The first-time home buyer incentive savings program can shave hundreds off of your monthly mortgage payment. However, as with almost every loan, you eventually have to pay the first-time home buyer incentive (FTHBI) back.
Is the money you save upfront enough to justify getting a shared equity mortgage with the federal government? We’ll lay out the pros and cons and let you decide!
In this post, we’ll talk about:
- How the FTHBI works
- How the FTHBI affects monthly mortgage payments
- The pros and cons of the FTHBI
- Whether the FTHBI is worth the investment
Let’s get started!
What is the First-Time Home Buyer Incentive?
The FTHBI is a program available to first-time home buyers, where the Canada Mortgage and Housing Corporation (CHMC) will loan you an additional 5% or 10% to your down payment. When your down payment is larger, your monthly mortgage payments are smaller because you have less to pay back.
The qualify, you have to be a first-time home buyer in Canada, have at least 5% of your down payment, and you must be either a:
- Canadian citizen
- Permanent resident
- Non-permanent resident who is legally authorized to work in Canada
If you’re buying a home previously owned by another homeowner, or if it’s a new or existing mobile or prefabricated home, you’re eligible for a 5% incentive. If it’s a newly constructed home and you’re the first to live there, you can qualify for either a 5% or 10% incentive.
Our article on everything you need to know about the FTHBI thoroughly covers the rest of the qualifications.
Also, you might be a first-time home buyer without even knowing it! According to the Canada Revenue Agency, you’re a first-time home buyer if you have not occupied a home that you or your current spouse or common-law partner owned within the previous four years.
How the FTHBI Affects Monthly Mortgage Payments
Think an additional 5% won’t make a big difference? Think again! In our first-time home buyer plan repayment guide , we created a hypothetical situation where these were the parameters:
- Purchase price: $450,000
- Homeowner’s down payment: 10%
- Interest rate: 4%
- Mortgage loan: 25 years
Without the FTHBI, you would pay $658,927 over 25 years. With a FTHBI of 5%, that number drops to $620,509—a total savings of $38,418!
When broken down, that’s $128.06/mo and $1,526.72/yr. That’s money you can use to build back up your savings, or use for repairs or renovations to your new home.
Unlike most other loans, you don’t have to pay back the FTHBI anytime soon. You’ll only be required to pay it back in full when:
- You sell the home
- You’ve owned the home for 25 years
We’ll dive deeper into what you have to pay back—and how much—a little later.
FTHBI Pros and Cons
Before signing up, you should be aware of the benefits and drawbacks of the FTHBI. Here are main pros and cons:
Obviously, making a lower monthly mortgage payment is already a big pro. Here are a few more to consider:
No interest fees
Unlike conventional loans, you won’t be paying back interest on your incentive. Instead, you’ll pay a percentage of the fair market value of your home.
No prepayment fees
You can decide to begin paying off your loan whenever you’d like, so you can determine when it’s most advantageous to do so.
Upfront tax incentives
The FTHBI adds an extra $10,000 to your First Time Buyer Registered Retirement Savings Plan (RRSP), increasing from $25,000 to $35,000 per applicant. Often, this results in a few thousand dollars more in upfront tax incentives.
Decreased mortgage loan insurance premiums
Homeowners must have insurance. The FTHBI helps you keep a little extra money in your pocket by lowering your insurance costs.
Plenty of homes available
Qualifying homes include:
- Single family detached houses
- Semi-detached houses
- Condominium units or townhouses
- Freehold townhouses
- Duplexes, triplexes, and fourplexes
- Mobile homes
Not every loan program is perfect. Here are the main drawbacks of the FTHBI:
This is the big one. Because the FTHBI is a shared equity mortgage, the CHMC has 5% or 10% equity in your home. If you purchased your home and the CHMC loaned you 5% of your down payment, they have that percentage in equity, regardless of when your home’s fair market value changes.
In other words, if your home was worth $500,000 when you purchased you, the CHMC would have $25,000 in equity. If you sell your own at $1,000,000, the CHMC’s equity swells to $50,000
Income and Mortgage Caps
If the combined annual income of all borrowers exceeds $150,000 in Greater Vancouver Area (GVA), Victoria, or the Greater Toronto Area (GTA), or $120,000 anywhere else in Canada, you won’t qualify for the FTHBI.
Also, the home buyer incentive is capped at 4.5x the qualifying income for properties in GVA, GTA, and Victoria, and 4x anywhere else in Canada. If you live in Vancouver and earn $100,000, the most you can qualify for is $450,000. If you live in Alberta, that number drops to $400,000.
You Have to be Ready to Pay It Back
If you’re selling your home or hit 25 years, you’ve got to pay the loan back. You have to plan ahead and save the money you need to pay back in full. If you ignore it, and things begin to pile you (because life happens), you may find yourself scrambling to come up with the money.
When unprepared, this could royally screw up your retirement.
Is the FTHBI Worth It?
The FTHBI is great for instant gratification and will save you money over time. Also, it’s a loan that you don’t have to pay back immediately—and if you choose to pay it early, you can do so at your own convenience.
If you can save money and watch the market, you can make the most of the incentive program by paying it back when your property dips in value.
For example, let’s say you buy your home for $500,000 with a 10% FTHBI, which comes out to $50,000. Five years later, the market drops and your home is now worth $480,000. If you chose to pay off your incentive, then you’d only owe $48,000, meaning you’re paying back $2,000 less than what you’ve received, while still reaping the many other benefits of the program!
However, the incentive can—and usually will—work the other way. Home prices increased by 375% nationwide from 1996 to 2021. If the housing market continued following this trajectory, your home’s fair market value could go from $500,000 to $1,875,000. While that’s a great return on your investment if you decide to sell after 25 years, many people will choose to remain living in their homes. Either way, that $50,000 initial down payment will now cost you $187,500 to pay back.
If you’re a keen investor, you can make out ahead. Let’s say you had an extra $50,000 (most of us don’t, but it’s a nice thought) and decided to invest in the S&P 500, rather than adding it to your down payment. If the S&P 500 followed the same trajectory it had from 1996 to 2021, your $50,000 investment would now be worth $597,482.01. Even after paying capital gains tax, you can still pay your FTHBI in full and have a couple hundred thousand left over.
FTHBI Savings: Our Final Thoughts
The FTHBI program is great, if you can plan ahead and keep an eye out on your housing market, the FTHBI is definitely worth it! You’ll enjoy upfront tax incentives, lower mortgage and insurance costs, no interest or prepayment fees, and there are plenty of homes available.
If you’re not a great planner, you could find yourself unprepared to pay the incentive when it comes due. Also, the CHMC was shared equity in your property. If that makes you uncomfortable, the FTHBI is probably not for you.
Still need more advice? Ask Vancouver realtor – Kim Lee on what she thinks of the FTHBI. As one of the best Vancouver realtors, we’d love to offer you our advice when planning on purchasing your first property in the Greater Vancouver Area, so send us a message!