The CMHC, Canada’s housing agency could soon be helping first-time home buyers by contributing up to 10 per cent of the purchase price of a home and bring down the mortgage load for borrowers.
The budget offers the program, known as the First Time Home Buyer Incentive, as a way to help with housing affordability. The government is earmarking $1.25 billion over three years for something it’s calling a “shared equity mortgage.”
Functionally, it’s more like an almost interest-free loan — one where the repayment plan doesn’t require any payback until years in the future. In order to qualify, an applicant must have a household income of less than $120,000 per year and be able to come up with a five per cent down payment — the minimum requirement for an insured mortgage with the Canada Mortgage and Housing Corporation (CMHC).
CMHC is the Crown corporation that backstops the vast majority of Canada’s housing market by insuring the loans that finance it. This new program will make its role in the market even larger than it already is.
In addition to those stipulations, the program also caps out at four times the applicant’s annual income, which means it can only help home owners looking to buy properties where the mortgage value plus the CMHC loan don’t exceed $480,000.
But if a would-be buyer meets the conditions described above, under the program the CMHC would kick in up to 10 per cent of the value of a newly built home, or five per cent of the value of a resale.
The CMHC would contribute that amount in exchange for a corresponding equity stake in the home. That has the effect of bringing down the size of the homeowner’s mortgage — but comes with a bill to be paid down the line.
For example, if a first-time buyer wants to buy a home that costs $400,000, they’d have to come up with a $20,000 down payment, under both the new rules and the old ones.
Normally a buyer would opt for loan for $380,000 to cover the rest of the purchase price — but under the new program (if it’s a newly constructed home), CMHC could kick in $40,000 toward the purchase price, in exchange for a 10 per cent stake in the home.
That brings the buyer’s mortgage down to just $340,000 for the home, instead of $380,000. On a standard mortgage at 3.5 per cent interest, that translates into a monthly mortgage payment more than $200 lower than it would have been for the 25-year life of the loan. That’s more than $2,700 a year in potential savings.
The catch is that the homeowner eventually has to pay back the CMHC’s stake in the property — but they don’t have to do that until they sell (or sooner, but only if they want to).
The government is estimating that the plan could create about 100,000 new first time buyers over the next three years.
Besides this help, going forward, first-time buyer can withdraw from an RRSP, without penalty — $35,000, up from the current level of $25,000 where it has been for the last decade. And Ottawa also will amend the RRSP withdrawal rules to help people who have been through family crises.
Starting this year, Canadians who have seen their marriages or common law partnerships break down will be able to participate in the Home Buyer’s Plan, even if they don’t meet the technical requirement of being a first-time buyer.
The program launched in 2017 to fund construction of rental units with low-cost loans is to be expanded.
But critics of this announcement by the government to address housing affordability say that it doesn’t do anything to make housing affordable but rather simply makes it easier for first-time homebuyers to get a break on part of their mortgage. -CINEWS