There were multiple possible changes on the table for mortgage regulations for the federal budget which was announced this past Tuesday, March 19th. Everything from increasing the amortization to 30 years on insured mortgages and upping the maximum purchase price on insured mortgages (currently at $1 million), to increasing the maximum RRSP limit for first-time homebuyers, and reducing the stress test.
The announcement ended up proving disappointing to say the least. Only one of the potential changes came to fruition. The maximum RRSP withdrawal limit will be increasing from $25,000 to $35,000. While this will help some, the vast majority of first-time home buyers do not end up maxing out the contribution limit, even at $25,000.
There was only one other change made. If you are a first-time home buyer with 5% down payment, the government will lend you an additional 5% down payment to bring it to 10%… interest-free and payment free. It’s kind of like ‘free-money’ since you not only don’t have to make any payments or pay any interest on it, but it also lowers your mortgage amount and therefore lowers your payments.
Sounds great, right? There is, of course, a catch.
When you pay back this loan to the government, you will need to pay them a portion of any money earned from the appreciated value of the home. Likely, this would be when the home is sold, although the budget did not specify. So how much of your appreciation will you have to give up? Well, they seemed to have left that little tidbit of information out as well. So at this point, it’s an undetermined amount.
This new incentive will only be available to those with a combined household income of under $120,000. The home value cannot exceed 4 times the household income, which would make the maximum home value $480,000. I’m sure you’ll find your perfect first home for under $480,000, right? Of course, that’s if your income is $120,000 (actually, $119,999 as it needs to be under $120K). If your household income is $100,000, then that then limits you to a $400,000 purchase… and so on.
How much more will the new incentive allow first time home buyers to qualify for?
Based on the maximum income of $119,999, you would typically qualify for a purchase of $555,000 with a minimum down payment of $30,500 (5% of the first $500,000 and then 10% on the additional $55,000). As long as they are capping the that maximum purchase price to 4 times the income limit, the incentive will not help homebuyers qualify to purchase a higher priced home. In fact, it lowers their maximum purchase price. Given that the limit is so low to begin with, I’m not sure how they think this will actually help too many people.
Are there any benefits at all?
Sure, it will help with lowering the mortgage payments. If a couple earning $120,000 is purchasing a home for the maximum $480,000 with 5% down payment ($24,000), their monthly mortgage payment would be $2,266.28 based on today’s lowest 5-year fixed rate of 3.09%. This includes the CMHC fee of $18,240.
When we add in the additional $24,000 coming from the government incentive increasing the down payment to 10%, the monthly payment would drop to $2,128.42, or a difference of $137.86 per month. This will also drop the CMHC fee to $13,392, a “savings” of $4,848. I put savings in quotes because we cannot forget that you will still have to pay back an undetermined portion of your equity accumulated from any of your home’s appreciation when you sell. Keep in mind that even though your mortgage amount will be 5% lower, you still owe the same amount as you would without the incentive, considering you still have to pay back the loan.
It could also save with your mortgage penalty if you find yourself in a position where you need to break the mortgage before the end of the 5-year term since the penalty would be calculated on a lower balance.
Given that so few first-time homebuyers max out their RRSP limits, and the limitations of the down payment incentive, these new changes will affect a very small number of people. Most first-time home buyers still qualify for the maximum $480,000 purchase price, even after passing the stress test, and with room to spare. So do they really need the lower payment? Sure, every penny counts, but considering you need to give up a portion of your home’s appreciation, I see this new program benefiting a very small segment of the population.