What is the First Time Home Buyers Incentive
The "First time home buyers incentive" (FTHBI) is often confused with the "Home Buyers Plan" (HBP) but they could not be more different. To find out about the HBP check out this.
tldr; HBP is a loan from yourself (via your RRSP) and FTHBP is a loan from the government.
How the FTHBI works
The FTHBI is a program introduced in 2019 allows first time buyers the option to take a 0% interest no-payment loan from the government which will go directly toward paying down your mortgage. This loan must be paid back within 25 years or if the property is sold (whichever comes first). While their is no "interest" the repayment amount is directly proportional to the fair market value of the house, so as the house goes up or down so does the repayment amount.
For example if you bought a $300,000 property and were eligible for the FTHBI you could get a $15,000 interest free loan from the government (5% of the purchase price of resale homes and up to 10% on new builds) which will go toward the downpayment and reduce the mortgage amount. At any point after possession you can repay this loan in full, the repayment amount will be 5% of the market value of the home at time of repayment. So if you waited the full 25 years and your property appreciated to $400,000 your repayment amount would have increased from $15,000 to $20,000.
Eligibility and Restrictions
- You or your partner must be a first time home owner
- Your total income cannot exceed $120,000 ($150,000 for Toronto, Victoria, and Vancouver)
- Your total borrowing is no more then 4x your income
- You still must come up with the minimum down payment in cash
So if Bob and Alice made $100,000 combined in Ottawa, Ontario and were interested in buying a new build for $400,000 they would need to have $20,000 for the 5% downpayment but you could get $20,000 - 40,000 as part of the FTHBI.
Benefits of FTHBI
- Less likely to default on your mortgage.
Unexpected things happen in life and the FTHBI would reduce the minimum mortgage payment by up to 10% providing a buffer if money gets tight.
- Ability to save more agressively for retirment.
While we have seen huge growth in the Canadian housing market its important to have a diversified portfolio for retirment. The FTHBI frees up some cash each month for you to invest in your TFSA or RRSP which could grow more in 25 years then the home equity would.
- Creates a hedge against the housing market.
We all want our homes to go up in value but in the case they don't this could reduce the risk that you and your partner are overstretching yourselves and being underwater on a mortgage. If house prices skyrocket your golden cause you still hold 90% of your equity but if they stagnate or are lower then inflation the FTHBI splits that loss between you and the government.
In the above example if Bob and Alice had a 2% mortgage with a 25 year amortization then using the FTHBI would reduce their monthly payments from $1,673 to $1,497 ($176/month) and save them tens of thousands of dollars in mortgage interest over the 25 years.
Criticism of the FTHBI
- Giving the government a 10% stake in your house is stupid
Given the 40 year growth of the Canadian housing market I can understand where people are coming from with this. For many folks they believe the housing market only goes up and so giving up 10% of a sure investment seems illogical. Ill leave this you you to decide what you think.
- 4x your income is too low for most house hunters
The large cities where many Canadians live require taking on mortgage debt that is 5-10x your annual income. Limiting this incentive to 4x effecively makes most Canadians ineligible for this incentive.
- $120,000 is too low (partially addressed) for many cities
In March 2021 the program was altered to that folks in Toronto, Victoria, and Vancouver would be eligible for the incentive if they make up to $150,000 but there are many cities which there are strong arguments for increasing the income cap aswell. Ottawa for example has many dual income government couples making $120,000-$150,000 and with large house price increases they are getting priced out of the market.
The FTHBI is a fantastic tool for many Canadians that feel like they may be priced out of the housing market or fear that they will need to overstretch themselves to afford a home but for many people in larger cities it isn't something they can take advantage of due to the relatively low limits in place. Personally I would have used this incentive when buying my home if I could but unfortunately housing prices in Ottawa have increased so much in the pandemic that most houses are priced over the 4x limit.