000 in mortgage savings left.
The Advantages and Drawbacks of the First-Time Home Buyer Incentive
Advantages
- Creating Wealth: Building wealth through the FTHBI program may require paying back more than the initial loan, but it can also lead to significant equity growth. If the property’s value doubles, the repayment amount will also increase, but the potential profit could outweigh the borrowing cost by hundreds of thousands of dollars.
- Purchasing a house: The First-Time Home Buyer Incentive (FTHBI) can reduce your mortgage expenses and help you purchase a home even if other programs are not viable options.
- There are no penalties: You won’t face any penalties if you choose to pay back the loan in its entirety before the 25-year time frame ends. This allows you to exit the program before your home value increases at a rate that can’t be sustained.
- Zero-Interest: With 0% interest, your FTHBI loan will not add to the strain on your monthly budget.
Drawbacks
- Limitations: There are limitations to consider when it comes to income and home valuation limits. These limitations may make it difficult for some households to find suitable housing.
- Larger Repayment: It’s important to consider the shared equity component of the FTHBI program, as it may result in a larger repayment to the government than your initial borrowing amount.
- Appraisal Expenses: If you choose to leave the program without selling your home, you will need to cover the cost of a professional appraisal to ascertain its present market value.
Other first-time home buyer assistance programs
There are other programs available for first-time buyers besides the unique structure of the First-Time Home Buyer Incentive.
If you aim to increase your down payment, you might want to think about utilizing the Home Buyers’ Plan. This plan permits you to use your RRSP savings for purchasing a house without incurring any early withdrawal charges.
Homeowners can benefit from various “green home” grants that offer savings when they make energy-efficient upgrades. Additionally, the First-Time Home Buyers’ Tax Credit can reduce your tax bill by up to $1,500.
As a first-time home buyer, you may be eligible for grants and incentives at the provincial and municipal levels. These programs are particularly beneficial if you’re planning to purchase your first home in pricier real estate markets such as Ontario and British Columbia.