Does Owning an Investment Property Disqualify You from the First-Time Homebuyer Incentive in Canada?
I have encountered this question several times: does owning an investment property disqualify you from the First-Time Homebuyer Incentive in Canada? The straightforward answer is no. The First-Time Home Buyer Incentive (FTHBI) offers a valuable opportunity for Canadians to enter the housing market. This government program provides an interest-free loan that helps cover the cost of purchasing your first home. The amount you repay is determined by the future value of your property, ensuring that the repayment aligns with the home’s appreciated value.
According to the CRA, you are considered a first-time homebuyer if you did not occupy a home you owned four years before your home purchase. Therefore, if you purchase a property as an income property and do not live in it, it will not count as your first home, allowing you to still participate in first-time homebuyer programs when you purchase a primary residence in the future.
This article will explore how the FTHBI works, its advantages and disadvantages, eligibility criteria, and additional considerations. Our goal is to provide you with comprehensive information to help you decide whether the First-Time Home Buyer Incentive is the right choice for your home-buying journey.
What is the First-Time Home Buyer Incentive?
The First-Time Home Buyer Incentive is a government program aimed at making homeownership more affordable for first-time buyers. It offers a shared equity loan of up to 10% of the property’s purchase price to assist with your down payment. This incentive is available across Canada and is specifically for individuals buying their first home.
If saving for a larger down payment is challenging, the FTHBI loan can be beneficial. By using this loan to increase your down payment, you can reduce the size of your mortgage, leading to lower monthly payments and making homeownership more manageable.
How Does First-Time Home Buyer Incentive Work?
To start, you’ll need to qualify for the First-Time Home Buyer Incentive, which we’ll discuss further. If you meet the qualifications, you’ll receive a loan based on the type of home you buy:
- 5% of the purchase price for an existing home.
- 5% of the purchase price for a manufactured or mobile home.
- 5% or 10% of the purchase price for a newly built home.
The loan is interest-free but must be repaid within 25 years or upon selling the house, whichever comes first.
Repayment is based on the home’s value when you sell, not the initial amount borrowed. Essentially, the repayment amount reflects the property’s value at that time, plus or minus a maximum of 8% per year of any value change.
While you may repay more if your home appreciates, the savings from reduced mortgage payments can outweigh the amount repaid.
What is the Maximum Amount You Can Receive from the First-Time Home Buyer Incentive?
The loan amount is 5% or 10% of the property value. The total amount you will receive depends on the property value.
Must You Repay the First-Time Home Buyer Incentive?
You must repay the FTHBI loan, but the repayment structure can benefit you. This loan operates as a shared equity agreement, meaning both you and the government hold a stake in the property.
Instead of repaying the exact amount borrowed, you repay a percentage of the property’s market value. If the government provided 5% or 10% of the home’s purchase price, they are entitled to that same percentage of the property’s value when they repay the loan or sell the home.
The repayment amount depends on the home’s value at the time of repayment. If your home has increased in value, you will repay the lower percentage of the home’s value or 8% annual growth of the borrowed amount. Conversely, if the home has decreased in value, you will repay the higher percentage of the home’s value or an 8% annual loss of the borrowed amount.
You must repay the loan in full either when you sell the property or within 25 years, but you can also repay it earlier without penalties and without selling the home. The repayment amount will be based on the home’s value at the time of repayment.
What is The Qualification for the First-Time Home Buyer Incentive?
As the name suggests, the First-Time Home Buyer Incentive is available exclusively for those buying a home for the first time. This means you must have never owned a home before. Additionally, you must not have lived in a home you or your spouse or common-law partner owned in the past four years.
If your marriage or common-law relationship has recently ended, you might still qualify despite not meeting the standard criteria.
Eligibility also requires you to be a Canadian citizen, permanent resident, or authorized to work in Canada. You need to have sufficient funds for the minimum down payment and be pre-approved for a mortgage covering more than 80% of the property’s value.
There is an income cap for eligibility: $120,000 in most parts of Canada or $150,000 if purchasing in Toronto, Victoria, or Vancouver. Additionally, you cannot borrow more than four times your income. However, this limit increases to 4.5 times your income in Vancouver, Victora, or Toronto.
Can You Qualify for a First-Time Homebuyer Incentive if You Already Have an Investment Property?
Yes, owning an investment property does not disqualify you from the First-Time Homebuyer Incentive in Canada. The CRA defines a first-time homebuyer as someone who has not occupied a home they owned in the four years leading up to their purchase. If you buy a property as an income property and do not live in it, it does not count as your first home. This means you can still qualify for first-time homebuyer programs when you buy a primary residence in the future.
Is it Better to Own Your First Home as an Income Property or Primary Residence?
If your goal is to buy an income property, it’s generally better to purchase it directly as an investment rather than using it as a primary residence first and then converting it to a rental. This approach helps you fully leverage the benefits and strategies available for investment properties and future first-time home purchases.
First-Time Home Buyer Incentive Application Process
If you’re a first-time homebuyer in Canada eligible for the FTHBI loan, start by getting pre-approved for a mortgage. Once you have mortgage approval, you can select your property and proceed with the FTHBI application.
The application process is straightforward. Download and complete these two forms:
- FTHBI – SEM Information Package
- SEM Attestation and Consent Form
You can find both forms in PDF format here. After filling them out, print and submit them to your mortgage lender, who will handle the submission.
If your application is approved, contact FNF Canada to finalize and activate your loan. Be sure to do this at least two weeks before your closing date.
What Are The Pros and Cons of the Canada First-Time Home Buyer Incentive?
Pros
- The loan is interest-free.
- There are no penalties for early repayment.
- It simplifies the application process.
- Helps reduce the overall cost of your mortgage.
Cons
- Income and home valuation limits could affect your eligibility.
- Not available to all homebuyers.
- You might incur appraisal costs if repaying the loan without selling your property.
Additional Government Support for First-Time Home Buyers in Canada
First-time homebuyers in Canada can access various government assistance programs. Exploring these options is a good idea to find the one that best fits your needs.
Tax-Free Home Savings Account (FHSA)
The FHSA helps you save for your first home with tax-deductible contributions. You can contribute up to $8,000 annually, with a maximum limit of $40,000. This account is exclusively for first-time homebuyers.
Home Buyer’s Plan (HBP)
With the Home Buyers’ Plan (HBP), you can withdraw up to $35,000 from your Registered Retirement Savings Account (RRSP) tax-free or up to $70,000 for a couple. This money can be used towards purchasing your first home.
To qualify, your income must be $120,000 or less, and you have 15 years to repay the withdrawn amount.
Provincial Incentives
Incentives vary by province, so check what’s available in your area, especially in higher-cost markets like Ontario and BC. For example, Alberta offers the Public Essential and Key (PEAK) Program, Ontario has the Land Transfer Tax Refund for First-Time Homebuyers, and New Brunswick provides the Home Ownership Program.
Frequently Asked Questions (FAQs)
How does RRSPS benefit first-time home buyers?
The Home Buyer’s Plan (HBP) allows you to withdraw up to $35,000 from your RRSP without paying taxes on it, which can be used for purchasing a home.
What Are the Closing Costs for First-Time Homebuyers in Canada?
Closing costs can differ but typically range from approximately 1.5% to 5% of the home’s purchase price.
Should You Focus on Paying Down Your Mortgage or Contributing to Your RRSP?
It depends on the interest rates. If your mortgage rate is higher than the return on your RRSP, paying down the mortgage first might be more beneficial.