In Canada’s major housing markets, the future for first-time homebuyers looks bleak. Cities such as Toronto and Vancouver are among the most expensive in the world. Others, such as Montreal, aren’t exactly a cakewalk to break into either.
A report from the non-profit Generation Squeeze shows that, across Canada, it takes 13 years of full-time work for someone between age 25 to 34 to save for a 20 per cent down payment on an average-priced home.
In an attempt to make things easier, the federal government and the Canadian Mortgage and Housing Corporation (CMHC) introduced the first-time homebuyers’ incentive in the March budget. The incentive, which went into effect this September, will see the CMHC provide a portion of the purchase price in exchange for a stake in the home.
The so-called shared-equity mortgages will cover five to 10 per cent of the purchase price of a newly constructed home, five per cent of an existing home, or five per cent of a new or existing mobile/manufactured home. Investment properties are not eligible, with “possible exception in times of hardship.”
While any help for first-time buyers is generally well received, there have been questions about just how effective the plan will be.
How does it work?
There are several conditions that must be met for a first-time buyer to qualify for the program.
The buyer’s household income can be no more than $120,000. The total mortgage is limited to four times their maximum income, so the most one could borrow is $480,000.
The loan must be repaid after 25 years or if the house is sold, and the program does not allow for partial payments over time. Since it is a shared-equity loan, the government shares in the appreciation or depreciation of the property, which an independent appraisal will determine. As well, before selling the property, you must obtain approval of the sale from the program administrator.
“You have to pay the whole thing back at one time,” said Rob McLister, founder of RateSpy.com. “Since most people don’t have tens of thousands of dollars lying around, that’ll let the government ride their ‘winnings’ for longer.”
On the program’s website they use this example to illustrate how the pay back works: “You receive a 5 per cent incentive of the home’s purchase price of $200,000, or $10,000. If your home value increases to $300,000 your payback would be 5 per cent of the current value or $15,000.”
The website includes calculation tools so you can determine the size of your loan.
You are considered a first-time homebuyer if you have never owned a home before, if you are experiencing the breakdown of a marriage or common-law partnership or if in the last four years you did not occupy a home that your current spouse or common-law partner owned.
The total amount of funding for the program, which was first announced in March of this year, is $1.25 billion over three years.
Why is it controversial?
With a 15 per cent down payment, the most expensive home one could purchase under this program would be priced at $565,000.
It is for this reason that some see the program as ineffective, considering the astronomical home prices in some Canadian markets. The Toronto Real Estate Board reported a Greater Toronto benchmark price of $810,900 in October, with the City of Toronto coming in at $897,200.
Meanwhile, the Real Estate Board of Greater Vancouver reported a composite benchmark price of $992,900 and the median price of a home in Montreal is $532,026.
“Anecdotally, sources at lenders and insurers tell me they’re seeing less than one in 20 high-ratio applicants applying for the program,” said McLister. “If you extrapolate that, it’s likely less than 15,000 applicants per year versus the government’s 30,000 to 40,000 estimate.”
The reason, according to McLister, is that half of first-time buyers put down more than 20 per cent on their mortgage, thus disqualifying them, and 85 per cent of first-time buyers are getting the biggest mortgage they can, going against the limiting nature of the program.
B.C.’s provincial Liberals launched a $700-million first-time homebuyer loan program in 2017 with a predicted 42,000 applicants. It only attracted 3,000 and was scrapped by the NDP in March 2018.
With all these stipulations, the program is best suited for those who may move in the next five years or so, especially those in low-demand markets.
Will it stick around?
During the election campaign, the federal Liberals promised they would raise the household income limit to $150,000. They also promised to lift the mortgage ceiling to $750,000 in hot markets like Vancouver, Victoria and Toronto. With a minority government, it remains to be seen whether these promises will come to fruition.
“Some think it could be shelved for a while, potentially permanently given the average minority government lasts less than two years,” said McLister.
With fewer than one in 10 expected to opt for the program, it appears that first-timers will for the most part be left to fend for themselves.