Answers to your questions about Canada’s First-Time Home Buyer Incentive, including who is eligible, how it works, repaying it, and other associated costs.
In September 2019, the Government of Canada introduced the First-Time Home Buyer Incentive. The purpose of the Incentive is to make home ownership more accessible for qualifying first-time buyers.
Recent updates to the program in June 2022 limited the shared equity amount payable to the Government upon repayment. The Government has also recently announced an extension of the Incentive program to 2025.
Who is eligible for the Incentive?
A buyer must meet the following conditions to qualify for the Incentive:
- The buyer’s total annual qualifying income cannot exceed $120,000 ($150,000 if the home being purchased is in the Toronto, Vancouver, or Victoria Census Metropolitan Areas). If there is more than one buyer, the combined qualifying annual income cannot exceed these amounts.
- The buyer’s total borrowing cannot be more than four times the buyer’s qualifying income (or 4.5 times if the home is in Toronto, Vancouver, or Victoria).
- The buyer or their partner must be a first-time homebuyer. A first-time homebuyer is someone:
- who has never purchased a home before
- who, in the last four years, did not occupy a home that they or their current spouse or common-law partner owned, or
- who is experiencing a breakdown of a marriage or common-law partnership.
- The buyer must be a Canadian citizen, permanent resident, or non-permanent resident who is allowed to work in Canada.
- The buyer must be buying a home located in Canada that will be their primary place of residence.
It is important to be aware that a person may only obtain the Incentive once.
How does the Incentive work?
The Incentive involves the Canada Mortgage and Housing Corporation (CMHC) lending part of the home’s purchase price to the buyer at the time of the purchase. The buyer uses this amount to increase their down payment.
The buyer must still provide a minimum down payment of at least 5% of the purchase price from traditional sources (such as savings or withdrawal from an RRSP).
The exact percentage CMHC will provide as part of the Incentive (5% or 10%) depends on the type of home being purchased.
- For a re-sale home, the Incentive will be 5% of the original home value.
- For a new build, the Incentive can be 5% or 10% of the original home value, as requested by the buyer and approved by CMHC.
- For a mobile/manufactured home, whether new construction or resale, the Incentive will be 5% of the original home value.
The advantage of the Incentive is that the buyer can increase their down payment and lower their carrying costs for the main mortgage on the home. In exchange for receiving the Incentive, the buyer gives CMHC a second “shared equity mortgage”. This second mortgage is registered on the title of the home at the same time as the main mortgage when the buyer completes the purchase.
A shared equity mortgage is unlike a typical mortgage as it does not require regular payments and there is no interest. Instead, under the Incentive’s shared equity mortgage, the buyer/borrower agrees that CMHC will share in the upside or the downside of the property value at the time of repayment (usually when the home is sold).
Let’s look at an example: Imagine a person buying a home for $300,000. They put down 5% ($15,000) from savings and also receive an Incentive of 5% ($15,000), meaning their total down payment is $30,000. The buyer takes out a traditional mortgage for the balance of the purchase price, and makes monthly principal and interest payments on the mortgage. When they sell the home, its value has increased to $400,000. The repayment amount for the Incentive would be 5% of the current value ($20,000). The same principle applies if the value of the home goes down. If the value is now $250,000, the repayment amount for the Incentive would be 5% of the current value ($12,500).
Effective June 2022, the Government of Canada changed the Incentive so that its share in the appreciation or depreciation of the home is limited to a maximum gain or loss of 8% per annum (not compounded). This means the Government’s gains (if the home’s value has increased drastically) are capped, but also that the Government’s losses are limited (if the home’s value has decreased drastically).
When does the Incentive need to be repaid?
The buyer must pay the Incentive in full when they sell the home or after 25 years, whichever comes first. Certain types of refinancing can also trigger a requirement to repay the Incentive in full.
A buyer can also choose to repay the Incentive early, subject to CMHC’s approval. This may be a sound option if the value of the home is increasing rapidly, or if the buyer is planning on carrying out major renovations or an expansion to the home.
What other costs are associated with the Incentive?
While there is no fee to apply for the Incentive, prospective buyers may be responsible for paying for certain expenses in connection with the Incentive, such as closing services, funding advances, and legal costs associated with the second mortgage. There may also be administration costs relating to valuating the home at the time of repayment, default management costs, and legal fees associated with discharging the Incentive.
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DISCLAIMER The information in this article was correct at time of publishing. The law may have changed since then. The views expressed in this article are those of the author and do not necessarily reflect the views of LawNow or the Centre for Public Legal Education Alberta.
About Ben Throndson
