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First-Time Home Buyer Incentive Launches on Monday

A young couple in their new home looking out a window with boxes in the foreground.

The federal government’s much hyped down payment assistance program starts September 2. Dubbed the First-Time Home Buyer Incentive (FTHBI), it’s administered by the Canada Mortgage and Housing Corporation (CMHC) and was first announced in the government’s March budget.

Despite promising to make homeownership more affordable, that promise has come under heavy criticism from industry experts in the months following the announcement. Here’s a quick take on that and how the program functions.

How does the FTHBI work?

As the name suggests, it’s available only to first-time homebuyers—as the government defines the term.

You must:

  • earn a household income of less than $120,000 a year
  • qualify for and purchase mortgage default insurance
  • make a 5.00 to 14.99 percent down payment from your own resources
  • limit your mortgage amount plus incentive amount (combined) to no more than four times your household income
  • purchase a home priced less than $565,000.

The federal government—through the CMHC—then provides participating homebuyers with an interest-free extra down payment (incentive). This incentive amount equals five percent of the property’s value if the purchase is a resale home, or 10 percent if it’s a new build.

The FTHBI is no free lunch, however. In exchange for saving you money, the government takes a proportionate share of your home’s price appreciation. If you get a five percent incentive and your home rises 20 percent in value, you give CMHC one percent of that gain. CMHC also (theoretically) absorbs that same share of losses if your property value is lower at the time you sell.

FTHBI: The pros and cons

  • PRO: Because the incentive lowers the loan amount, the average participating homebuyer will save roughly $150 to $200 on their monthly payments, plus save hundreds or thousands on their default insurance premiums. Although, most first-timers who might realize these payment savings could easily qualify for a mortgage without the program.
  • CON: Due to the program’s qualifying limitations, most buyers will qualify for less mortgage under the FTHBI.
  • CON: If property appreciation matches that of the last decade, the program could end up costing homebuyers who remain in their home for years.

What to expect when the FTHBI comes into effect?

Probably not much. Despite the government forecasting 100,000 buyers to participate in the program over the next three years, uptake is expected to be low, at least so long as the current restrictions remain in place. Fewer than 1 in 10 first-time homebuyers are projected to participate each year.

Why? Data shows that roughly half of first-time buyers take out mortgages without default insurance, meaning they are putting more than 20 percent down and wouldn’t qualify under the program.

Even for those who do, a majority aren’t willing to sacrifice future home price appreciation in exchange for a slightly lower monthly payments, according to a survey by Mortgage Professionals Canada.

And according to the CMHC’s own data, 85 percent of first-time buyers try to buy as much house as they can afford, suggesting the program’s restriction of four times income is likely to be an additional deterrent, given that many first-time buyers would be able to qualify for roughly 10 percent more home by not participating in the program.

But then, CMHC head Evan Siddall has said publicly the program is specifically intended to have minimal impact so as not to fan the flames of the real estate market and further drive up prices.

“[The FTHBI] is deliberately designed to be a surgical response to people being excluded from the market,” he said in an interview earlier this year. “Because it’s a marginal program, and people are being excluded at the margin, it’s targeted right there. And if it were much larger, it would have an inflationary effect.”

He said the impact on home price inflation across the country is estimated at between 0.2 and 0.4 percent.

FTHBI could appeal to some

Despite the criticism and its shortfalls, there are those who will benefit from the program.

For example, anyone who plans to sell or move before their five-year term is up could stand to benefit from interest and default insurance premium savings, which would likely outweigh the equity give-up over that period of time.

Those who expect prices to fall might also find the loss-sharing appealing, although few people tend to buy a home when they think prices are going to fall. And those with little equity may not be able to sell after a price correction anyhow.

In the end, given the relatively small pool of eligible first-time buyers, and the fact it’s essentially a taxpayer-funded homebuyer subsidy, there are some who will wonder if the purported benefits justify the program’s estimated $241 million price tag. Let’s wait to see how many homebuyers bite.