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Get help with your down payment from the First-Time Home Buyer Incentive

young woman smiling holding moving box and moving into her first home

Who can afford to buy a home these days? Especially for young people, it can seem impossible – in addition to regular mortgage payments, how are you supposed to save up enough for a down payment? That’s why the Canadian government has introduced the First-Time Home Buyer Incentive (FTHBI). When you apply for this program, the government will kick in up to 10% more money toward your home purchase in exchange for a corresponding equity share in your new home.

The key benefit and trade-off

In a nutshell, by adding the government’s money to your own down payment, the mortgage payments will be more affordable for your post-purchase household budget. The trade-off is that the government shares in the upside (or the downside) of the property value.

Who can apply for the FTHBI?

The FTHBI is open to Canadian citizens, permanent residents, and non-permanent residents who are legally entitled to work here.

The main financial condition is that the borrowers’ qualified income (yes, you can have more than one borrower) can’t be more than $120,000 annually. That includes employment, investment and rental income, all in before-tax dollars for all borrowers. This total also affects how much you can borrow – the combined mortgage and incentive can’t be more than four times the total of qualified income.

At least one of the borrowers must fit the definition of a first-time homebuyer. You’re a first-time homebuyer if in the last four years you have not lived in a home that you or your current spouse or common-law partner owned. You may still qualify if you owned a home within that time, but no longer own it due to a marriage breakdown.

What kind of home can you buy and how much will the government contribute?

You can use the incentive for a home in Canada that is either new construction or re-sale, including detached and semi-detached houses, duplexes, townhouses, and condominiums. You can even use the FTHBI to buy a mobile or manufactured home, as long as it is situated on loaned or leased land.

The FTHBI amount is 5% for re-sale and mobile/manufactured homes.

For new construction homes, the incentive is generally 10% but could be reduced to 5% in some circumstances. 

How much help can you get for your down payment?

First, you must qualify for an insured mortgage. That’s when your down payment is less than 20% of the property value, requiring you to buy insurance to protect the lender against your potential default. Generally, you must put up at least 5% for the down payment. That can come from your own savings, non-repayable gifts from relatives, and accessing RRSP funds under the home buyers’ plan.

To qualify for the FTHBI, the down payment you’re contributing and the incentive amount cannot exceed a total down payment of 20%. Here’s the official policy:

  • If the down payment you’re contributing is up to 14.99% you can get an incentive amount of 5%.

  • If the down payment you’re contributing is up to 9.99% you can get an incentive amount of 10%.

This means that though you may be eligible for a 10% incentive on new construction, if your down payment is 10% or more then you will be limited to a 5% incentive.

Whichever incentive rate you receive, it helps increase the amount you can put down, reducing the size of the required mortgage. This in turn reduces your mortgage payments and the cost of your mortgage insurance premium.

When do you get the incentive?

Once an application is approved, the latest closing date for a re-sale home is 6 months, or 18 months for new construction.

The incentive will normally be advanced at time of closing of the insured first mortgage, though a few more completion requirements must be met if it’s a new construction. The FTHBI contribution is then registered as a 25-year term second mortgage with no interest and no regular principal payments.

When do you have to pay it back?

You can pay the incentive back in full at any time, without any pre-payment penalty.

Otherwise, it’s due at the end of the 25-year term, or earlier if you sell the property. You can refinance with your lender or move to another lender, as long as the registered incentive continues to meet the program rules. However, if you port the mortgage to a new property, the incentive must be repaid.

How much do you pay back?

In all cases, the repayment is based on the incentive percentage multiplied by the property’s current fair market value. Let’s look at a couple of scenarios

  • You received a 5% incentive on a purchase at $400,000, or $20,000. You later sell for $500,000, which means you have to pay back $25,000 out of the sale proceeds.

  • You received a 10% incentive on a purchase at $400,000, but it dropped in value to $350,000 at time of sale. You benefited from a $40,000 incentive, but only have to pay back $35,000.

The fair market value will normally be the gross purchase price in the Purchase & Sale Agreement, without reduction for real estate commissions or other selling costs. An independent third-party appraisal will be required in non-arm’s length sales, or if you are repaying early without selling.

Is the FTHBI for you?

Like any big financial decision you should do your homework to make sure you know what’s involved before you commit. The FTHBI is a great way to help motivated buyers get into the housing market, but it’s not a magic solution. For example, there may be additional costs involved, including legal and registration fees for closing two mortgages, and potential appraisal fees depending on the payback circumstances. As well, be conscious that while you don’t have to ask permission to make renovations, the government will effectively share in any resulting increase in property value, so be sure to do a full cost-benefit review at such future time. 

Learn more about buying your first home

What’s new for first-time home buyers in 2019?
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