What is the First-Time Home Buyer Incentive – and is it a good idea?
In case you weren’t aware, there’s a federal program just for home-buying rookies like you: Canada’s First-Time Home Buyer Incentive. But is it a good idea? Let’s find out.
I’ve always thought Canada needed some sort of Home Buying Tips for Dummies book. But since those are out of date about a week after they’re printed (not to mention calling your readers dummies is pretty insulting, right?) we’ve got something better for you.
In case you weren’t aware, there’s a federal program just for home-buying rookies like you: Canada’s First-Time Home Buyer Incentive. But is it a good idea? Let’s find out.
What is the First-Time Home Buyer Incentive and how does it work?
For the sake of your eyes and my keyboard, let’s just say FTHBI from here. Canada’s FTHBI helps you with the down payment for your first place by loaning you 5% or 10% of the price of your home, depending on the type of home you buy:
| Property type | Incentive amount |
|---|---|
| New build home (you’re the first person living there) | 5% or 10% |
| Existing home (you’re buying the home from another person) | 5% |
| New or existing mobile or prefabricated home | 5% |
Types of homes that qualify: Single family detached house, semi-detached house, duplex, triplex, fourplex, freehold townhouse, condo townhouse, condo apartment, or a mobile home.
The FTHBI helps you have a larger down payment, which means your monthly mortgage payments are lower. Take a look at the side-by-side comparison to see how it works:
| Expenses | Without the FTHBI | With the FTHBI | Difference |
|---|---|---|---|
| Purchase price | $500,000 | $500,000 | None |
| Down payment | $30,000 | $55,000 ($30,000 + $25,000 FTHBI) |
$25,000 higher down payment |
| Mortgage insurance premium | $18,800 | $13,795 | $5,005 lower |
| Mortgage amount | $470,000 | $445,000 | $30,005 lower |
| Monthly mortgage payment | $2,441 | $2,291 | $150 lower |
Legal: this example is for illustrative purposes only, and assumes a $25,000 FTHBI, a 25-year mortgage with a 3.6% interest rate and monthly payments.
Do I have to pay the First-Time Home Buyer Incentive back?
Goodness yes. Free money would be great, but you’ll have to pay your FTHBI back.
But here’s the important thing to remember: when you sell your home – or pay off your FTHBI early – you’ll be paying the government back the same percentage you borrowed, not the same amount.
Let’s work with the example from earlier. Imagine you bought a home for $500,000 and your incentive was $25,000 (5% of the price). Awesome! The incentive gave you a higher down payment and lowered your monthly mortgage payments.
But after living in that home for 10 years, you’re ready to move. Property values have increased in your neighbourhood, and now your home is worth $600,000. When you sell, you have to pay back 5% of your home’s value – in this case, that means you have to pay back $30,000.
Keep that percentage in mind when figuring out how much resale income you can count on. If your house has increased in value, you’ll be paying back more than you received, which will impact how much home you can afford when you move.
It works the other way too, so if your house has lost value, you’re only on the hook for the same percentage, whatever it is.
Am I eligible for the First-Time Home Buyer Incentive?
Like any government program, there are certain requirements to qualify for the FTHBI:
- You have a down payment of your own of at least 5% of the value of the home.
- Your annual qualifying income is less than $120,000.
- Your mortgage is a maximum of 4 times your qualifying income.
- Your mortgage must be more than 80% of the value of the home, and you must also get mortgage insurance.
- You or your partner are a first-time homebuyer, or you’re buying a place after a divorce or dissolution of a relationship.
- You’re a Canadian citizen, permanent resident, or non-permanent resident authorized to work in Canada.
- Your home must be in Canada and suitable for year-round occupancy (for example, it can’t be a 3-season home).
Plus, the place you’re buying needs to be your primary residence, not an income property.
Now you’ve got the basics of Canada’s FTHBI. If you want to level-up from rookie to all-star, here’re some pro-tips to consider.
Tips for using the First-Time Home Buyer Incentive
Like everything with buying your first place, the FTHBI has its positives and negatives. But, if you’re looking for a lower monthly fee and meet the criteria, Canada’s FTHBI may be a handy tool in your home-buying toolkit.
- The FTHBI isn’t for investment properties, but you can buy a duplex, triplex, or fourplex and rent out other units.
- Since the FTHBI is like a second mortgage on your purchase, your lawyer fees may be higher since they’re closing two mortgages instead of one.
- You can only have one benefit, so this federal option will rule out provincial or regional ones. Make sure you get the best one for you.
- And my favourite - you can pay your FTHBI back early without penalty! If your home value is rising and you can afford to get the proverbial monkey off your back, you can save a bundle by paying your incentive back early at whatever the rates are when you pay.
For more tools and tips on buying your first home, check out the articles below. Future you will appreciate it.
Happy home-buying, fellow rookies!
