By now you have likely heard the buzz regarding The First Time Home Buyer Incentive (FTHBI), which will come into effect September 2nd for homes that close no earlier than November 1st. The Government of Canada is offering an interest-free loan in the form of a shared equity mortgage to help home buyers obtain a smaller mortgage and keep their monthly payments lower. The program will offer 5% for a first-time buyer’s purchase of a resale home and 5% or 10% for a first-time buyer’s purchase of a newly constructed home.
The incentive can be repaid at any time without penalty, but it must be repaid after 25 years or if the property is sold, whichever comes first. Repayment is based on the property’s fair market value. When the loan is repaid, the government will also get a share of any gains from appreciation of the property. Vice versa, if the property value goes down, the government will shoulder some of the loss.
In order to participate in the FTHBI buyers must meet two main requirements: be a first time home buyer and have an annual income of less than $120,000. Buyers will still need to save their down payment of at least 5 percent and the maximum home price is limited to 4 times the buyers qualifying income, let’s look at an example:
Anita wants to buy a new home for $400,000.
Under the First-Time Home Buyer Incentive, Anita can apply to receive $40,000 in a shared equity mortgage (10% of the cost of a new home) through the program. This is on top of the minimum required down payment of $20,000 (5% of the purchase price) from her savings.
This lowers the amount she needs to borrow and reduces her monthly expenses.
As a result, Anita’s mortgage is $228 less a month or $2,736 a year.
Years later, Anita has sold her first home for $420,000. At this time, she would now have to repay the original incentive she received as a percentage of her home’s current value. This would result in Anita repaying 10%, or $42,000 at the time of selling her house. - www.placetocallhome.ca/fthbi
The program will certainly help some first time home buyers. But it’s important to remember although this is an interest-free loan, it is still a loan that will need to be paid back.
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