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The PBO describes Ottawa's new incentive as 'providing financial support to first-time home buyers to reduce the size of their insured mortgages, thereby reducing [the buyer’s] monthly mortgage payment.'

JONATHAN HAYWARD

If you’re a fledgling home buyer you’ve probably caught wind of Ottawa’s “free” money giveaway, the First Time Home Buyer Incentive (FTHBI).

The Parliamentary Budget Office (PBO) describes it as “providing financial support to first-time home buyers to reduce the size of their insured mortgages, thereby reducing [the buyer’s] monthly mortgage payment.”

If you’re not a first-timer buyer you might be wondering why taxes are coming off your paycheque and being donated to home buyers. But if you are a rookie buyer salivating over a federal handout, you might be wondering: how do I get mine – and what are the strings attached?

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That brings us to the first challenge. Most new home buyers are lost as to whether they should sign up for this thing. Calculating its potential benefit can make you feel like a kindergartner in algebra class. You better be good at making assumptions.

Meanwhile, the program is supposed to launch on Sept. 2.

In an attempt to clear some haze, below is my nonexhaustive rundown of who wins and loses with this thing.

First, you have to qualify

If you qualify, the government hands you extra interest-free money to purchase a home. If you buy an existing home you get 5 per cent of the purchase price. If you buy a new build you get 10 per cent.

In return, Ottawa takes that same percentage of your future home appreciation – or losses – when you pay back its incentive (loan).

To get a piece of the action, you must:

  • Have not occupied a home in the prior four years that you or your current spouse or common-law partner owned;
  • Have at least a 5 per cent down payment from your own resources;
  • Have a household income of $120,000 or less;
  • Have a combined mortgage plus incentive amount that does not exceed four times household income;
  • Meet all normal default-insurance requirements.

Many of you have read this much elsewhere. Now for some points you might not be aware of:

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It’s useless to most buyers

To begin with, 47 per cent of first-time buyers put down 20 per cent or more, Mortgage Professionals Canada estimates. These people are excluded by default since the FTHBI’s minimum loan-to-value is 80.01 per cent.

Second, “… [a] borrower may qualify for a larger mortgage and a higher-priced home if they forgo the FTHBI and pursue a traditional (and larger) insured mortgage,” a CMHC spokesperson confirmed by e-mail. With prices so high, 85 per cent of first-time buyers get the most expensive home they can afford, CMHC’s data suggest. Most of those people would also be rejected because CMHC’s four-times income rule shrinks their buying power, as much as 9.4 per cent in some cases, compared with a regular old insured mortgage.

High home prices will also limit FTHBI adoption. If you’re single, making just $50,000 and want to buy in a big city, for example, places such as Moncton or Regina had better be your idea of a big city.

You need decent credit

Your buying power depends on your debt service ratio. That’s what determines how much housing debt you can carry relative to your income. For that reason, you’ll likely need a 680-plus credit score. That’s the minimum to qualify for CMHC’s highest allowable debt service ratio (which is 39 per cent, as opposed to the standard 35 per cent).

Government’s got your back, sort of

If home prices plunge, Ottawa might eat some of your losses. Suppose you’re buying a resale home for $373,000 (the average purchase price for a first-timer buying alone, according to Genworth Canada and Environics). You put down 5 per cent of your money and 5 per cent of Ottawa’s money.

Now suppose prices drop 20 per cent. Under the FTHBI you’d lose just 19 per cent instead of 20 per cent – not including realtor fees and closing costs. The government absorbs $3,730 of that loss (1 per cent of $373,000), but only if you sell or pay the whole incentive off. (Technically, the feds will absorb their share of losses if you wait 25 years and still live in the home – CMHC demands payback of the incentive after 25 years if you don’t sell beforehand. But if prices in 2044 are lower than today, we have bigger things to worry about).

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For a high-ratio borrower, selling is easier said than done after a price correction, assuming you want to net enough to pay off your mortgage, realtor fees and closing costs. Most people try to avoid dumping their home and crystalizing losses after a big selloff – unless they’re forced to. This purported “loss sharing” benefit is therefore largely a mirage in practicality.

Upgrading kills the FTHBI

Most mortgages can be carried over (or “ported”) to a new property. Not the FTHBI. If you move into bigger digs, it must be paid off as soon as you sell the existing home.

That matters because those who don’t intend to live in their home for 20-plus years plan to move in roughly five years, suggested a 2011 TD Canada Trust survey (among the latest data on this topic). That same poll showed that 70 per cent of prospective buyers, especially first-time buyers, moved earlier than expected.

