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The First-Time Home Buyer Incentive: Everything You Wanted to Know About Shared-Equity Mortgages

With the federal election coming up on October 21st, home affordability is a hot topic for Canadians. Home affordability is such an important issue because it’s the single most costly household expensive for most Canadians. When your shelter costs are high relative to your income, you can find yourself “house rich, cash poor,” with very little left over to save, let alone have fun.

To help address home affordability, the Liberals introduced the First-Time Home Buyer Incentive. The First-Time Home Buyer Incentive is a shared-equity mortgage, a relatively new concept to most Canadians. Let’s take a closer look at the Incentive and how it may help with home affordability.

What’s a Shared-Equity Mortgage?

Shared-equity mortgages may not be something you know very well and that’s understandable. Shared-equity mortgages aren’t very widespread in Canada, but that could soon change if the Incentive proves popular.

A shared-equity mortgage is a mortgage where the lender (or the government for the Incentive) puts money towards your down payment. But instead of it being a loan that you have to pay back right away, the lender or government takes an ownership stake in your home.

The main benefit of a shared-equity mortgage is that it helps make the carrying cost of your home less costly and more affordable. That’s because your mortgage payments will be lower, not to mention you’ll pay less in mortgage default insurance (insurance you’re required to buy when making less than a 20 percent down payment on a property in Canada).

But there is a downside to that. As mentioned, the government owns part of your property. Depending on how much your home goes up in value over the years, a shared-equity mortgage could end up costing you a lot. That’s because not only will you have to pay back the original amount you borrowed, you’ll also have to pay back a portion of how much your home has gone up in value. (Although the silver lining is that in most cases you won’t need to pay back any money while you’re still living in the home. It’s only when you sell the property or you’ve been there 25 years that you have to repay the shared-equity mortgage).

Who is Eligible for the First-Time Home Buyer Incentive?

As mentioned, the First-Time Home Buyer Incentive is a shared-equity mortgage. A “shared-equity mortgage” can be offered by any lender, and for the Incentive, the federal government is using this existing financial tool to provide a top-up to a home buyer’s down payment, if they’re putting down less than 20% on a property.

The Incentive has been accepting applications since September 2nd, 2019 with the first closing taking place November 1st, 2019 – the application info is available here. Using the Incentive, if your household has a combined income up to $120,000 you’re able to receive 5% from the Incentive towards a resale home and 10% towards a new home. (In case you’re wondering, yes, you can withdraw the money from your RRSP under the Home Buyers’ Plan).

As the name suggests, you have to be a first-time homebuyer to participate in the Incentive. That means that you’ve never owned a home before, you haven’t occupied a home that you or your spouse or common-law partner owned, or you’re going through a marriage breakdown or breakdown of a common-law relationship.

Using the Incentive you can spend up to $565,000 on a property. This scenario is assuming you earn $120,000 per year and you’re purchasing a new home. That’s equal to four times your annual income and the Incentive amount. If your income is lower or you’re buying a resale home, your maximum purchase price under the Incentive would be lower.

To address the lack of affordable housing in Toronto, Vancouver and Victoria, the federal government has since introduced a new version of the Incentive. If you’re buying in those markets, you’d qualify to spend almost $800,000 on a property and could have a combined income of up to $150,000.

Does the Incentive Make Sense for Me?

If you’re someone struggling to save up a large enough down payment the Incentive is worth considering. It can help you get into a home sooner rather than later and start building up equity, not to mention it can save you in mortgage default insurance premiums.

Are you looking to rebuild your credit score to qualify for a better mortgage rate? Contact our offices today for tips on achieving a good credit score.

Climb’s Personalized Credit Prescription provides you with customized recommendations to help rebuild your credit score.

About the Author

Sean Cooper

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

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