This week I learned some very exciting news about an incentive the Federal government is offering for first time home buyers from Cedric Wong a CFA (Certified Financial Analyst) from CCW Lending. Today November 1st 2019, the program officially kicks off across Canada, and it’s super exciting for prospective buyers in more rural areas such as the Sunshine Coast, as our medium house price is so much lower than the mainland. It’s currently sitting at $600,300 which means this program will help first time buyers right here on the coast. Are you or someone you know looking to buy your first home? If so, then continue reading below.
The obvious fact – this Incentive is for First Time Home Buyer with annual income of $120,000 or less.
The less obvious fact – since this is a Federal program, based on the Federal definition, some homebuyers can be First Time Home Buyers more than once in their lifetime.
The Incentive provides 5% of the purchase price (10% for new houses) as interest-free loan towards your down payment. Note that Homebuyers still need at least 5% (6.5% if including closing costs) of their own money — the Incentive simply boosts up their down payment.
The limit for the home purchase price is $600,000, due to the following criteria:
Loan size (including the incentive, excluding mortgage insurance premium) must be no more than 4 times the homebuyerÕs income. Hence, the maximum will be $120,000 x 4 = $480,000.
Loan-To-Purchase Price must be at least 80% or above. So the maximum purchase price will be $480,000 / 80% = $600,000.
Each homebuyerÕs limit will differ depending on his or her circumstances. The $600,000 figure represents the theoretical maximum limit that a homebuyer may enjoy.
As this benefit is provided in the form of an interest-free loan, it needs to be repaid. This shall be done when the house is sold; the Incentive shares the profit or loss (think of the Incentive as your silent partner). If the house hasnÕt been sold in 25 years, the loan needs to be repaid also.
For any reader who is more inclined to the Incentive’s details, an Operational Policy Manual has been released.
Now we have the Incentive details under the belt, so how does it benefit the homebuyers? After all, the Federal government says it will spend $1.25 billion (that’s $1,250,000,000) over 3 years to support this program.
Overall, I can think of 3 possible reasons:
Reducing the burden of monthly mortgage payment is the benefit advertised by the government officially.
Back to the question earlier, how much monthly payment a homebuyer with a $120.000 income can save per month?
For most borrowers (5% incentive), the savings will be a little over $100 per month for a $120,000 income household. This is based on the assumption that the homebuyer borrows the maximum amount (as shown in the calculations below).
Here are several additional facts related to payment reduction:
- The amount of savings can change slightly should interest rate change (e.g. if interest increases to 5%, the savings will change to $140).
- The amount of savings is also directly proportional to their income (e.g. if the income is 20% below the maximum income of $120,000, the savings is also 20% below the maximum savings of $114).
- The actual savings will actually be slightly more (~$10 – 20 per month) as we consider the mortgage insurance.
If a homebuyer is concerned about the future house price and still wanting in buying a home, the Incentive allows the homebuyer to offload this burden partially to the Incentive.
Remember that we can think of the Incentive as 5% / 10% silent partner? Should the homebuyer sells the property at a loss, the actual repayment to the Incentive will be reduced by the same proportion as well.
It is fair to question why the homebuyer wants to buy a property in this scenario in the first place. At the same time, one should recognize that not all homebuying are emotionless, calculated financial decisions – there’s more to that. I’m here to advise — homebuyers call the shots.
Finally, a lesser known, but arguably the most valuable feature of the Incentive is that it can reduce the mortgage insurance premium required for a homebuyer. This especially applies to homebuyers who want to maximize the amount that they can borrow (borrowers who want to borrow 95%), as these could mean thousands of dollars worth of savings.
In general, if a homebuyer wants to borrow 80% of the purchase price or more (ie. putting less than 20% down payment), banks require the homebuyer to purchase insurance for the mortgage. The cost of this insurance (also known as the premium) depends on how much the homebuyers borrows. Naturally – the more the homebuyer borrows; the potential risk for the bank increases; and hence the insurance cost goes up.
As you can see above, the cost, which gets added on top of the mortgage, ranges from 0.6% to 4.5% of the purchase price depending on how much the homebuyer borrows.
You may wonder how it ties to the Incentive. The beauty is that the loan the Incentive provides does NOT count towards the Loan amount (refer to Operating Policy Manual Section 3.3).
For a homebuyer who borrows the maximum amount (95% Loan-to-Value), the Incentive can reduce 5% (or even 10% for new houses) of the Loan-to-Value, thereby reducing the Premium required for this mortgage.
Revisiting the same mortgage insurance table, a 5% Incentive’s contribution (95% → 90% Loan-to-Value) can reduce 0.9% premium required. On a $400,000 mortgage, that would mean $3,600 saved.
Note the savings comes in the form of monthly payment reduction, so the homebuyer shall expect to pay $10 – 20 less per month (every penny counts).
More importantly, if the homebuyer wants to sell a home, you may be able to accelerate the entire savings (the “$3,600”) during the sale.