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How to Understand the First-Time Home Buyer Plan Repayment

Are you confused by how the first-time home buyer incentive repayment plan works? You’re not alone.

Loans and government programs come with all sorts of repayment plans. Term loans require you to pay back your loan with interest during a set repayment period. Meanwhile, the Registered Retirement Savings Plan (RRSP) under the Home Buyers’ Plan (HBP) gives you 15 years to repay the RRSP, starting the second year after you originally withdrew funds.

The first-time home buyer incentive (FTHBI) is no exception to having a unique repayment plan. Unlike term loans, the FTBHI is interest-free, and unlike the RRSP, you—usually—don’t have to pay it back anytime soon.

In this post, we will cover everything you need to know about the first-time home buyer plan repayment structure, including:

  • How the FTHBI incentive works
  • When do you start repaying it
  • How your home’s value influences the payback amount
  • The home buyer’s repayment step-by-step process
  • How to reap the benefits of the repayment plan

Let’s get started!

How Does the FTHBI Incentive Work?

In our first-time home buyer incentive guide, we took a deep dive into how the program works and who qualifies for it. In short, the incentive is a shared equity mortgage. The Canada Mortgage and Housing Corporation (CHMC) loans you 5% or 10% of your home’s purchase price, depending on the type of home you’re buying:

  • Newly constructed homes – 5% or 10%
  • Already existing homes – 5%
  • New or existing mobile or prefabricated homes – 5%

When you make a larger down payment, your monthly mortgage payments are lower. First-time home buyers could easily save $100+ a month, or $1,000s a year, which they can use to build back their savings or buy things for their new home.

How much can you save altogether? Here’s a similar example to one we used in our guide. Let’s assume Mike and Jamie’s home purchase price is $450,000. Also:

  • Their interest rate is 4%
  • Their down payment is 10%
  • The FTHBI is 5%
  • Their mortgage loan is 25 years

Costs

Without the FTHBI

With the FTHBI

Difference

Purchase price

$450,000

$450,000

0

Down payment

$45,000

$67,500

(10% + 5% FTHBI)

$22,500 (your FTHBI)

Mortgage loan insurance premium

$12,555

$10,710

$1,845 (saved)

Mortgage amount

$417,555

$393,210

$24,345 (saved)

Interest Cost

$241,372.10

$227,299.21

$14,072.89 (saved)

Monthly mortgage payments

$2,196.42

$2068.36

$128.06/mo

$1,546.72/yr

Total Savings

$1,546.72 x 25yrs

$38,418

Here’s the calculator we used.

Also, the home buyer incentive doesn’t require you to make any interest or ongoing payments. You also don’t get charged prepayment fees, meaning you can start paying it off at any time.

Sounds great, right?

It is. However, the FTHBI is still very much a loan, and you have to pay back your incentive… eventually.

When Do You Start Repaying your FTHBI?

Your FTHBI must be paid in full either after you’ve owned the home for 25 years or when you sell it, whichever comes first. You can enjoy up to 25 years of savings before paying a cent! However, we don’t recommend that.

Unlike other loans, the amount you’ll owe is determined by the value of your home when you pay back your incentive.

How does Home Value Influence the Payback Amount?

Here’s where things get tricky. Since the FTHBI has a shared equity mortgage, you’re not paying back the original 5% or 10% the federal government loaned you. Inside, you’re paying for that percentage at your home’s current value.

Let’s revisit Mike and Jamie’s example. When they purchased their home, it was worth $450,000, and their FTHBI was $22,500. 25 years from now, their home is now with $900,000. They’re not paying $22,500 back to the CHMC. Instead, they owe $45,000, which is 5% of their home’s value. In other words, they’re paying $22,500 more than what they originally received.

It’s worth noting that their total savings overall are $38,418, so the incentive saved them: $38,418 – $22,500 = $15,918.

However, you might not be so lucky. According to the National Post, home prices increased an average of 375% nationwide in the previous 25 years. If that trajectory continued, Mike and Jamie’s $450,000 home would actually be worth $1,687,500.

5% of that is $84,375, and $38,418 – $84,375 = -$45,957.

