An incentive for first-time home buyers offered through the Canadian Mortgage Housing Corporation (CMHC) was only announced a week ago, promising to provide $1.25 billion over three years to help lower mortgage costs for eligible Canadians.
However, a new company is now also promising to provide an alternative form of relief for potential home buyers.
If a home buyer chooses to work with Fraction, the Vancouver-based start-up says it will take up to a 40 percent stake in the buyer’s property, securely reducing mortgage payments by up to 35 percent.
Since Fraction is putting up 40 percent of the purchase price, the home buyer is then only required to take out a mortgage for the remaining 60 percent.
“It’s almost like selling shares in a home,” said Fraction’s Chief Technology Officer Josh Baker, as you’re essentially selling equity in your home and paying it back to Fraction upon resale at its future value.
For instance, if your home is worth $500,000 and you want to sell 40 percent of your property, Fraction will take on that $200,000 share. If you put five percent down ($25,000), you will only need to take out a mortgage of $275,000. Now, let’s say you want to sell that home five years later and the home is now worth $620,000. Fraction collects 40 percent of that resale value at $248,000, while you get the remaining $372,000.
Canadian properties historically appreciate 5.5 percent per year, but if the property in which Fraction invests fails to meet that threshold, it has a built-in interest rate of three percent and it collects on whichever of the two is greatest.
Fraction also provides an opportunity buy securities from them, which essentially means you’re investing in multiple properties across Vancouver.
And in case a property devalues (whether it be due to damage or a market correction), Fraction says it has a number of regulations in place to counterbalance the loss.
The CMHC program was announced this past March along with the other varying 2019 Federal Budget proposals.
Under this new incentive program for first-time home buyers, CMHC says it will put up 10 percent of the price for buyers purchasing a newly built home, and five percent for existing homes, ultimately increasing your down payment. In order to be eligible for the program, your household income must be $120,000 or less and you must be applying for an insured mortgage.
Thus, if you are a first-time buyer and you wish to purchase a $500,000 home with the minimum required five percent down payment ($25,000), you could also receive an additional $50,000 through CMHC, meaning you would only need to take out a mortgage for $425,000.
Though details are still unclear, it’s assumed home owners would have to repay the incentive at a future date after purchase, possibly upon selling the home again.
Those who opt for the incentive will still be put through the mortgage stress test, though the CMHC incentive means you wouldn’t have to qualify for as much, taking some pressure off of applicants.
The Federal government hopes to launch the CMHC incentive program by September 2019.
And while Fraction has already quietly launched in Vancouver, it intends on breaking into the Ontario market and other parts of Canada.
There is also no cap on income nor on the equity share, or limitations on whether you’re buying a resale or a newly-built home in order to be eligible for Fraction.
Fraction positions itself to be a more secure option in contrast to the CMHC incentive, claiming that it’s still a mortgage whereas the CMHC program is more like just a down payment. “What that mean is we’re open to a much larger pool of capital because it’s a much safer investment,” says Baker.