The average price of a home in the Greater Toronto Area is just over $1,030,000 currently. The average price of a condo is now $836000, making purchasing real estate in the GTA difficult let alone for a first-time home buyer. If you thought the price of a Caramel Macchiato in Starbucks is expensive, home prices will make that look like pennies. How can someone afford a home at these prices? Either they have a lot of money saved up, a wealthy uncle, fantastic duel incomes, or they own real estate and use their equity to buy something purchase real estate or upgrade! For the common person like you and I, the answer is real estate.
For those of you that are on the outside looking in to acquire real estate, the government has finally decided to help with the introduction of the new and active first-time home buyers program, effective September 2nd, 2019. The program aims at making it easier for people to buy their first home and lessen their mortgage payments. Introduced by the Liberals in their 2019 budget, the federal government will absorb five per cent of monthly mortgage payments on existing homes and 10 per cent on new and existing homes.
What, what does this mean?
Buying an preexisting resale home: Applicants can borrow 5%
Buying a New build (Condo, Townhouse, detached etc…): Can borrow 5 or 10%
The criteria to qualify are for the first-time home buyer program.
1. People who have not owned a home in the last four years with some exception to Separations and breakdown of common laws. **** It’s possible that you own or owned real estate, get divorced and may Qualify for this program! I don’t think anyone knows that yet.
2. Combined household income of $120000 or less (One hundred and twenty thousand)
3. A maximum house price of $560,000.
These criteria will not work for everyone, certainly not for most of the population of Central GTA, but it will work for other areas that are less expensive in general. It is estimated that this program could help up to 100,000 people. Will you be one of those that qualifies?
The catch? There are 2 items to be aware of.
1. The applicants will have to pay back the 10% either at the time of sale or after 25 years, which ever comes first. For example: the home is purchased for $500,000 and sold after 10 years for $700,000, meaning the applicants will borrow $50,000 and give back $70,000. This loan is not interest barring and can be paid back any time or annually, however it is not necessary any could even be paid back after 25 years! This is termed a shared equity mortgage.
Let us review: Applicants must repay the government the 5 or 10% when and whichever comes first
a) When the home is sold
b) After 25 years
2. The consumer will have to add the default insurance premium to their mortgage. This default insurance come from the Canadian Mortgage and housing corporation, otherwise refereed to the CMHC insurance. This CMHC fee is added to a mortgage if a consumer has under 20% down payment, typically from 2.8- 4% ranging on the down payment amount. When a purchaser has a down payment of 20% or more, they will not have to pay this CMHC fee. The maximum that can be applied using this program is %19.99 or %14.99 of the home value, depending is you have your own 5% or 10% down payment. This guarantees the purchaser will pay the CMHC insurance.
Let’s do a quick example of the CMHC insurance and how to calculate it.
Mike and Julie are purchasing for $500,000 and they have 5% down payment, successful from the program adding 10%. They now have 15% down payment which is $75,000. Their mortgage would be $425,000 and adding 2.8% for CMHC Insurance on top. Their mortgage will essentially become $436,900 once the CMHC insurance is added. Their mortgage payments are calculated on this amount.
Look below at the average increase in housing prices over the last many years in Toronto. If you are asking is it worth it to pay this CMHC insurance if you have a choice, then yes, I think it is in my humble opinion. Add the insurance premium and consider it as an expense for doing business and move on. The house will increase in value faster, then someone trying to save up for the 20% working, in my opinion 99 times out of 100.
Let's Do An Example Of A Successful Applicant
Let’s say our couple, Mike and Julie are looking to purchase their first home, a New build condo. Remember they have the option with the program with a condo or a house already on the market. Their largest issue is their down payment. They are looking to purchase at $500,000 backed by solid credit and good incomes ($120,000 or under, remember?) as well as having limited debt (car payments, student loans etc…). The bank has reviewed their file and told them they can get a mortgage approval for $500000 if they can come up with 15% of the down payment which works out to $75,000. The only problem is they saved up 5% and closing costs. They have roughly $30000 in their hard-earned saving account. Let us consider $5000 for closing costs, leaving them with $25000 as their 5% down payment.
Here is where the new first-time home buyer program makes this now possible and/ or easier for our couple. Their purchase must be under $560,000, which it is. They must have a combined income less than $120,000. In this case, they both make $50,000 for a combined $100000 annually, check. They apply for the first-time home buyer program and get approved! This allows them to borrow 10% of the down payment and the best part is there is no interest!
Their 5% down payment will become 15%, and they can now buy their first home! Their mortgage is now $425,000 and at today’s rates of 2.5% are fantastic to borrow. Did you know 30 years ago mortgage rates were common at 10% or more. When Mike and Julie borrow money at 2.5% or so, their monthly expenses will very likely be under market rent. Giving a notch to the old buy vs rent argument, but that is for another time to discuss. Considering monthly mortgage payments, home insurance and property tax combined, it will most likely be under comparable rental rates for their home or condo. Also, let us not forget the 2.8% for the CMHC insurance and their total borrowing will be $436,900 in which installments will be calculated on.
What will the catch equal out to? Really, it’s quite small. Whenever they decide to sell this home, they must give back the 10% of the value at the time of sale. Let’s say in 10 year they decide to sell. Their home is now worth $700000, which is a very reasonable if not under value based on the year average. They sell their home, they must give back $70,000 to the government, $20,000 more then they borrowed. Let’s say their remaining mortgage was $375,000 at that time, they sold for $700000-375000-70000=$255,000. If you subtract let’s say $30,000 for realtor fees, closing costs, they are now walking away or putting their new savings to another home of $225000. That is a full $195000 more then they started with. That is a whopping %750 increase in equity, which is nothing to sneeze at.
Very few ways in life can someone save that much if not for real estate. This is how the average people gains wealth, and this first-time home buyer’s program will give a lot of people opportunity which they would not otherwise get, to afford their first home. To get them into the real estate game. This program will help Mike and Julie, will you be the next Mike and Julie?
According to the national housing strategy – The Government of Canada has allocated $1.25 billion over three years (starting in 2019) for this program. More details about the First-Time Home Buyer Incentive will be released later this year. The program will be ready to receive Incentive applications on September 2, 2019. The first closing will take effect on November 1, 2019.