The FTHBI promises to help make real estate more affordable, but there’s a big catch: It’s a loan you have to repay with a share in your home’s growth in value.
Photo by Jimmy Dean on Unsplash
In a red-hot real estate market, a little help with the down payment on a home can go a long way—especially when you’re a first-time buyer without the advantage of equity in an existing property. So when the Canadian federal government decided, in 2019, to begin offering first-time home buyers down payment assistance under the First-Time Home Buyer Incentive (FTHBI), it seemed eligible buyers were in for a bargain.
Before you begin a Whatsapp chat with your real estate agent and start browsing available listings, there are a few things you should know about the FTHBI. First, not everyone qualifies, since the program is limited to a specific subset of first-time homebuyers. Second, the incentive is not free money, but a form of loan from the Government of Canada which will eventually need to be paid back, possibly at a large premium.
We break down the specifics of the FTHBI, how accessible it is and, most importantly, the potential pitfalls you should know about.
Watch: What is the First-Time Home Buyer Incentive
Who’s eligible for the First-Time Home Buyer Incentive?
For the FTHBI, “first-time home buyers” are not only those who have never owned a home before, but it can also include previous homeowners who have gone through a divorce or breakdown of a common-law partnership, or people who have not lived in a home that they owned (or that was owned by their spouse or common-law partner) for the past four years.
To be eligible for the program, however, you also need to meet the following criteria:
- Your qualifying household income is less than $120,000. Qualifying income includes money earned from investments and rental income, not just your job(s).
- You have at least the minimum down payment. The minimum down payment is 5% of the first $500,000 of the home’s purchase price, and 10% for any amount above that. However, the total amount you put down (including the FTHBI amount) must be less than 20% of the home’s purchase price. This maximum down-payment rule also assures that the FTHBI applies only to the Canada Mortgage and Housing Corporation (CMHC) mortgage-default-insured mortgages.
- You are borrowing less than four times your qualifying income. Since the maximum qualifying income is $120,000, the most any eligible buyer can borrow (and still be able to apply for the incentive) is $480,000—including the mortgage, mortgage insurance and the FTHBI amount. Lower-income earners who want to apply for the incentive are limited to borrowing even less, which would be challenging considering that the average price of a home in Canada in October 2021 was $716,585, according to data from the Canadian Real Estate Association.
For those looking to buy in Toronto, Vancouver or Victoria
In May 2021, the federal government and the CMHC, which administers the FTHBI program, expanded the eligibility rules for home buyers in three of the country’s most expensive markets. So, if you’re buying a home in the census metropolitan areas of Toronto, Vancouver and Victoria, you must meet these amended criteria:
- Your qualifying household income is less than $150,000. Again, this includes annual earnings from all sources, not just employment income.
- You have at least the minimum down payment. These requirements are the same as above.
- You are borrowing less than 4.5 times your qualifying income. In this case, because the maximum qualifying income is $150,000, the most any eligible buyer can borrow (including mortgage, mortgage insurance and FTHBI) is $675,000. While that raises the maximum qualifying purchase price in these cities to $722,000 (from the previous $505,000 maximum purchase price, which still applies in the rest of Canada), it still falls short of the $1.13 million, $1.2 million, and $871,000 average selling prices in Toronto, Vancouver and Victoria, respectively, in October 2021.
“For people who live in larger cities, these limits probably seem ridiculous,” says Sandi Martin, a fee-for-service Certified Financial Planner and partner of the virtual services firm Spring Financial Planning. “But in smaller city centres, where incomes and home prices are lower, this incentive may be the difference between someone being able to afford a home or not.”
What to know about repaying the incentive
If you meet the eligibility criteria, you can apply for the incentive, which comes in the form of a shared equity mortgage with the Government of Canada. (It’s called a shared equity mortgage because the government shares in any gains or losses on the home’s equity. More on this below.)
