The homebuyer incentive is a government program that shares equity between the buyer and the government. The government lends buyers 5 to 10% of the price of a home. It allows homebuyers to increase their down payment and therefore reduce monthly payments. Before taking advantage of this incentive, homebuyers must understand the terms and details. Keep reading for more information.
Basics of the First-Time Homebuyer Incentive
The government of Canada administers this first-time homebuyer incentive (FTHBI). It is a program that loans buyers 5% of the purchase price, or 10% of the purchase price for new construction. The money loaned increases the down payment amount that homebuyers can pay toward the sale. This allows buyers to have a bit more invested at the beginning of the home mortgage and decreases the amount of the loan. The loan has 0% interest, but homebuyers must fully repay it when they sell the house, or within 25 years, whichever is sooner.
The FTHBI is an agreement where investors share equity. The government owns part of the home. When the homeowner is ready to repay the loan, they must repay the original percent borrowed (5% or 10%) at the property’s value at that time. This may or may not be the original dollar amount borrowed. The FTHBI appears like an easy way for first-time homebuyers to get help.
Eligibility for the FTHBI
To qualify for the incentive, an individual must live in Canada and be a citizen or able to work within the country. A homebuyer must not have previously purchased a home. Applicants who have been divorced or common-law relationship breakup are eligible. For married couples applying, if one spouse has never owned a home, they will qualify.
There are income requirements for this incentive. The total income of borrowers must be $120,000 or less annually.
For applicants who live in the Greater Vancouver Area, the Census Metropolitan Greater Toronto Area, or Victoria, the income must be $150,000 or less. Applicants must also have enough money to pay 5% of the down payment. The down payment can be from savings, a gift, or a retirement plan. Homebuyers should be pre-approved to obtain a mortgage valued at over 80% of the property value.
Finally, the incentive is limited to four and a half times the applicant’s income for properties in GVA, GTA, or Victoria, and four times for the other parts of Canada. This means that homebuyers who live in Manitoba with a salary of $80,000 cannot take a mortgage for more than $320,000.
How the FTHBI Works
Once eligible homebuyers have been pre-approved for a mortgage, they can apply for the FTHBI. Those who qualify will receive either 5% of the cost of an existing home, 5% or 10% of the cost of a new home, or 5% of the cost of a mobile home.
Paying Back the Incentive
Remember, the FTHBI is a shared investment. So basically, the government owns 5% or 10% of the home (whichever amount they loaned at the time of purchase). The incentive must be repaid, either when the homeowner sells the house or within 25 years. When the homeowner pays back the loan, they must pay it back at the percent of the current property value.
Repayment At Resell
When the homeowners decide to sell the property, they will need to pay back the percentage based on the sale price. For example, if homeowners buy a $400,000 home, they receive an incentive loan equal to 5% of the total price ($20,000). When they sell the home 15 years later, it is worth $700,000. This means that the amount paid back to the government is 5% of $900,000, which is $35,000.
The FTHBI works the other way, too. If a home depreciates while homeowners own it, the amount to be repaid will be considerably less than when the loan originated. While no one wants their property to decrease in value, the government will get a reduced repayment, too.
Repayment At 25 Years
If homeowners wait 25 years to pay off the loan, they will need to have the home professionally appraised. This determines the fair market value. They will then pay the 5% or the 10% of this value. Homeowners may have difficulty repaying more money than they borrowed. However, this isn’t a program to maximize profits. The FTHBI is to help first-time homebuyers move into a house.
Homebuyers can pay off their incentive loan anytime they want, without penalty. Homebuyers should pay the loan back as soon as possible after purchasing their home to avoid having to pay back a higher amount. This allows them to repay as close to the original amount as possible before the house appreciates.
The most significant benefit of the incentive is that it lowers the cost of a mortgage. More first-time homebuyers will be able to get into a home. The program can also help applicants build wealth by investing in property. If the property doubles in value, homebuyers must repay double the amount borrowed, but they will also have profited a great deal. This is an interest-free loan, making it one of the best ways to borrow money. Another great benefit to the incentive is that it is flexible. Borrowers can repay the loan any time before 25 years is up, and they can repay the money before the home has time to appreciate quickly.
There are some disadvantages and limitations to the FTHBI. Income and limits for home values may be too low for some people. It may be difficult for some people to pay back more money than they originally borrowed. Finally, if homeowners decide to repay the loan early, they will have to pay for an appraisal for the current market value.
The homebuyer incentive is a great government program for some individuals. The loan is interest-free, and there is no penalty for repaying the loan early. The homebuyer incentive can lower monthly expenses by reducing mortgage payments. Homebuyers need to do their homework and make sure they understand the fine print in the program before taking advantage of it.