First-Time Homebuyer Incentive - What We Do And Don't Know
Since it was proposed back in March, the First-Time Home Buyer Incentive (FTHBI) is slowly taking shape. While it is being touted as a measure to address affordability by the federal government, the response has been mixed. On one hand, it has been criticized as an overly complex program that does not address how difficult it is to qualify for a mortgage, and is simply a strategy to win millennial voters over with an approaching election. On the other hand, it does lower carrying costs and could appeal to those lower-income buyers who are hesitant to commit to home ownership because of the monthly costs. This solution was also chosen because it has a low inflationary impact on housing prices.
Regardless of how it is viewed, it is clear the Government is pushing to roll this out before the election. While we wait for clarity from lenders on if and how they plan to implement the FTHBI, here are the high points of what we know and what I still see as the gaps in understanding today:
What We Know
For first-time buyers with a qualifying income of $120,000 or less, you can apply for a Government of Canada shared-equity loan that will provide an additional 5% of down payment on a re-sale home, or an additional 10% down on a newly built home. The additional down payment is in the form of a shared-equity loan that will be registered to your title as a second mortgage. This loan will lower your mortgage and therefore decrease monthly mortgage payments, making home ownership more affordable.
September 2, 2019 - start date for applications
November 1, 2019 - start date for closings (possession dates)
Repayment is due when you sell or after 25 years, whichever happens first. It can be prepaid at anytime without a pre-payment penalty.
The combined mortgage and FTHBI amount is capped at four times your qualifying income.
The amount you will pay back is determined by the fair market value of your property when you sell or pay back the loan. They share the equity you gain or the loss you incur, depending on what your market value has done. You pay back the same percentage you borrowed, but of the current value when paying it back.
You must have the minimum down payment (5% of the first $500,000 of the lending value and 10% of the lending value above $500,000) from traditional sources to participate. This can be gifted from a relative, saved, or withdrawn from an RRSP. No flex down allowed (borrowed down payment).
Mobile/manufactured home purchase will only qualify for the 5% loan, even if brand new.
At least one borrower must be a first-time buyer, as per the definition given by the Government of Canada. (see resource link below).
It must be an insured mortgage, through any of the three insurers, with the first mortgage greater than 80% of the value of the property. The insurance premium is based on the loan-to-value of the first mortgage only (i.e. after the Incentive is added to down payment)
What We Do Not Know
Renewals - will you be able to switch lenders for better rates at renewal? Because the governments interest will be registered as a lien or second mortgage against your property, it makes switching lenders more complex. Clearly consumers would be at a disadvantage when it comes to negotiating a new rate at renewal if their lender knows they are not able to move the mortgage elsewhere. This has not been addressed.
Income Calculation - this entire program is really based on your household income level. So what number will be used to determine your household income: Your salary? Your Notice of Assessment income level? The nitty gritty details of how this will work are still unknown 6 weeks from the start of the program.
Lender Participation - The only way this program can be accessed is if mortgage lenders support it and are given the time to set up their systems to actually process them. We have not heard any announcement from a major bank supporting the government announced timelines. The program itself has been criticized as an election gimmick more than an effective tool to get people into homes. Will it make sense for lenders to scramble to change IT platforms, revise underwriting, and train staff on a program that could disappear post-election? We await take-up from lenders for the answer.
Pay It Back At 25 Years Or...? - It has been laid out that the government loan must be paid out at 25-years or sooner, but what happens if at that deadline you do not have the means to pay it out with savings or do not qualify for a refinance to clear it? Would the government force a sale or foreclose?
Government of Canada - First-Time Home Buyer Incentive Website
Edmonton Journal Article - Determine If The First Time Home Buyer Incentive Makes Sense For You
This program is complex even for those of us working in mortgages every day. If you are interested in using the FTHBI, reach out to me early to understand if this will be a fit for your purchase. And expect further clarifications and updates from the Government as we approach the September 2nd implementation date.
Mortgage Considerations When Property Values Drop - Don't Be Caught By Surprise
Broadly speaking, properties in Alberta have seen a decrease in value in the last couple of years. This has been more prominent with certain property types (condos for example) and locations, but lower property values are a new reality for many Albertans. In this environment there are new considerations for managing your mortgage:
Plan To Stay Put Longer - Purchase Accordingly
Without an increase in values to help cover the costs of selling, it will take more time to be able to sell, clear your mortgage balance and any costs of selling (realtor fees, mortgage breakage penalty), and come away with down payment for your next purchase. This is particularly true for those who buy with minimum down payment and have the mortgage default insurance premium added into the mortgage. The best way to prepare for this is to purchase a property that you can stay in longer, if possible.
