Sunday, February 23

The First Time Home Buyer Incentive Explained

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The First Time Home Buyer Incentive (HBI) was announced in June 2019 to help middle-class Canadians purchase their first home. The program provides up to 10% of a home’s value as a downpayment. It will become available to Canadians on September 2, 2019.

This program is different than the First Time Home Buyer’s Plan (HBP), in which the home buyer borrows money from their retirement savings to put a down payment on a home. However, like the HBP, the HBI will also need to be paid back. 

How does the First Time Home Buyer Incentive (HBI) Work?

The First Time Home Buyer Incentive, or HBI, is a shared equity mortgage. The Government of Canada provides money to help you make a downpayment, in exchange for equity in your home.

When you sell your home, you will pay back the equity share the government has in your home. If your home increases in value, you will pay back more than you initially received under the HBI plan. If your home decreases in value, you will pay back less than you received under the HBI plan. 

The First Time Home Buyer Incentive provides 5% or 10% of the downpayment on a new home, or a 5% downpayment on an existing home. The home buyer will still need to save at least 5% of the down payment on their own before qualifying for the program. The First Time Home Buyer Incentive will help a new homeowner put between 10% to 30% down when buying a home. 

The First-Time Home Buyer Incentive works on a first-come, first-served basis. There is $1.25 billion available over 3 years. 

Can I use the First Time Home Buyer Incentive (HBI) and the First Time Home Buyer Plan (HBP) together?

Yes! The First Time Home Buyer Plan lets Canadians borrow up to $35,000 from their Registered Retirement Savings Plan (RRSP) for a down payment. For a detailed explanation of how the HBP works, check out How to Use the RRSP First Time Home Buyer Plan

Because the First Time Home Buyer Incentive and First Time Home Buyer Plan are different programs, you can use them together. However, make sure this amount you withdraw from your RRSP does not put you over the 20% down payment threshold on the home you intend to purchase in order to qualify for the HBI. 

Who is eligible for the First Time Home Buyer Incentive?

Not everyone shopping for residential real estate will be able to qualify for the HBI. The program is designed for people buying their first home, and it disproportionately favors low- to mid-income Canadians purchasing homes below the average house price in Canada.

In order to qualify for the First Time Home Buyer Incentive, you must have:

  • never purchased a home before OR have gone through a divorce or breakdown of common law relationship
  • a household income less than $120,000 per year
  • have at least 5% but less than 20% to put down on the home
  • be borrowing an amount for the mortgage that is less than 4x your qualifying income 

If you’re unsure if you qualify, there is a more detailed explanation on the Government of Canada website

The good, the bad, and the ugly

I have a lot of criticisms for the First Time Home Buyer Incentive, but it will do some good for those who qualify for the program. Like most things the government rolls out, there are pros and cons, and whether or not it works for you depends on your situation.

What’s good about this program

A bigger down payment gives you more equity in your home. Purchasing a home with only 5% down actually provides you with only 1.6% equity! This leaves you vulnerable to real estate market fluctuations, and you could end up underwater on your mortgage very quickly.

With the First Time Home Buyer Incentive, your 5% down payment will now become 10% or 15% with the Government of Canada’s Contribution. This reduces the amount of CMHC insurance you’ll need and gives you more equity in your home. 

Reduces your monthly mortgage payment. On the same note as the point above, a larger downpayment reduces the amount of your purchase you need to finance and therefore reduces your monthly mortgage payment. A lower monthly mortgage payment will provide greater financial flexibility, and hopefully allow Canadians to save more money and pay down other debt faster. 

What’s bad and very bad about this program

You have to pay back the First Time Home Buyer Incentive. It’s important to note that this isn’t free money like a grant or a subsidy, it’s a shared equity mortgage and the Government of Canada will want their piece of the pie. As mentioned above, you will pay back either 5% or 10% (depending what your borrowed) of your home’s value to the Government when you sell.

However, if you do not sell your home, you still must repay the incentive amount you received after 25 years. Therefore, if you buy a house and settle down there for life, expect a hefty bill just as you’re heading into retirement!

The HBI doesn’t really help housing affordability because it is virtually useless in Canada’s most expensive housing markets. The household income and borrowing restrictions on accessing the plan are so limiting, it cannot be used in cities where even a new-build condo costs $600,000+ and incomes are higher. If you call Toronto or Vancouver home, this program might not be for you.

