Purchasing your first home is a huge accomplishment, but it can often be confusing to understand the credits, programs, and incentives available to you. Not to mention it can be expensive! This ultimate guide will give you a better understanding of all of the assistance you can access as a first-time home buyer in Canada.
How First-Time Home Buyers Can Save Money
The housing markets across Canada are continuing to grow, and property values are ever-increasing. This growth can make it very difficult for a first-time homebuyer to enter the market and get a mortgage to buy your first home.
There are several programs, tax credits, and incentives available that make it easier for individuals and families to buy a home. Whether it's through down payment assistance, monthly payment reduction, or transfer tax credits, it is essential to know how these programs can help you save money.
Keep reading to learn more about the first-time homebuyer incentive, transfer tax rebates, and province-specific assistant programs that you may be able to qualify for!
Housing market inside scoop
What is the First-Time Home Buyer Incentive?
The most well-known program available is the first-time homebuyer incentive. The goal of this incentive is to help qualified individuals reduce their total mortgage payments without having to add additional financial burdens.
It involves taking out a shared-equity mortgage with the Canadian government so that you can get 5% of the purchase price towards the down payment on your first home. This benefit extends to purchasing an existing home, a new or resale manufactured home, or a newly constructed home. If you choose a newly constructed home, the incentive may be bumped up to 10% in certain cases!
So, how does this shared-equity mortgage work?
Since the government is helping you to save money on your monthly mortgage payments, they have a shared investment in the home. This means that they share the upside and downside risk when it comes to the value of the property.
As a result, they will lend you 5% to 10% of the purchase price of the home. You must return that same percentage – based on the fair value of the home – within 25 years or when you sell it. In other words, the repayment is based on the value of the home when you pay back the funds you borrowed.
You can also choose to repay the incentive at any time, and there is no prepayment penalty if you choose to do so.
Let’s take a look at an example:
If you received a 5% CMHC first time home buyer incentive and the purchase price of your home was $200,000, you borrowed $10,000. When you sell the home in 10 years the house is now worth $220,000, so you must pay back 5% of that – which totals to $11,000.
The same thing will occur if the home's value decreases over time. If instead, your house is worth $175,000 in 10 years, you will only need to pay back $8,750.
In both scenarios, the total mortgage that the buyer would need decreases by 10,000 dollars. The only difference is that the fair value at repayment determines the amount you have to pay back.
Although you have to pay it back, the incentive can help alleviate hefty down payment requirements and make your total mortgage smaller. This reduction makes your monthly mortgage expense more affordable.
Think of this incentive like a second mortgage but note that only the first mortgage is used to calculate insurance premiums and loan-to-value ratios. This means that you're not responsible for paying any mortgage insurance on the value of the incentive because it is considered part of the total down payment.
You may have also noticed that there is no interest associated with this shared-equity mortgage. This feature makes the first-time homebuyer credit extremely attractive for those who would like to purchase a home in the booming Canadian housing market!
Additional Cost Considerations
When you qualify for a first-time homebuyer incentive, you may need to pay additional legal fees since you will be closing on two separate mortgages. Similarly, you may need to have an appraisal completed when you are going to repay your incentive so that they can determine the fair market value of the property.
If you switch lenders or mortgage providers or decide to refinance your first mortgage, you may also face some additional fees. Although it is helpful to keep this in mind when you apply for any incentive program, the fees will likely not outweigh the benefits provided.
First-Time Home Buyer Eligibility Requirements
To receive a first-time homebuyer incentive, you must meet certain eligibility requirements. First, you must be a Canadian citizen, permanent resident, or someone who is authorized to work in the country. This must also be the first time you or your partner are purchasing a home.
You can also qualify as a first-time homebuyer if you did not live in the home that you or your current partner owns within the last four years or if you have recently experienced a breakdown of a marriage or common-law partnership.
If one of you is a first-time buyer, but the other is not, you may only qualify for a portion of the incentive program.
Next, your total yearly income must not exceed $120,000, and the total amount you seek to borrow cannot be more than four times your qualifying income. Also, you need to meet the down payment requirements with traditional funds to obtain the mortgage.
If you have been pre-approved for a mortgage, found the home you would like to purchase, and think you are eligible for the first-time homebuyer incentive, all these people all you have to do is apply!
Your lender will help you complete the forms, and they will apply on your behalf. If you receive your acceptance, you will need to activate the incentive and provide the notary before your final closing date.
Upcoming Changes to the Incentive Program
As the housing market in Canada continues to grow and evolve, so does the incentive program. It needs to adapt so that it can continue to help first-time homebuyers.
The Canadian government released a Fall Economic Statement that detailed changes to this program. The goal is to increase eligibility for buyers in specific areas, including Toronto, Victoria, and Vancouver. Even though these potential changes were announced in September 2019, it is expected that they will come into effect beginning in Spring 2021.
While first-time purchasers were previously limited to a home valued at four times their household income, the changes will allow them to buy a home with a mortgage up to 4.5 times this amount. The income limitations will also be increasing from the current maximum of $120,000 to a total household income of $150,000 or less.
To put it into perspective, with the current regulations, the maximum purchase price that can qualify for incentive support is approximately $505,000. These upcoming changes will boost this qualifying price up to $722,000.
Simply put, many more Canadians will be able to benefit from this shared-equity program so that they can purchase their first home.
