London Ontario First Time Home Buyer Incentive

London Ontario First Time Home Buyer Incentive

With an average house price of 420,000 dollars, will the First Time Home Buyer Plan actually help Londoners purchase homes?

On Monday, September 2nd 2019 the First Time Home Buyer Incentive (FTHB) comes into effect, enabling First Time Home Buyers to effectively borrower a 5 percent down payment from the Government in order to assist in the purchase of their first home.

The plan was introduced by the Government of Prime Minister Justin Trudeau as a means to help First Time Home Buyers combat the struggles of purchasing a home in the wake of the Stress Test, and rising Home Prices.

I have been receiving an abundance of calls on the FTHB, as there are many hopes that it will enable First Time Home Buyers break into the London Real Estate Market, which has been rising nearly 10 percent year-over-year since 2016.

Indeed, with the introduction of the Stress Test in 2018 many buyers have lamented that their purchasing power diminished significantly, as the new rules required that borrowers qualify at two points above the contract rate that they were receiving, or the Bank of Canada rate, whichever was highest. So if your interest rate was 2.59 percent, you would effectively have to qualify at 5.19 percent (the BoC rate).

The FTHB was designed with the intention of combating this problem.

What is the First Time Home Buyer Incentive?

According to CMHC, the First Time Home Buyer Incentive helps to provide Home Buyers with their down payment:

5% or 10% for a first-time buyer’s purchase of a newly constructed home

5% for a first-time buyer’s purchase of a resale (existing) home

5% for a first-time buyer’s purchase of a new or resale mobile/manufactured home

In plain English, the Government will match your down payment, up to 10 percent (5 percent for existing homes, 10 percent for new builds), in order to decrease the total amount or mortgage financing needed to purchase a home.

Great! So Will it Work in London Ontario?

As of July 2019 the average price of a home in London stood at nearly 405,000 dollars. This would require a minimum down payment, 5 percent, of 20,250 dollars.

Assuming no debt and 1 Percent in Property Taxes, a First Time Home Buyer would need a combined income of 85,000 dollars in order to qualify for financing, with a 5-percent down payment.

Under the FTHB the Government would match that 5 percent, enabling those same home buyers to purchase a higher priced home (with 10 percent down).

So How Much Can I Buy?

Under the FTHB the Government would match the above 5 percent, enabling the Home Buyers to put down 10 percent down payment. This would enable them to raise the amount of their total purchase price to 425,000 dollars, an extra 20,000 dollars in purchasing power.

What is the Catch?

The Catch is a Big One. While the Government’s matching 5 percent will enable you an extra 20,000 dollars in purchase power, it also grants the Government a 5 percent stake in your home. Thus, as your home appreciates over time, so does the Government’s absolute share in your home. If your home raises in value by 100,000 dollars, the Government’s share goes up by 5,000 dollars. If the home is ever sold, or refinanced, the Government has to be paid back its 5 percent.

There are other Catches as well: Mainly, only borrowers with a household income of 120,000 dollars or less qualify, with a maximum home purchase price of 505,000 dollars.

So is it Worth It

Although the extra 20,000 dollars in purchasing power might seem enticing, it is important to remember that it effectively puts restrictions on what you can do with your home in the future.

While nobody ever intends on having to put a Second Mortgage on their home, or to re-finance, it is unclear as to how lenders are going to treat Second Mortgages and/or Refinances on homes that are partially owned by the government. Indeed, “stuff” does happen, and by using the additional 20,000 in purchasing power that the FTHB offers, borrowers are effectively restricting their options in the future.

With that said, if you have found your dream home and it is just out of reach, it might be worth considering taking advantage of the program. However, if you can avoid it, most home buyers with whom I work would much rather own all of their home and only worry about the bank’s share, rather than having to worry about a third stakeholder, the government.