As many of you know, on March 19th, 2019 the Liberal government tables its pre-election budget. Main objective of the budget was to introduce a plan to support housing affordability through a number of measures to boost supply in housing and rental markets, as well as targeted measures for first-time home buyers. Let’s take a dive into the housing measures that were proposed and see how they may impact the market and the buyer.
The First-time Home Buyer Incentive
This incentive utilizes a unique financing model that allows first-time to reduce the amount of money required from an insured mortgage without increasing the amount they must save for a downpayment. This is called a shared equity mortgage, and it gives first-time buyers the ability to lower their borrowing costs by sharing the cost of buying a home with CMHC (Canada Mortgage and Housing Corporation). CMHC will essentially hold an interest-free and payment-free second mortgage on your home. This loan is required to be repaid once the property is sold. The main idea here is that the monthly carrying costs will be lowered for a buyer and hopefully make the purchase that much more affordable.
CMHC offers qualified first-home buyers a 10 percent “shared equity” mortgage for a newly constructed home, or a 5% “shared equity” mortgage for a resale home.
The incentive is available to first-time home buyers with household incomes under $120,000 and the program caps out at four times the applicant’s annual income, which means it can only help homeowners looking to buy properties where the mortgage value plus the CMHC loan don’t exceed $480,000.
This financing model is not new, some developers have already been offering similar programs over the past 8-10 years! Daniels Corporation’s – BOOST program, Options for Homes, are just some that come to mind. There are some differences here, but the overall scheme is very much the same.
See a practical example to the right.
Home Buyer’s Plan
If you found the First-time Incentive complex, don’t worry, this one’s easier to comprehend. As many of you know the current home buyers plan allows first-time home buyers to withdraw up to $25,000 from their registered retirement savings plan (RRSP) towards the purchase of a home. The 2019 budget proposes an increase of the withdrawal limit from $25,000 to $35,000. As a result, a couple could potentially be able to withdraw $70,000 from their RRSP’s to purchase a first home.
Ps. Under the Home Buyer’s Plan you are considered a first-time home buyer if you or your spouse or common-law partner have not owned a home that you occupied as your principal residence at any time during the relevant calendar year or in any of the four preceding calendar years.
Wondering How are these measures going to affect you and the market?
In short, as a resident of Toronto or even the GTA, they won’t affect you much at all. There are only 64 properties (when I say properties I mean condos of course) currently for sale in the city of Toronto that are being offered for sale under $480,000. There may be a few more outside of the city boundaries but the truth is, suites under 500K have been selling like hot cakes already anyways. The shared equity mortgage incentive will only make matters worse. In addition, I foresee that meeting the income cut-off criteria of $120,000 will be a challenge for many.
As for the home buyers plan, this one will be applicable to a minority. I personally don’t know any first-time buyer millennial who has 35K or even 25K stashed away in their RRSP. The baby boomers or Generation X could have some significant funds in RRSPs, and if their goal of home ownership is still alive, this could be beneficial to them.
Neither the First-time homebuyer Incentive or the Home Buyers Plan RRSP limit increase is expected to affect the Real Estate market significantly this year. We can applaud the Liberal government for tabling these measures, even if they make home ownership a reality for few, this can be considered a positive outcome.