For first-time homebuyers, the search for the perfect home for the ideal price can be tedious and often stressful, even with the help of an experienced REALTOR®. Luckily, there are many great programs available to make your home buying process smoother and more affordable. Canada Mortgage and Housing Corporation's (CMHC) First-Time Home Buyer Incentive Program can help you purchase your first home without adding to your financial burden. If you qualify for the program, you can reduce your monthly mortgage payment without increasing your down payment.
How the program works
Under CMHC's First-Time Home Buyer Incentive, you can reduce your monthly mortgage carrying costs without adding to your financial burden. In other words, when you buy a home under the program, you won't need a larger down payment in order to reduce the amount of your mortgage. In exchange for lower monthly payments, you must be willing to give up 5% of the value of your home to the federal government.
The Incentive isn't interest-bearing (meaning no interest) and doesn't require additional monthly payments. Also, the Incentive is a second mortgage on the property and has a maximum term of 25 years.
Through the Incentive, the Government of Canada provides:
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5% for a first-time buyer's purchase of a resale home?
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5% or 10% for a first-time buyer's purchase of a new construction
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5% for a first-time buyer's purchase of a new or resale mobile/manufactured home
For a better understanding of the Incentive, consider this scenario: You want to buy a new home for $400,000. Since the First-Time Home Buyer Incentive offers 10% of the cost of a new home, you can apply for $40,000 in a shared equity mortgage from the Government of Canada. Not only does this lower the amount you need to borrow for the purchase of your new home, but it also reduces your monthly expenses. As a result, your mortgage is $228 less a month (or $2,736 a year) than it would be if you didn't take advantage of the Incentive.
How much do I have to pay back?
You can pay the Incentive in full at any time without a pre-payment penalty. You must pay the Incentive back after 25 years or when the property is sold, whichever happens first. The amount you'll pay back depends on the home's fair market value.
For example, let's say you received a 5% incentive of the home's purchase price of $200,000, or $10,000. If your home value increases to $300,000, you'll pay 5% of the current value, which is $15,000. And if you receive a 10% incentive of the home's purchase price of $200,000 (or $20,000), but your home's value decreases to $150,000, the amount you'll repay will be 10% of the current value, which is $15,000.?
As you consider your options, it's a good idea to connect with a REALTOR® to point you in the right direction when it comes to finding a home that has the potential to increase in value. REALTORS® are knowledgeable about market conditions and potential value increases/decreases.
What do I need to qualify?
To be eligible for CMHC's First-Time Home Buyer Incentive Program, you must:
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Be a Canadian citizen, permanent resident, or non-permanent resident who is legally authorized to work in Canada.
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Be a first-time homebuyer.
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Have a maximum qualifying income of $120,000.
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Have the minimum down payment, which is 5% of the first $500,000 of the lending value and 10% of the lending value above $500,000.
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Have an insured mortgage.
To be considered a first-time homebuyer under the program, you must meet at least one of these qualifications:
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You've never purchased a home before.
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You're experiencing divorce.
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You haven't lived in a home that you or your partner owned in the last four years.
Under the four-year clause, you and your spouse could still qualify for the First-Time Home Buyer Incentive even if you've previously owned a home.
The combined qualifying income on your application can't exceed $120,000. Therefore, if you're applying by yourself or with someone else, your total income can't be more than $120,000. Qualifying income includes your annual salary (before taxes), investment income, and rental income. The mortgage and the incentive amount combined can't be more than four times the household income.
The minimum down payment must only come from traditional sources. This means that unsecured personal loans or unsecured lines of credit are not eligible for the program. Acceptable (or traditional) down payment sources include savings, withdrawal from a registered retirement savings plan (RRSP), or a non-repayable financial gift from a relative.
What properties are eligible?
Under the Incentive, first-time homebuyers can purchase new construction homes, resale homes, or new and resale mobile/manufactured homes.
Types of residential properties that are eligible under the First-Time Home Buyer Incentive include:
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Single-family homes
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Semi-detached homes
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Duplex
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Triplex
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Fourplex
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Townhouses
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Condominium units
The property must be located in Canada and must be suitable and available for full-time, year-round occupancy. In other words, the home shouldn't have any problems that may prevent you from living there.
Always work with a REALTOR® to determine if a home is in good enough condition to move into. He or she may suggest that you get a home inspection. This is important because you may not be able to spot certain things that could make your home uninhabitable, which could hurt your chances of qualifying for the Incentive.
Also, to qualify for the First-Time Home Buyer Incentive, you can't buy a home and then rent it out. The purpose of the Incentive is to help first-time homebuyers purchase their first home with the intent to live there. Therefore, investment properties aren't eligible.
Working with a knowledgeable REALTOR®
Whether you decide to go with CMHC's First-Time Home Buyer Incentive Program, it's always best to work with a licensed real estate professional to guide you through the process. If you're not sure about the details of any first-time homebuyer program or government grants, a REALTOR® can counsel you on prices and mortgages, as well as how certain programs work and benefits they offer first-time homebuyers. Not only will you be more informed, but you'll walk away knowing that buying a home for the first time doesn't have to be mentally, emotionally, and financially draining.
