The NEW First Time Home Buyer Incentive (FTHBI) Explained.

by Hashem Nahar, Karim Barbary

In an attempt to assist first time home buyers with purchasing their first home, the Federal Government of Canada & the Canadian Mortgage & Housing Corporation (CMHC) have introduced a new First Time Home Buyer Incentive (FTHBI). But what exactly is this incentive? Who is eligible to participate in it? And how does it actually work?

What is the First Time Home Buyer Incentive?

The first time home buyer incentive is a program which provides qualified first time home buyers with a lump sum of money in order to help increase their down payment amount, which in turn decreases monthly mortgage payments.

Eventually, qualified first time home buyers will have to repay the lump sum of money burrowed, however this payment is not due until at least 25 years later, or when you sell your home, whichever comes first.

The amount you need to repay depends on the value of your house at the time. Quite simply, if the value of your home increases, then you will have to repay more than the initial lump sum you received. If the value of your home decreases, then you will pay back less than the initial lump sum you received.

How Much is the Initial Lump Sum?

  • If you purchase a newly constructed home, then the lump sum provided to you is either 5% or 10% of the purchase price.
  • If you purchase an existing home (resale), then the lump sum provided to you is  of 5% of the purchase price.

How Much is the Total Mortgage Amount I Can Apply For?

  • The total mortgage amount you can apply for is four times your household income, however, your household income cannot exceed $120,000 per year, adding up to a maximum mortgage amount of $480,000.

Under This Incentive, How Much Money Do I Save?

As previously stated, when your total down payment amount increases, your monthly mortgage payments decrease. As such, let’s assume that you saved up 5% for the down payment of a resale $500,000 home, and borrowed another 5% under the first time home buyer incentive, then you would save up to $136/month, $1,632/year, and $8,160 over your 5 year mortgage term. Here's a comparison of buying the home using the FTHBI versus not:

As you can see from the example above, the amount you save on monthly mortgage payments depends on three main factors:

  1. The down payment amount you save up from your personal savings.

2.  The amount you burrow from the Government of Canada under the first time home buyer initiative (5% or 10% depending on whether you purchase an existing home or a newly constructed home).

3.  The total purchase price of your new home

Who is Eligible to Participate in This Initiative?

In order to be eligible to participate in this initiative, you must:

  • Be a Canadian citizen, a permanent resident, or a non-permanent resident who is legally authorized to work in Canada.
  • Be a first time home buyer with a maximum household income of $120,000 per year or less.
  • Be able to pay a downpayment of at least 5% of the total purchase price and a maximum amount equal of 20% of the total purchase price.
  • Occupy your new home as your primary residence with no intent of using it as an investment.

How Does the FTHBI Actually work?

Having developed a clear understanding of this incentive, now it is time to glue the pieces together with a real life example.

Let’s assume you have $25,000 (your down payment) and are looking to purchase a home in Toronto for $500,00. Like the previous example, if you get a mortgage at a 2.59% interest rate, with a 25 year amortization and take advantage of the incentive to borrow $25,000 from the government (5% of $500,000). Then 5 years later, the value of your house increases to $600,000. You would have to pay back the Government of Canada $30,000 (5% of $600,000) if you were to sell your home. That's $5,000 more then the original borrowed amount but again you would have saved $8,160 in mortgage payments during that 5 year period. So overall the FTHBI would have proven to be beneficial saving you a total or $3,160 ($8,160 - $5,000).

However, using the same example above if 5 years later the value of the home decreased by $100,000, then you would have to pay back the Government of Canada only $20,000 (5% of a $400,000 home) at the time of sale.

It should also be noted that there's a chance of a potential net loss when using the FTHBI - if at the time of sale the property had appreciated more than the amount saved in mortgage payments from the incentive. For example, if in 10 years the $500,000 home appreciates by 80% to reach a value of $900,000. You would have to pay back $45,000 (5% of $900,000). That is $20,000 over the original $25,000 borrowed. Leaving you you with a net loss of $3,680 ($20,000 - [$8,160 x 2]).

You can save even more for your down payment with Dwelly's Buyer Rebate, buy with Dwelly and save an additional 1.25% on average on your home purchase - and that's a rebate that you don't have to pay back!

For more information regarding the new First Time Hime Buyer Incentive, please visit the Government of Canada's website here.

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