Canadian real estate is in a melt-up, and the Government of Canada (GoC) was warned not to pour any gas on the fire. Naturally, they’re getting ready to pour gas on the exact fire they were told not to. On May 3, 2021, the GoC will expand the First-Time Home Buyer Incentive (FTHBI) program. The program is the type used to push prices higher and stimulate demand during a downturn. Instead, the government plans to expand the program in the frothiest markets. Let’s take a dive into how Canada will be speculating alongside homebuyers.
First-Time Home Buyer Incentive (FTHBI)
The First-Time Home Buyer Incentive (FTHBI) is a shared equity mortgage program. People that buy a home with the program get 5 to 10 percent of the purchase price as an additional down payment but it’s not free.
The state is buying an equity stake in the home. It’s like taxpayers become a shareholder in your condo and that is the reason we, as active successful experienced mortgage agent have never done a FTHBI transaction! Do you want the government as your partner?
The down payment funds they give are considered a non-interest-bearing second mortgage. No principal payments are required, and the maximum term is 25 years, or when you sell the home. The repayment is based on the value of the home at the time you pay it off though. Until then, the government considers itself a part-owner of the home.
Since the government is speculating along with you, they share some risk. If the value of the home goes up during this period, taxpayers make money. If the value of the home falls, taxpayers lose money. Homeowners shoulder all maintenance and carrying costs. What could go wrong?
To qualify for the program, income is capped at $120,000 per year, so no high-income borrowers. The maximum mortgage amount is 4x your qualifying income. Since the FTHBI is technically a second mortgage, it’s included in the total debts. The pitch is, it lowers your monthly costs. If home prices rise significantly, it can cost a lot more than the interest. The stated reason is, the program helps low-income households. The reality is, it’s trying to spur more demand from low-income households.
Let’s say your household makes $120,000 per year, and you have a down payment of $50,000. Under the current rules of the program, you may qualify for up to $530,000, and they’ll kick in 10% of the down payment. If you resell, you cover the maintenance and selling fees, and they collect 10% of the gross costs.
Canada Is Expanding This Program In Its Frothiest Markets
When the program was launched in 2018. Starting May 3, 2021, Toronto, Vancouver, and Victoria will see the max income boosted to $150,000. The leverage ratio will also increase to 4.5x, giving those buyers an extra 12.5% leverage. It’s not hard to read this as trying to pump city home price growth, since they now lag small towns.