Today the federal government announced a new incentive to help more people enter the housing market. Under the new plan, the Canada Mortgage and Housing Corporation will contribute up to 10% of the purchase amount of a new home. In exchange, CMHC gets an equity stake in the property. Sound like a good deal? Here's the fine print to help you decide.
How the First-Time Home Buyer Incentive Will Work
In order to qualify, you'll need a household income of $120,000 or less and your insured mortgage cannot be more than four times your annual income. So the maximum financed value would top out at $480,000, assuming you are at the maximum household income.
You will need to come up with a minimum down payment of 5%. On a mortgage of $400,000, that's $20,000. CMHC would put up to 10% against the total mortgage cost, so instead of $380,000 left owing, you would have to pay $340,000. So, your monthly payments should be less.
As for the "up to" 10%, that depends on what you plan to buy. CMHC will put up 10% for new builds only. For existing homes, their contribution maxes out at 5%. You don't have to make payments to CMHC right away, but they do get an equity stake in the property that you will have to eventually settle.
What About That Equity Stake?
The Government of Canada's budget document calls the money provided by the CMHC a "shared equity mortgage." That means that the Crown corporation gets an equity stake in the home.
The equity stake will need to be paid back on the sale of the home, or when the mortgage is paid off.
According to Global News, the program will be in place by September.
What Does it Mean for the Mortgage Stress Test?
As of 2018, all homebuyers (even those who pay a down payment of more than 20%) have to do a mortgage stress test to assess their ability to make payments. They have to show they can meet payments according to the Bank of Canada's five-year benchmark rate or the rate offered by their lender, whichever is more. For those who put down more than 20%, the stress test is the higher of the Bank of Canada rate or the lender rate, plus 2%.
For those who qualify under the First-Time Home Buyer Incentive, their mortgage balance, and ultimately monthly payments, will be lower. In theory, it should be easier for many households to meet that stress test.
Get Prepared Today By Looking at Mortgage Rates
The First-Time Home Buyer Incentive may not be in place for a few months. But if you want to start thinking about mortgages now, check out Rates.ca. You can see what's out there and start planning for a future in your new home.