The 2019 budget includes a new program for home buyers aptly called the First-Time Home Buyers Initiative or FTHBI. It is intended to help new home buyers and would indirectly aid the construction industry by fueling demand for new houses. The heart of the program is shared equity mortgages that would lower the monthly mortgage payments for an estimated 100,000 first time home buyers for about three years. They also mentioned the First Time Home Buyer RRSP portion will go from the individual current $25,000 to an increase of $35,000.
Shared equity mortgages or SEM are new to Canada, but they are not a new concept. They’ve been tried in the U.K., U.S. and Australia. There isn’t good data on their effectiveness, but they’ve been used by governments trying to deal with housing affordability challenges.
The Canadian SEM program details are not yet known. The government would have the Canada Mortgage Housing Corporation partner with homebuyers. CHMC will release the terms and conditions of this program later this year in the fall. What we can do is learn more about SEM in general.
In the average shared equity mortgage, the lender has an equity stake in the newly purchased home. While ownership remains with the home buyer, shared equity means the lender would have a claim in any capital gains if the home is sold – and losses, as well.
How would a shared equity mortgage work? Let’s take a first time home buyer who wants to purchase a brand new $400,000 house. The home buyer puts 5% or $20,000 down. They take out a CMHC insured mortgage. The CMHC will provide up to a tenth of the purchase price or $40,000 as an SEM. This reduces the mortgaged amount from $380,000 to $340,000. This saves the home owner $228 a month in mortgage payments. Note that Red Deer home buyers could save that much money by finding a lower mortgage rate or putting more money down on the property so they do not have CMHC or the government have a share into their home when profits come back. It is unclear if they will get the 10% for a new build or 5% for an existing home back based on initial purchase price or based off the home sale price allowing the government backed insurer CMHC to make a profit off the increasing in your home.
For some home buyers, $228 a month in savings is helpful. And this might be the perfect solution for you. If so contact me in September when they are supposed to fully unroll this new incentive.
The first time home buyer program outlined in the 2019 budget suggests the government understands home buyers are only part of the housing market equation. They know that supply is also an issue. While shared equity mortgages would be somewhat effective in increases the housing supply when combined with other initiatives, it isn’t going to fix everything. It does little, for example, in very expensive housing markets or areas where demand radically outstrips supply. This is because participation in the FTHBI is limited to those with household incomes less than $120,000 and the mortgage plus the incentive cannot be greater than four times the annual household income. This caps the value of homes people in the FTHBI program could buy at roughly $500,000. That won’t get you much in markets like Vancouver where you have to spend a million to buy a modest home. However, Red Deer residents would be able to utilize the mortgage program to buy any but the most expensive properties in their market. We are your trusted Red Deer Mortgage Brokers. Call us today to learn more.
Another criticism of the program is that the FTHBI will pit qualifying households against people who don’t qualify. Saving 5% or 10% on a property helps those who are able to utilize the program, but it means they can bid up the price of affordable homes. They’ll personally spend less out of their pocket, but everyone else may spend thousands more for the average home. In a worst case scenario, those in the program make homes at the cheap end of the market too expensive for those outside of the program.
Home buyers who qualify will find that the program helps them buy a home. The downside is that they’ll have to pay for it literally when they sell the home. They’ll have to share the capital gains on the sale of the home with the CMHC. In the United States, investors claimed as much as 50% of the property’s price appreciation depending on the terms of the agreement. The CMHC probably won’t be as harsh. The lack of private interest in such SEM loans is why the Liberal government has asked the CMHC to extend credit for the program.
What is less clear is the price households will have to pay in interest payments on the equity loan over time. SEMs are not without risk, especially in a housing market where home prices are stalling and may fall. The CMHC risks losing money if housing prices fall.
The proposed first time home buyers program would help around 100,000 households. This sounds like a lot but it is less than 10% of the home buyers in Canada. This raises concerns that the program is not really enough to address the problems in the housing market. . Follow us on our business Facebook page, link below, to make sure you do not miss the next blog update once the government unrolls the program.