Measures to Help First-Time Homebuyers
In the New Federal Budget
The 2019 federal budget includes an appealing new initiative for prospective first-time home buyers - a measure that could see Canada's housing agency cover roughly 10 percent of a home's price, easing the mortgage burden on borrowers.
The budget introduces a program called the First-Time Home Buyer Incentive, aimed at improving housing affordability. The government is setting aside $1.25 billion over three years for what's called a shared equity mortgage. In essence, this works something like an interest-free loan, where the repayment plan doesn't require paying anything back in the early years. To qualify for this program, a household needs to earn no more than $120,000 a year and have a down payment of at least 5 percent of the purchase price, the minimum requirement for a CMHC-insured mortgage.
As a reminder, CMHC supports a large share of the Canadian real estate market by providing mortgage insurance. This new program will expand the corporation's role even further. If a prospective buyer meets the requirements above, CMHC will contribute, under this program, up to 10 percent of the total price of a new home from a builder, or 5 percent of the price of an existing home on the resale market.
CMHC will make this generous contribution in exchange for a corresponding equity stake in the home. As a result, the borrower's mortgage amount shrinks, though there's a cost to pay for that down the road. Detailed information on how the program actually works won't be available until the fall at the earliest, but the government has already laid out a general outline of how it could work for a prospective buyer. If a first-time buyer wants to purchase a home priced at $400,000, they'd need to put down $20,000. Normally, in that case, the borrower would need a $380,000 mortgage to cover the rest of the price, but under the program (assuming it's a new home), CMHC could contribute $40,000 in exchange for a 10 percent equity stake in the home. That would shrink the borrower's mortgage from $380,000 down to $340,000. On a standard mortgage at a 3.5% rate with 25-year amortization, that works out to monthly payments $200 lower than without the program.
The catch is that the homeowner eventually has to repay CMHC's share of the equity, though not until the property is resold (or sooner, but only if the borrower chooses to do so).
The budget doesn't yet make clear how the size of that debt is calculated: is it the same amount CMHC originally contributed, or does it grow along with any increase in the property's value?
According to government officials, the details of the plan will follow in the coming months. Craig Alexander, Chief Economist at Deloitte, calls the program a sensible idea and believes the benefits should outweigh the drawbacks. Note that the government isn't taking any new steps here that could end up driving prices sharply higher, he says, adding that the plan could help more Canadians become homeowners. The catch is that the homeowner eventually has to repay CMHC's share of the equity, though not until the property is resold (or sooner, but only if the borrower chooses to do so).
According to the government's own estimates, this plan could increase the number of new first-time buyers by 100,000 over three years.
Incidentally, this program wasn't the only real-estate-related announcement in the budget. The government is also raising the amount a first-time buyer can withdraw from their Registered Retirement Savings Plan (RRSP) without penalty, from the current $25,000 to $35,000. On top of that, Ottawa is changing the RRSP withdrawal rules to help those going through a family breakdown.
Starting this year, Canadians who've gone through a divorce or the end of a common-law relationship will be able to take part in the Home Buyers' Plan, even if they don't technically meet the requirements of a first-time buyer.
The budget didn't overlook renters either. The government is announcing an expansion of a program launched in 2017 to finance the construction of rental housing through low-cost loans. Last year, the government managed to add another 14,000 units to this rental-financing initiative, and this year's budget adds 9 more years of funding to the program.
At a cost of $10 billion, the government intends to add 42,500 new rental units to the Canadian real estate market by 2028. There are also plans to crack down on what the government is calling financial crime in the real estate sector.
Recent increases to tax-agency budgets have already uncovered $100 million in tax evasion tied to property sales, prompting the government to keep digging.
Ottawa will provide the Canada Revenue Agency with another $50 million over the next 5 years to address tax evasion in the following areas: reporting the sale of a principal residence, paying taxes owed on the sale of a second property, reporting profits from property flipping, reporting commissions earned on home sales, and builders properly charging GST or HST on the sale of new homes. According to the government, this investment should pay for itself and then some, potentially generating $68 million in revenue over the next five years.