Robert McLister is managing editor at Rates.ca.
What is Rates.ca?
McLister: Rates.ca compares insurance, mortgages and credit cards from dozens of companies across Canada. By juxtaposing numerous providers, it’s easier for consumers to quickly compare terms and find the best prices.
How does the new down payment assistance program for first-time homebuyers work?
McLister: The government gives qualified first-time buyers five per cent of their purchase price (or 10 per cent if it’s a new build) as a payment-free loan. That ‘incentive’ reduces the mortgage amount and saves a typical borrower $150 to $200 a month.
It also lowers their default insurance fees, since the mortgage must be insured. The mortgage plus incentive must be no more than four times the household income (with a maximum $120,000 household income). Borrowers can put down anywhere from five per cent to 14.99 per cent of their own money (maximum 9.99 per cent if the property is a new-build).
The incentive is on top of that, and it must be paid back all at once in 25 years or when the property is sold, whichever comes first. The maximum theoretical purchase price under the program is approximately $565,000, assuming the borrower puts down 14.99 per cent and gets a five per cent incentive.
What are the benefits and the downfalls of the new program?
McLister: Benefits: Those who don’t live in their property a long time and/or live in a slow growing housing market will potentially save more by using the FTHBI, and vice versa.
Drawbacks: The shared equity mortgage (incentive) must be paid back at one time. That lengthens the amount of time the government participates in one’s price appreciation – given that most borrowers won’t have $15,000 to $25,000-plus lying around to pay back the incentive.
First-timers in rich markets like Toronto and Vancouver will be hard pressed to finance their ideal home with the FTHBI, given how it limits buying power.
Every taxpayer in the country should be asking one question: “Why is the government spending my tax dollars to subsidize borrowing costs for someone who could qualify for a mortgage without this program?”
The FTHBI also shares in the losses if home values plunge and you sell the property. But if home values drop considerably, insured borrowers may not be able to sell because their mortgage may be underwater. So the loss-sharing aspect of the FTHBI may be moot.
What’s your advice for Canadians looking to do a mortgage?
McLister: Assuming we’re talking about first-time buyers making a purchase with less than 20 per cent down: First, talk to a mortgage adviser to confirm how much you qualify for. Or use a calculator like this one you can find on the Government of Canada web site. (Input the Bank of Canada benchmark rate, currently 5.19 per cent, as the “Interest Rate.” This will ensure you properly stress test yourself based on government rules.)
Then compare how much you’d qualify for using the FTHBI (following these steps.) Assuming you can qualify for a mortgage with or without the FTHBI, make assumptions about two things: your home’s future price appreciation (check the last 20 years for guidance); and how long you’ll likely live in the property.
Provide those figures to a mortgage adviser and ask them to estimate which option will save you more.
Do you think Canadians will take advantage of this new program as the government anticipates?
McLister: The government expects roughly 33,333 takers annually. Meanwhile, Canada has roughly 300,000 first-timers buy each year. Eliminate roughly 47 per cent who put down 20-plus per cent. Then eliminate at least three-quarters of the remainder who tend to purchase the most house they can afford. That leaves you with a maximum of 40,000 potential users each year.
Then you’ve got surveys showing that almost half of Canadians dislike the idea of the government taking a portion of their upside.
Long story short: I think it’s unlikely CMHC will meet its 100,000 user goal.
Interviewed by Mario Toneguzzi, a Troy Media business reporter based in Calgary.