Higher Down Payment Or Make Mortgage Pre-Payments - Protect Your Equity Position
We all know that having a higher down payment and paying off your mortgage saves you in interest costs, but it does something else...it protects your equity position. Your equity position is the current value of your property minus the mortgage balances owing on it. Having a higher down payment when you purchase or paying down your mortgage more aggressively both allow you to sell sooner and not be upside down, where you owe more on your property than it is worth. If you are concerned that you are in this position now, you can maintain your flexibility to sell in the future by paying extra on your mortgage to reduce the balance.
Dont Count On A Refinance - Pay Debts Down
When property values are increasing it can allow you to refinance or restructure your mortgage and draw on that home equity. This is often done to clear higher interest debts. In order to refinance, 20% of the current value must remain in the property. When property values are flat or drop, it takes more time before your mortgage balance will be low enough to allow a refinance. This means debts will need to be paid down without using the equity in your home. While I still do many successful refinances, I am seeing more clients who want to consolidate debt but their property values do not allow it. Plug away and pay that debt down!
Purchase and Refinance Plus Improvements - Do Those Renovations At The Start
This one is for my house hunters! Much like refinancing to pay out debts, homeowners often refinance to add a home equity line of credit or draw equity out to pay for home renovations or repairs. Now that it takes more time to be in the equity position to allow a refinance, the purchase plus improvements mortgages at time of purchase have become an even more important tool. This allows a buyer to build in a renovation, paying for a new roof, new flooring, or a finished basement at time of purchase. There is a refinance plus improvements product as well for those who JUST have 20% equity and want to build in a renovation.
Renewals - Call Me!
Lenders know it is tougher to qualify to switch your mortgage when property values move down, and they are quoting rates higher as a result. DO NOT ASSUME you do not qualify. I have successfully moved many clients to new lenders saving them thousands! If your current lender offers you competitive rates, great. But you will not know if they are competitive without speaking to a broker, and if they are not, you do not want to miss out on significant savings!
Until we see a significant up-tick in the housing market that would push up values, it is important to understand how your mortgage options are impacted. If you have any questions please do not hesitate to reach out.
Benefits Of A Buyer's Market - Don't Miss An Opportunity
You may have seen For Sale signs lingering on your neighbors lawn, lower values on your property tax assessments, or maybe you have even experienced difficulty selling your own house. Our Edmonton real estate market has been seeing the impact of a slow economic recovery from the Alberta recession from 2015 and the impact of tougher mortgage lending requirements. Lending on insured mortgages changed drastically in the fall of 2016, and the lending market tightened again in January 2018 with stricter requirements on how residential mortgages need to be underwritten, along with a stress test for conventional mortgages.
All of this has added up to a challenging real estate market in Edmonton and area, and really for most of Canada. But in this environment, there is an upside for buyers looking to enter the market.
Benefits Of A Buyers Market
Whenever a market is seeing this type of downward pressure, consumer confidence takes a hit and people pull back from what they perceive as risk. In reality, times like this can be a fantastic time to enter the market:
More Bang For Your Buck - With property values slipping down, you get more value for your dollar. This is particularly true at higher property prices. You may get less for the property you sell but you are getting that discount and MORE at higher values in a move-up.
Low Interest Rates - A benefit of a weaker Canadian economy has been a reprieve from the increasing rates we saw over the last 18 months. Interest rates have continued to slip down from where they were this fall and winter, making mortgage payments more affordable again.
Less Pressure - When the market is hot, you feel much more pressure as properties sell faster and you need to make decisions to write offers quicker. There is also a push to shorten the time you have for financing and home inspection. In a slower market these pressures lessen, giving buyers more time to make a good decision and prevent buyers remorse later.
More Choice - Although listings are currently down from their peaks last year, they are still high. And, we will likely see them move higher as we move into spring. This increase in listings provides buyers with a greater selection and higher likelihood of finding a property that meets your needs.
NOTE: I have had 3 clients experience multiple offers in the last 2 weeks. Even in a buyers market, a property that is well prepared for sale, in a popular location, and listed at a fair price WILL get attention.
Is This Bottom?
The answer is: we dont know. In any market down turn, we do not know what bottom is until we are on the other side of a decrease and prices have already climbed back up again. And guess what, at that point you have often missed the best opportunities.
When Is The Right Time?
The right time is a lot more about what is happening with you than what is happening in the market. If you are financially prepared to buy a property, are buying within your affordability, and are purchasing something for the long term, consider the benefits of buying in a market with these types of opportunities.
I am always happy to complete a mortgage review, discuss your mortgage options, and help you plan for your purchase goals.