It’s also worth mentioning that Toronto’s and Vancouver’s markets shot up by as much as 450% to 490% in the last 25 years.

Obviously, just because the prices have inflated by this amount in the last 25 years doesn’t mean this trend will continue, but it’s a risk you should be aware of.

Luckily, we have a way to hack this payback plan so that it works in your favor, and we’ll show you how shortly.

Should You Renovate Your Property?

When home buyers learn how the FTHBI works, many feel de-incentivized to renovate their homes. After all, renovations add value to your home, which means you’ll have to pay more when your loan comes due.

While this is a downside of having a shared equity mortgage with the CHMC, it shouldn’t keep you from renovating your home. If Mike and Jamie renovate their kitchen and add $20,000 to their home’s value, the CHMC’s value is only 5% of that, or $1,000. Not only will they enjoy the kitchen they want, they’ll also reap 95% of the profits if they decide to sell.

The 4-Step Repayment Process

Whether your 25 years is up, you sell, or you decide to pay your loan off early, here’s how the repayment process works:

Step 1: Notification

 As the borrower, you or your legal representation must contact the CHMC Program Administrator to let them know you’re planning on repaying the loan.

Here’s how you can reach them:

Step 2: Property Valuation

Next, you must provide the Program Admin with documentation that shows your property’s current market value at the time you’re planning on repaying your loan. To do so, you need either:

  • An appraisal in compliance with program requirements
  • Agreement of purchase and sale documents

If you’re selling the property, your incentive amount is based on the market value of your home when you’re selling it. Usually, this is supported by the home’s purchase price, as stated in your purchase and sale agreement. In certain situations, you may need an independent third-party appraisal performed in accordance with the FTHBI program’s requirements.

If you repay early or at the end of 25 years, the incentive amount is determined based on your property’s fair market value. Again, this is determined by an independent third-party appraisal performed in compliance with the FTHBI program’s requirements.

Step 3: Documentation Review

This step is pretty self-explanatory. The Program Admin reviews the documents you give them and sends you an invoice with instructions on how to pay back your loan.

Step 4: Payment

Once you pay the loan back in full, the Program Admin works with you or your legal representation in accordance with the laws of your province and/or municipality to complete the discharge of your shared equity mortgage.

How to Reap the Benefits of the FTHBI Program

Perhaps the biggest question surrounding the FTHBI program is whether the program is worth it. If you wait the full 25 years, you could end up with a huge bill to pay.

If Mike and Jamie buy their home at $450,000 now, and then it increases 375% in value, they’re living in a home worth $1,687,500. That’s great, until the $84,375 bill comes due. If this is the case, it may be more advantageous for Mike and Jamie to just put 10% down and then pay the extra 5% that’ll add $38,418 over 25 years.

Obviously, one strategy would be to sell. If you’re selling a home that’s increased in value by $1,237,500, that $84,375 will hurt, but that eats up less than 7% of your income. You’ll still end up $1,153,125 ahead, minus real estate realtor fees and other expenses.

Repay Early When the Housing Market Dips

If you decide not to sell, there’s a way to hack the system to make your incentive work for you.

Your home buyers repayment plan is based on the value of your property when you choose to pay it. While the housing market usually goes up, there are always periods where your home decreases in value.

Let’s say Mike and Jamie’s home is worth $450,000 now, and in five years it’s worth $600,000. If they repay their loan at this point, they’ll owe $30,000, not $22,500. However, in year six, the housing market dips, and suddenly Mike and Jamie’s home is only worth $500,000. If they repay their loan at $500,000, they’ll owe $25,000—$5,000 less than the year before.

If their home ever dips before $450,000, they can repay their loan for less than what they got it for. There’s no other program like it!

Our recommendation is to open a high-yield savings or investment account and set money aside to pay off your loan. Then, when the housing market dips, repay your loan and call it a day!

Still confused? Reach Out for a Consult Today!

The FTHBI is a great program when used effectively. It can save you hundreds every month, the repayment process is easy, and if you plan accordingly, you could end up paying less than what you originally received.

If you still need additional information, check out our FTHBI guide or send us a message today!