When clients ask questions and I don’t know the answers, I ask some really smart experts to find out. Recently I had a couple clients asking about the recently announced First Time Home Buyer Incentive (FTHBI) Program.
The (FTHBI) Program revealed Sept 2019 announced it will help thousands of families across the country buy their first home. The program offers eligible buyers up to 10% of a home’s purchase price to put toward their down payment, thus lowering mortgage carrying costs and making home ownership more affordable. It sounded great at first, but something felt a bit wrong so below I include some comments from a senior mortgage broker, Jason Dodd, and one of the expert real estate lawyers in Calgary, Lubos Pesta.
Some important points:
- The program targets first time buyers. So these buyers are not experienced with mortgages, bank terms, legalities, etc.
- The program limits home purchases to approx $480,000 including mortgage, mortgage interest and the borrowed amount.
- This program is in effect a loan which the buyer will repay by paying back a % of the increase in their home value on sale. The government, in effect, is on your title. This registration has some important consequences.
A recent Money Sense article explained the dollar details very well if you want a breakdown.
Challenges identified by local real estate lawyer, Lubos (Lou) Pesta:
- It will take much longer to be approved for this program than for a normal mortgage loan and sellers may not accommodate the longer condition time.
- Higher legal and appraisal costs will result as two separate mortgages have to be prepared and registered (one for the lender and one for the equity share) and an extra appraisal will have to be obtained and paid for by the owner if paying out the incentive mortgage prior to the ultimate sale of the property.
- A disincentive to improve/renovate the property will exist as any appreciated value is shared with the government notwithstanding that they don’t contribute to the renovation costs.
- A potential trap is being created for non-permanent residents who are legally authorized to work in Canada who can qualify to buy under this program but will have extreme difficulty in selling when their work permit expires as they will not have sufficient equity to satisfy the required withholding requirements under the Income Tax Act
- It may be more difficult to refinance the property (it is not clear whether the Government will permit refinancing of the first mortgage and postpone their security to the new financing)
- If refinancing of the first mortgage will not be possible without paying out the government’s equity share, then the first mortgage lender will have a captive borrower. The lender will have no incentive to reduce posted mortgage rates on renewal resulting in substantially higher interest rates in the second and subsequent mortgage terms for the homeowner.
Challenges identified by local mortgage broker, Jason Dodd:
- There are fees involved buyers need to be aware of. The buyer is responsible for extra legal costs to set up a second registration for the program. Best to discuss with your prospective lawyer on what that will add additionally to your legal bill at closing.
- You can refinance in the term of ownership if you have enough equity, based on high ratio purchase initially and having a second registration behind your first it would require a large equity pay down and reduction of principal balance to make that happen, Remember the second registration factors in to the equation.
- The maximum allowed based on income maximum $120000.00 per family will price a lot of young buyers out of the program from the start. From our own internal database a lot of our young borrowers collectively carry a larger income than this even though they are first time buyers.
- The buyer are responsible for extra discharge legal fees Through your lawyer to clear not only the first mortgage but the second registration with government on title. Also insurer requires an appraisal to ascertain a fair market value even through a sale price is agreed upon. So there is an additional cost to put this in place as well.
- A mortgage/home ownership is typically a marathon and not a sprint. The government gives you some money up front in return for equity share in the house. This is after they charge 4% (5% down payment) or 3.1%(10% down payment) in Mortgage default insurance. In my opinion double dipping on a secured asset as they counter losses with large insurance premium and then get a share in the value if the property increases. I went on the National information session with the Government representatives. On that teleconference I was not happy with the answer to question if values drop if the homeowner is on the hook for all the losses.
The answer was “it makes sense not to charge them for the loss and we will review that, we will look at the trends and data in that area and make sure its not a consistent theme.” So there is no guarantee they will share in the loss. Now forward to parts of Alberta and Saskatchewan where young buyers are buying condos that have dropped in value in a very difficult market. They need to sell because of job loss and the value of Condo/townhouse has gone down 5-7%. If you look at the mortgage amount after insurance premium and there is value drop the seller could be on the hook for some serious losses if they are paying back the government loan in full. There is still no full fledged guarantee how much loss they will cover.
- With every home like condo fees and detached/semi detached homes there is also costs of upkeep on the property. These are repairs, maintenance, upkeep and upgrades that add value. You are responsible for these as homeowners and they will over time help retain or increase value of the home. These costs are large and are part of the process for all homeowners. This is where I find this program stops short. I feel it would be a more complete program if participants were offered a tax write off in relation to percentage given by government for all these costs. Since the government wants to share in equity appreciation why aren’t they rewarding the homeowner for upkeeping and improving the property they co own with the taxpayer. This would go a long way to silencing critique of the program as that is a tangible benefit to sharing the home ownership with the government. This in my opinion will not happen as the government will never allow this.
It is very important for first time buyers utilizing the (FTHBI) program to first speak to a real estate lawyer and their mortgage broker to have a complete understanding of the program at purchase and at key points during ownership. What is the timeline for application, process and timing when offering to purchase? What are the additional costs of the program? How does the program affect future decisions about refinancing, mortgage discharge or transfer of the mortgage between lenders? What happens at sale if the property is worth more or less than when it is bought? How does the program affect decisions around renovations?
As always, if you have questions please contact me and I can put you in touch with the right folks to help you. Thank you Jason and Lou for your input on this important topic. Cheers, Monika
Lubos K. Pesta Q.C.
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