The government announced the new home owner incentive.
It was announced in the budget that the new incentive will be available to first-time home buyers with household incomes of less than $120,000. The incentive is worth up to 5 per cent. If home owners purchase of an existing home. And up to 10 per cent for a new build. This program limits the total amount of a mortgage to four times the buyer’s household income.
However, current mortgage rules for people who are not participating in the program allow mortgages of up to 4.7 times a buyer’s household income. So, if you qualify for a regular mortgage without the new incentive, you will get to keep 100 percent of the proceeds from your home and you will be able to afford more of a home.
The Home Owner Incentive Pro’s:
- Available throughout Canada
- Assisting qualified first-time home buyers without adding financial burden
- In theory it is supposed to keep costs down for fist time homeowners
The Home Owner Incentive Con’s:
- Home owners qualify for less
- The government owns part of your home and you have to pay back the money when you sell
- It does not actually help all Canadians. Homes in Toronto and Vancouver cost around 1MM. No first time home buyers would qualify as the cut off is around $500K
An example released on Monday provides an illustration of how the program could work.
A $500,000 home could be purchased with a minimum 5-per-cent down payment of $25,000, which must be funded by the buyer. If it is a newly built home, the home buyer could qualify for an additional 10-per-cent down payment top-up from the government, worth $50,000, which would be registered as a mortgage on the property. Because the buyer still does not have a 20-per-cent down payment, the mortgage must also be insured, which adds a further $11,900 insurance premium to the mortgage amount, bringing the total mortgage to $436,900.
That would require a monthly mortgage payment of $2,187. Which is a savings of $286 a month or $3,430 a year. Compared with a mortgage without the $50,000 government loan.
The only caveat is that the $50,000 incentive must eventually be paid back to the government, plus 10 per cent of any future increase in value of the property.
In The End:
For some people this may be an incentive to get them into a home. However, the truth of the matter is that the government is simply using this to get the credit cycle back up and running.
Real estate is in a downturn. If you buy a home now, and the value continues to fall (plus you are now in bed with the government who owns your home) you could sell your home plus have to return the $50,000 given to you. That’s not exactly a great deal by our calculations.
As always, if you need help buying or selling your home, please contact us.