The government will loan buyers 5% of the purchase price for a resale home, or 10% for a new one. That works out to a possible $50,000 on a new $500,000 home, or $25,000 on a $500,000 resale property. That could save you a little bit on your mortgage payment and monthly insurance premium—somewhere around $100 to $300 per month, according to the federal government’s calculations.
Buyers aren’t charged interest on the loan, and they don’t have to make ongoing payments. But they do have to repay the incentive, either when they sell the house, or after 25 years—whichever comes sooner.
It’s important to note that the repayment is not based on the dollar amount borrowed. Instead, borrowers must repay the same 5% or 10% share that they received through the FTHBI, but calculated as a percentage of the home’s fair market value at the time of sale, or at the 25-year mark. That’s because, as mentioned above, the government benefits from any increase in equity of the home and loses out if equity goes down. So, while you’re not paying interest, there is a cost to using the incentive.
In other words, if the home has increased in value, you will need to pay back more than you borrowed. If the home has decreased in value, you’ll pay back less than you borrowed. But with the way the real estate market is going, prices may not go down anytime soon.
What does that mean in real terms?
Assuming that Canadian housing prices increase to the same degree over the next 25 years as they did in the previous 25 (that’s 375%, since the average home in 1996 was worth $150,899), your $500,000 home in 2021 could be worth $2.375 million in 2046. In that case, the repayment on the $50K you borrowed would balloon to $237,500 (or 10% of the value of the home) in 25 years.
That’s just considering normal appreciation of the home as it was when you bought it. What if over the 25 years you made significant renovations, adding to the base value of the home? It could now be worth even more—and so will that 10% slice you owe the government.
That sounds off alarm bells for Martin. “Will you have the money somewhere to pay that off?” she says to ask yourself. “Lots of people choose to stay in their homes and, after 25 years, they’re getting close to retirement. I’d be concerned that this repayment would come as a surprise 25 years after you buy your house.”
As for the possibility that the property value could go down and you’d have to pay back less, Martin’s not buying it. “I would be interested in seeing data on the likelihood of property values going down after 25 years. If there’s a house that is worth less on the 25th anniversary of purchase than the day you bought it, that’s got to be an outlier.”
Those who sell well before the 25-year limit and must repay the incentive at the time of sale could also be in for a shock. “Whenever you sell this house, you need to count on giving back the percentage of your equity—and that’s on top of closing costs, legal fees, land transfer taxes and real estate commissions,” she says.
The federal government has acknowledged that concerns about the shared equity approach might be scaring off prospective participants to the program. (Indeed, in its first 19 months, just 10,900 FTHBI applications were approved, despite the feds’ goal of helping up to 100,000 first-time home buyers during the program’s first three years.) So, in its 2021 election campaign, the Liberals pledged to make the FTHBI more flexible.
If and when enacted, the change would allow FTHBI borrowers to choose between the shared equity loan or a deferred loan. Under the deferred loan, borrowers would be charged market rate interest, but wouldn’t have to make any payments or repay the loan until they sell their home. (At the time this article was written, it was still unclear when or if the proposal would come into effect.)
Making the right decision for you: FTHBI or not to FTHBI?
“If all the numbers work out, the timing and price are right, and you’re willing to take the risk that you’d have to pay back more than you borrowed, then great,” says Martin. However, she cautions that those who are unable to save up an extra 5% down payment on their own should take that as a financial warning sign. She warns to pay close attention to all the risks of home ownership—including the possibility of rising interest rates and unforeseen maintenance and repair costs—not just the risks related to the FTHBI.
Buyers should also be aware that there may be extra legal, appraisal and mortgage refinancing fees involved in the administration of the FTHBI.
Those who do make use of the incentive would be wise to repay it before making any renovations that would increase the value of the home. Even without renovations, you may want to consider paying back the loan early (there is no penalty for early repayment), as that would limit the risks of a huge equity increase, says Martin.
“To me, if you are going to take advantage of this program, you want to ask yourself, ‘Is there a way to protect myself from that 25-year risk?’ ” she says.