This program contributes to urban sprawl. The HBI is it favors new builds by offering up to 10% down on new homes, but only a maximum of 5% down on existing homes. In Canada’s more affordable cities where the HBI will be used more often, many new builds are not urban condos, but suburban homes. Favoring these housing options contributes to urban sprawl, which is detrimental to the environment and a poor way to build a city. In fact, it’s not even cheaper to live in the suburbs!

This program props up Canada’s dangerously overheated housing market. Anything that makes buying homes easier for Canadians, contributes to Canada’s financially irresponsible real estate market. You can’t cool down an overheated market by making it more accessible. More eligible homebuyers will just create more people shopping for homes and continue to drive prices up. 

CASE STUDY: The HBI in action

Rachel lives in Saskatoon where she earns $72,000 as an engineer. She wants to purchase a new home that costs $340,000. Rachel has $20,000 saved in her RRSP that she plans to use for a down payment. She applies for the First Time Home Buyer Incentive, and because of her income and house purchase price, she qualifies. Her home is a new build so she receives the full 10% of her home’s value to make a down payment, which is $34,000.

Using the HBI program, Rachel combines the $34,000 she receives from the government with her $20,000 RRSP withdrawal. She makes a $54,000 down payment (approximately 16%) on the $340,000 house. This gives her significantly more equity in the property when she makes her purchase, and reduces her monthly mortgage payment. 

  No HBI Program With HBI Program
Home Value $340,000 $340,000
Rachel’s personal Savings $20,000 $20,000
First Time Home Buyer Incentive N/A $34,000
Total Down Payment $20,000 $54,000
Total % Down Payment 5.9% 15.9%
CMHC Required $12,800 $8,008
Total Mortgage Required $332,800 $294,008
Equity in home at time of purchase 2.1% 13.5%
Monthly Mortgage Payment (5-year term @ 3%, 25-year amortization) $1,575 $1,391
Total Monthly Savings $0 $184

 

When Rachel decides to sell her home, she will need to pay 10% of its value to the Government of Canada to repay the First Time Home Buyer Incentive. If her home increases in value to $400,000, she will need to give the Government $40,000 at the time of sale, even though this is more than she received in the program.

However, if her home decreases in value to $300,000, she will only need to give the Government $30,000 at the time of sale. This is true even though the amount is less than she received in the program. If she does not sell her home, after 25 years she will need to give the Government $34,000 to repay the amount she received. 

How do I apply for the First Time Home Buyer Incentive?

Still interested in the HBI even with the downsides? Well, the only thing you need to do now is to wait. The First Time Home Buyer Incentive will launch on September 2, 2019. If you’re house shopping now, you may want to delay your purchase if you want to capture the help with your down payment that the HBI offers!

In the meantime, you can sign up to receive updates from the Government of Canada about the First Time Home Buyer Incentive program here

This article will be updated as more details about the program become available. 

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About Author

Student debt killer, super saver, and stock market addict. BSc. in Chemistry from the University of Alberta, MBA in Finance from the University of Calgary. CEO x 2 and MOM x 1. Currently residing in Calgary, Alberta, Canada, but hooked on travelling.

10 Comments

  1. To me this sounds like another way for the government to receive more money from its citizens rather than tax them. When the house goes up you owe more than you borrowed. Pretty much borrowing with interest still. At the end of the day it still sounds like a loan. If possible I would not go for it because I am tired of having the government having their hand in my wallet.

    • No sorry that was my mistake in how I worded it! As I understand it, you only need to meet 1 of those criteria, so if you’re recently divorced you can qualify even though you may have previously bought a home, etc.

  2. Oh my gosh…this is a TERRIBLE idea. There are so many things I want to say…so many things…..this is not good for anyone long term and actually could give us some big headaches down the road. :(:(

  3. Danielle Vander Wekken on

    In some regards, this is a great idea. But it really doesn’t help in some of the housing markets! I don’t know that I could buy anything remotely ‘nice’ in my area with only 4x my salary…

    I think you should clarify that you only need to meet one of the criteria, not all of them – you don’t have to be divorced or gone through a breakup in order to apply!

  4. New home for $340,000? This is basically a useless option if you live in south Ontario, where “decent” used homes 45min outside of Toronto are $350,000 – $500,000.

    • there are other provinces lol. $340K can buy you a home in Alberta, Manitoba, Saskatchewan, rural BC, and any of the maritime provinces, and probably the territories.