Mortgage-industry officials say the government’s First-Time Home Buyer program is likely to fall far short of its goal of making real estate more affordable to many new buyers.
The federal government released new details of the program on Monday, outlining how it offers to top up a first-time home buyer’s down payment with an interest-free payment as a way to make monthly payments lower. One hitch for buyers, though, is that Canada Mortgage and Housing Corp., which will run the program, will hold a piece of the home’s equity in return for providing the interest-free funds. When the home is sold, the owner must pay CMHC back a portion of the value if it has risen. The government would take a loss if the value falls.
The program, first announced in the March, 2019, budget, will launch Sept. 2 – more than a month before Canadians head to the polls.
Jean-Yves Duclos, Minister of Families, Children and Social Development, said the program “will keep the monthly costs down so that younger Canadians – younger middle-class Canadians – have more money for everyday expenses.” In an interview, Mr. Duclos said he is confident the government will hit the target of helping 100,000 Canadians over three years through the incentive.
Mortgage professionals, however, said the program’s limitations mean it will have little appeal for most prospective home buyers.
Mortgage broker Rob McLister, founder of Ratespy.com, said he is struggling to figure out who is the ideal user of the program, because it allows a lower maximum mortgage level than if a borrower were to simply apply for a standard mortgage.
The program limits the total amount of a mortgage to four times the buyer’s household income, while 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.
Mr. McLister said he has run many scenarios and cannot find one in which a home buyer would qualify for a bigger mortgage using this program. And given the need to share a portion of any gain in value with the government, he said there are major disincentives to using the program.
“Basically the government is building a bridge to nowhere for first-time buyers,” he said. “I don’t think anyone needs it and very few will want it. To me, this is vote candy. … Basically they are doing a little but trying to appear like they are doing a lot.”
James Laird, president of Toronto-based mortgage brokerage firm CanWise Financial, said people who are buying a home below their maximum financial capacity should be able to afford a mortgage without needing government assistance and without having to give up an ownership stake in their house.
“The only logical conclusion is that this program was designed to not be used, which is logical if their goal was to be able to tell the public they are taking some steps to help first-time home buyers, but they really were concerned about pouring any fuel on the housing market," he said.
The program continues to have the support of the Canadian Real Estate Association, chief executive Michael Bourque said. In an interview, he said his group appreciates the additional details about how the incentive will be paid back. He said those details suggest that homeowners would be wise to pay back the benefit before making major renovations that would significantly increase the value of the property.
“We think it will help and we think that it’s a good initiative because it’s going to help people get into a home where otherwise they wouldn’t be able to,” he said.
As announced in the budget, 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 for the purchase of an existing home and up to 10 per cent for a new build.
The homeowner won’t have to pay interest on the incentive, but the money must be paid back after 25 years or when the property is sold, whichever occurs first.
The government will share in the upside or downside of any change in property value. Government officials explained in a technical briefing that when the time comes for a property owner to pay back the incentive, the value of the incentive will be increased or decreased by the same percentage that the overall value of the property has risen or fallen.
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.
Paul Taylor, chief executive officer of Mortgage Professionals Canada, which represents people working in the mortgage-brokerage sector, said on Monday the mortgage industry is going to incur costs building the technology and documentation to offer this program, but many are not optimistic it will be widely used because the total mortgage size is so restricted.
“We think it’s definitely going to have very regional application,” he said. “In the two most expensive cities, where we would suggest first-time home buyers need the most support, this solution is not really going to do that."