You’ll cough up some profits

Resale prices in Canada’s 11 biggest cities have risen an average annualized 6.3 per cent a year so far this century, according to the Teranet National Bank House Price Index. And if future prices match that pace (definitely not a prediction) and you sell in five years, that $373,000 home would be worth $506,500. Ottawa’s rake off the “winnings” would be $6,675 or $13,350 depending on whether you bought new or resale. That is tax-free profit lost forever (tax-free because of Canada’s principal-residence capital gains exemption).

The savings

Now for the marquee benefit. Buy that $373,000 home with 5 per cent down plus 5 per cent of CMHC’s money and your payment drops $106 a month. You save $3,100 in interest in the first five years plus $3,767 off your insurance premium. That’s $6,867 in total less any FTHBI transaction fees, which aren’t yet announced. You’d save another $4,300 if you bought a new build. (Assumes a 2.99 per cent five-year mortgage rate and 25-year amortization)

That’s a decent loot that you must measure against your expected giveback on price appreciation.

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Other FTHBI tidbits

  • Only 1,100 home buyers in Vancouver would have qualified in 2018 had this program existed then, and only 2,300 in Toronto, tweeted CMHC CEO Evan Siddall.
  • The government’s target adoption rate for this project is 100,000 people. But British Columbia had a program that matched down payments – and didn’t take a share of profits. Only 3,000 buyers applied in its first year and it was cancelled.
  • If you take the 5 per cent incentive, the maximum down payment you can make is 14.99 per cent. (Remember, FTHBI’s loan-to-value rules limit the total down payment to less than 20 per cent.)
  • If you take the 10 per cent new-build incentive, the maximum down payment you can make is 9.99 per cent.
  • When considering that 10 per cent carrot (incentive) for new builds, note that only one in 20 (5.43 per cent) of CMHC high-ratio insured borrowers bought a newly built property in 2018. That’s partly because developers typically require 20 per cent deposits or more, and most high-ratio borrowers simply don’t have that.
  • The maximum allowable purchase price is about $565,000, but you need household income of $120,000 a year and a 14.99 per cent down payment (from your own funds) to qualify for this amount.
  • Vancouver has no houses under $565,000, according to Realtor.ca. Toronto has nine as of July 11, most of which you’d probably find uninhabitable.
  • The FTHBI does allow you to refinance without paying off the incentive. So that’s good news.
  • “Every time you improve, renovate or landscape your home, remember: a) the government is spending zero; and b) you just increased the profit it will make on your home,” notes Ron Butler of Toronto broker Butler Mortgage.
  • You can’t pay back the incentive in pieces. It’s all or nothing, which potentially lets the government ride people’s price appreciation for longer.

In short

Very few millennial buyers can take advantage of the FTHBI, given all the restrictions. The ones who could use the incentive can easily qualify for a regular mortgage without it. They don’t “require” taxpayer-subsidized payment savings because they already have lower debt ratios in the first place, compared with typical first-time buyers.

That’s why Conservative MP Tom Kmiec doesn’t mince words when he calls the FTHBI “a gimmick.” “The government is now actively participating in real estate and playing the market despite warning Canadians about housing debt,” he says. (On a positive note, the FTHBI does, at least in theory, incentivize developers to create much needed housing supply.)

A June PBO report estimated the cost of this program at $241-million. That’s on top of a “… small risk of loss for the Government in the unlikely event of the Canadian housing market experiencing a severe and prolonged downturn,” said Parliamentary Budget Officer Yves Giroux.

Brass tacks: Should you sign up?

If, somehow, some way, you’re a first-timer able to buy well under your means (good luck with that in our biggest cities) and prices don’t rise much before you sell, you’re likely a winner with the FTHBI.

It’s an especially good tactic for short-term homeowners to save interest and premiums, on the backs of taxpayers. “That’s gaming the system,” says mortgage broker Shawn Stillman of Toronto-based Mortgage Outlet Inc. “But that’s not what the government wants. It wants people in their houses long term because it’s losing money if they’re not. The only financial way they make this work is if the property appreciates.”

If price appreciation does resume its historical pace in 2020, your equity sharing with the government could offset any payment and default insurance savings you enjoy. The FTHBI then becomes a matter of how bullish you are on Canadian home prices. You’ve got to ask yourself one question: Do I feel lucky?

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Robert McLister is a founder of RateSpy.com and intelliMortgage. You can follow him on Twitter at @RateSpy

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