I haven’t said much (publicly) about the recently implemented federal First Time Home Buyer Incentive (FTHBI) since I figured that due to the limitations on the program, it would, like a similar BC program, fizzle out.
However, I forgot that it’s election season. I’m not going to get overly political – my intention is not to be partisan, but when the Prime Minister announced that he is proposing to expand the program from the current $500,000 threshold to something closer to $800,000, suddenly I’m a bit more worried that more of my clients might start looking into this incentive.
What is the First Time Home Buyer Incentive?
I’m not going to get into all of the details – you’re welcome to Google it or check out the government website – but I’ll brief you on it if you haven’t heard about it. The FTHBI was announced earlier in 2019 and came into effect on September 2. The timeline is suspiciously strategic with an impending federal election in October. Targeting young voters that helped the federal Liberals form a majority government 4 years ago, the premise of the incentive is to help first time home buyers get into the market in a “shared equity mortgage”.
The incentive would provide first time home buyers with 5-10% of the required downpayment. Like the BC program adopted by a couple short years (if even?), there would be no interest payments. However, unlike the BC program, this federal incentive would take the percentage of the equity they put into it.
There are host of requirements to be eligible for the program that made it difficult, one being that the applicants’ income (household total) cannot exceed $120,000 and that the mortgage plus incentive amount cannot exceed 4x the household income… effectively limiting the maximum home purchase price to $565,000. While many pundits decried that this is too low for Canada’s urban markets, I disagree. The purpose is to get first time home buyers started. At the time of writing this, there were just under 5,500 active listings under $565,000 in Metro Vancouver. Over 400 of those are single family homes and over 900 are townhomes. Trust me, there are options.
However, the limitation set on this program have received some serious criticism. A lot of people seem more concerned with the fact that you need a limited household income and therefore can only buy a home worth just over half a million dollars rather than what the end result of taking the government up on this could be. So just in time for an election campaign, the Prime Minister announced that the Liberal government would expand this program to cover homes values up to $789,000 for Toronto, Vancouver and Victoria.
That sounds great! So, why is it a bad deal for me?
Just because a policy targets a certain demographic, it doesn’t necessarily mean that it benefits that demographic. This is called “spin”. It’s pretty easy to dangle a monthly savings of up to $286 per month of interest free money in front of a “lucky few” without too many people looking at the big picture. However, with the proposed expansion of this federal program, the Canadian government could be pocketing some serious profits… at the expense of young Canadians.
Let me explain.
One reason that I believe that the BC version of this program (the BC Home Owner Mortgage and Equity Partnership Program) fizzled out is because there wasn’t really any upside for the government – it was really just meant to help out a handful of eligible first time home buyers, perhaps for macro economic reasons or, if you’re more skeptical – a way to get young voters. The BC first time home buyer program wasn’t making much money off the home buyer: it was a second mortgage where there was no interest for the first 5 years. Homeowners could pay off the bill, in full or part, at any time without penalty (such as when they sold their home). The government – and therefore the taxpayers – were footing the bill (money is never “free” – even the government pays interest.
FTHBI: Worse Than a Loan Shark?
The federal government’s plan is not to give anything for free. It’s not a helping hand “top up” mortgage. No, it wants an equitable share in your home. It wants all the positives that come with it and none of the negatives.
Let’s assume you want to purchase a new $500,000 condo – this way you can max out the incentive and receive 10% of the down payment in the form of a government loan: $50,000. The government now has a 10% stake in your home and you save yourself around $3,400 per year on mortgage interest and CMHC premiums. Multiply that by a 5 year term and that’s a savings of $17,000.
However, the government isn’t going to be paying for any renovations/upgrades, strata fees, or regular home maintenance. Additionally, they’ll want 10% of the home’s value when you sell. You lose that tax-free income that would normally be attached to the gains. How much money could that be?
In August of 2014, the typical single family home in the Fraser Valley was $570,000. 5 years later, it was $954,000 – a profit of $384,000 and you’re going to pay the government $95,400 for that $17,000 “savings”.
However, even on the short term, lets pick 2 years that didn’t include a crazy spike in the marketplace. In May 2012, the typical resale Langley single family home was $545,000. 2 years later, it was $576,000. Assuming I purchased this 2012 resale home with the 5% incentive, I would save just over $3,500 in mortgage payments, but I would need to pay back $29,000 out of my $31,000 growth. In two years, how much principle do you think you’ve paid off?
Aren’t I protected if home values decline?
The government is going to take some of the losses for sure. If that $500,000 house decreases to 10% – to $450,000, they’ve loss $5,000 of equity. However, they’ll still want their $45,000 back. So the home you paid $500,000 for in 2019 is worth (unlikely, but anything is possible) $450,000, you need to sell and you have to pay the government $45,000 of whatever is left over. Where do you think that money is coming from? Most likely, it’s coming from your original down payment money and possibly some of the principle of the mortgage you’ve paid off.
But what if this is my only way to purchase?
If you check out the eligibility requirements for this program, this simply probably isn’t true. If you can qualify for this program, you can qualify for a mortgage without it (don’t quote me on this – get it checked out by a qualified mortgage broker, I’m just going with what I’m told). But if you have a $50,000 downpayment for a new $500,000 condo and have a $120,000 income and the good credit required – I fail to see how this isn’t a fact.
This policy isn’t really about helping potential new home buyers buy something that they wouldn’t otherwise. It is about helping those that can purchase something save some money, meanwhile putting a LOT of money in the federal coffers. The Liberal government likely realized this which is why they are so excited about expanding it to almost $800,000 – this means more money.
The more money you use from this program, the tougher time you’ll have in upgrading later on. While mortgage rates are as low as they are, this literally makes no sense. When rates move back to a 6-8% range, let’s see if the government keeps this sort of program going.
Talk to the Experts
While I was writing this, a guest columnist at CBC News, Soheil Karkhanechi, published “The Liberals’ first-time homebuyers incentive is a bad deal.” Not only was I able to steal some numbers from this article, but it showed me that many people are catching this.
If you’re a first time home buyer, talk to your mortgage broker, a trusted financial advisor and the people you know that have done well with their financial planning. Ask them to look at the details of this plan and see whether its right for your short and long term future.
One more problem
By incentivizing first time home buyers to purchase homes, the federal government’s goal is actually to bring more demand to the marketplace. It seems they can’t make up their mind about whether they want to destroy demand or create it. Yet, the fact is, truly incentivizing first time home buyers will put pressure on low inventory markets, inadvertently pushing up entry level home prices. This is great for a government that is getting paid equity shares en masse, but will actually make it harder for first time home buyers to get into the market. Isn’t that what we were trying to avoid?