This week’s federal budget announced two measures that are intended to improve housing affordability.
The first is a modification to the Home Buyers’ Plan. This is a plan that gives first-time home buyers the ability to do a tax-free withdrawal from their RRSP (it does, however, have to be repaid within 15 years). The withdrawal limit was increased from $25,000 to $35,000.
The second measure, which is the one that got everyone’s attention, is the new First-Time Home Buyer Incentive. Through this program, CMHC will offer first-time home buyers (who have the minimum down payment required for an insured mortgage) the option of a “CMHC shared equity mortgage.”
What this effectively means is that CMHC will give first-time buyers an interest-free contribution for 10% of the purchase price of a new home (5% in the case of a resale). There’s no interest, but it does need to be paid back at the time of a sale. The higher percentage for new build homes is intended to stimulate housing supply.
It is still not clear whether CMHC will be expecting to participate in any increase (or decrease) in the value of the properties. But presumably, yes, since it’s called a “shared equity mortgage.” All of this is expected to come into force by the fall.
Here’s an example of how this program is intended to work.
If a first-time buyer purchases a new home for $400,000 with a 5% down payment, the insured mortgage amount would normally be $380,000. This is the highest loan-to-value you can get with CMHC mortgage loan insurance. With this new measure, the mortgage size would reduce to $340,000 and so the purchaser’s monthly debt service would drop accordingly, thereby helping with overall affordability.
The caveat to all of this is that this incentive will only be available to first-time home buyers with a household income under $120,000, and the insured mortgage and incentive amount cannot be greater than 4x the participants’ annual household income.
What this means is that this program really only touches the sub $500,000 market. And in highly desirable cities like Toronto and Vancouver, that market isn’t all that big.