By: Ian Mucignat
You know a Federal Budget in an election year is going to be juicy. This year, the Liberal government announced $22.8 billion of new spending over the next year. The expected deficit will be almost $20 billion and will continue past 2022.
With housing prices running away and rule changes that make it harder to qualify for a mortgage, the mortgage industry had been lobbying for months now to introduce some changes to help millennials and first-time buyers. On March 19, the budget announced two changes:
- CMHC First Time Buyer Incentive
- Home Buyer Plan (HBP) limit increase
Perhaps the purpose was to make a splash in an election year. Unfortunately, the changes will not be effective at all. Honestly, I’m pretty sure they didn’t consult with any mortgage professional. They didn’t even look at the experience of British Columbia, whom tried a very similar program that flopped tremendously and is now closed.
CMHC First Time Buyer Incentive
First, let’s look at the new incentive. On the surface it sounds great.
First-time homebuyers whose household income is under $120,000 may qualify for an interest- free loan from Canada Mortgage and Housing Corporation of 10% for a new home purchase and 5% for existing homes. Theoretically, this should allow the buyer to put more money down and borrow less for the mortgage. However, a key limitation of the programs is that the purchase price of the home cannot be more than four times the buyers’ household income.
The incentive is scheduled to go into effect in September of 2019.
Let’s consider an example:
- Household income is $100,000
- Maximum house price allowed is $400,000 (4 times income)
- Minimum down payment is 5% or $20,000
- Purchasing an “existing” house with property taxes at 0.5% the value
- CMHC First Time Buyer Incentive is $20,000
$400,000 Purchase price
($20,000) Down Payment
($20,000) CMHC Incentive
$360,000 Gross Mortgage Amount
$14,400 CMHC Insurance Premium (4% premium with 5% down payment)
$374,000 Actual Mortgage Amount
$1,820 Monthly mortgage payment at 3.25%, 25-year amortization
Looks great, right? CMHC is giving me $20K and helping me reduce my mortgage. No, they are taking an equity portion of your home to protect their investment. When you go to sell your home years later, they expect to get repaid! What happens when your property doubles in value? Are they going to ask for some of your gains? These details are unknown because they’re being worked out between now and the September implementation date.
Now, let’s consider the same First Time Buyer not using incentive plan. This buyer is not limited to a maximum four times income purchase price. After all, who can find a house for $400,000 in today’s market? Below is an example that meets the debt servicing ratio requirements:
$495,000 Purchase price
($24,750) Down Payment
$470,250 Gross Mortgage Amount
$18,810 CMHC Insurance Premium (4% premium with 5% down payment)
$489,060 Actual Mortgage Amount
$2,377 Monthly mortgage payment at 3.25%, 25-year amortization
As we can see, the scenario without the incentive allows the buyer to purchase more than four times their purchase price. Furthermore, they don’t have to worry about CMHC being on title and wondering what their equity is going to be when they sell the property years later.
Lastly, what about regular tax payers? Should we be happy with this incentive plan? CMHC is a crown corporation and they’re using our money to purchase real estate? What if there were major job losses, arrears and defaults increase, and housing prices go down… why are we putting our capital at risk?
Instead, the policy makers should have made special concessions in the lending rules for First Time Buyers to have an increased amortization to say 30 or 35 years. This would drastically improve their qualification ability while not transferring the risk to Canadian tax payers.
Why not? First Time Buyers are generally younger and can still pay off the mortgage in their normal working lives. A simple rule change would have been much easier to implement, far more effective, and not have to worry about how they are going to collect their incentive once the homeowner sells the house.
Home Buyer Plan (HBP) limit increase
The other change from the budget might help some first time buyers but it will also strain them a bit more too in the years after they purchase.
The Federal budget increased the amount first time buyers can withdraw from their RRSP to $35,000 from $25,000. Furthermore, they are also making the program more available to individuals recovering from a marriage or common-law break-up.
The general rules of the program still apply. Users must repay the money back to their RRSP’s over 15 years or be subject to full income taxation on the withdrawal.
Keep calm and mortgage on.
About the Author:
Ian Mucignat, CFA, is an independent mortgage agent at TMG The Mortgage Group. He graduated from Wilfrid Laurier University with a Bachelor of Business Administration, minoring in Economics, and is a CFA Charterholder. Ian has worked in the mortgage industry since 2000 at lenders, banks, and brokerages. If you are purchasing, renewing, or refinancing your mortgage, don’t hesitate to contact Ian directly for a free consultation.