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Land Transfer-Tax Rebate
In addition to the incentive we just discussed, a few cities and provinces offer a tax rebate that helps offset the cost of land transfer taxes for a first-time homebuyer. If you meet the eligibility requirements, you may be eligible for a refund of a portion of what you paid in transfer taxes.
If you are buying a home in Ontario, you may be able to receive a rebate for the full amount of the land transfer taxes that you paid up to $4,000.
To qualify, you must be a Canadian citizen or permanent resident, be 18 years or older, and they live in the home within nine months of buying it.
Similarly, your spouse could not have owned a home while they were married to you. If you are buying a property together and only one of you qualifies, you may receive 50% of the rebate.
At this rate, you can get a refund for the full tax amount if the home purchase price is $368,333. For anything above that, you will receive the $4,000 maximum.
The transfer tax rebate in Toronto is very similar to the one we just described, except the maximum value is $4,475. You may be able to qualify for both the Toronto and Ontario rebate together if you meet all of the requirements.
This rebate amount is enough to cover the total taxes on a home purchase price of $400,000.
To qualify for the tax credit in B.C., you must have lived there for twelve consecutive months before you registered the property. The other way you can claim this credit is if you have filed two income tax returns there within the past six years.
The B.C. rebate will cover property transfer taxes up to $8,000, which is enough for the entire tax amount for a home worth $500,000. However, if you purchase the house for over $525,000, you are not eligible for the rebate - and you will be responsible for the full tax amount that is due.
The transfer tax credit is also limited to properties that are 0.5 hectares or smaller. If the home you are purchasing is on a larger property than this, you will not be eligible for the land transfer tax rebate.
Prince Edward Island
For first time homebuyers looking to purchase property in Prince Edward Island, they may be eligible for an exemption equal to $2,000.
The rebate is only available for a maximum purchase price of $200,000, and you must have lived in Prince Edward Island for at least six consecutive months before registering the property.
First-Time Home Buyer Programs in British Columbia
First-time homebuyers in British Columbia should look to the incentive program offered across Canada by the CMHC. Although there is no specific down payment assistance or another incentive in this province, eligible individuals may qualify for the land transfer-tax rebate we discussed above.
First-Time Home Buyer Programs in Alberta
Alberta offers several additional programs to help individuals who are looking to purchase their first home.
Edmonton offers the First Place Home Ownership Program, which aims to help those with income limitations. Certain builders will participate in this program throughout the city, and most of these properties are condominiums or townhomes.
After you qualify for a mortgage - and if you agree to live in the unit for at least five years - you can apply for the First Place program.
The Attainable Homes Calgary program supports down payment assistance. As a Calgary resident, you can qualify for this program if you move into an area that is designated for this incentive. The down payment requirement is only $2,000, and the program will pay the remainder on your behalf.
However, when you sell your home in the future you are required to pay back a portion of the proceeds to the program. There are also income limitations that apply to qualify.
PEAK, which stands for Public, Essential, and Key, is a plan available for low-income individuals. This program assists with acquiring funds for a down payment on a first home through a second mortgage.
The plan is capped at 5% of the purchase price of the home, and no interest will accrue during the first five years on the second mortgage.
Housing market inside scoop
Tips for First-Time Home Buyers
Take these tips into consideration. It may help you establish a plan of action and what to do next.
1. Get Pre-Approved
It may seem obvious, but you will want to be pre-approved for a mortgage first. It will help you determine what you can shop around for and help to create your own mortgage payment plan/limit. Which brings us to our next point.
2. Improve Your Credit Score
If you know your credit score may not be the greatest, try to improve it before hand to prove to your lender you are a reliable customer and have a steady income to make your payments. Pay off any outstanding debts or loans otherwise, you may not be approved for the amount you need or want.
3. To Have A Higher Down Payment
You may have saved up enough for a down payment, but is it for 5% or 15%? The higher your down payment, the lower your mortgage payments will be, and you may be offered lower interest rates. Your home equity will also increase right away which can help you if you ever need a home equity line of credit or are wanting to sell in the future.
4. Find A REALTOR®
Once you are ready to find a real estate agent to help you with the buying process, you will want to make sure you are finding the right one. Interview different agents, maybe three to four to get a feeling on who you will work best with and who has your best interest at heart. Building a trusting and honest relationship with them will make everything easier and less stressful, especially when you know you can go to them for anything and ask any questions.
5. Use A Reasonable Loan Amount
Just because you were pre-approved for a certain amount, does not mean you need to use all of it. If you purchase a cheaper house you absolutely know you can afford and pay off your smaller loan, then think about moving into a bigger home with a higher loan approval. Your credit score will have improved immensely and you should have been able to save enough to be able to afford your newer home.
6. Stay Positive
Remember, in most people’s cases, you are not getting your dream home right away. You may have to start small, as mentioned above, but this way you know you can afford it and may be able to go with a smaller amortization period. After a few years, you may be able to upgrade, especially if your income has increased.
7. Try Not To Judge The Interior
It may seem hard, especially if you have a certain style in mind, but try to look past what you may consider an “ugly” interior. If the home is old, it may have outdated wallpaper and carpet, but that can all be changed. If you look for homes that are under your budget, it will be easier to afford renovations, particularly if you love the layout but just do not like the style the previous owners had.
8. Compare Mortgage & Interest Rates
Even though you are with a specific bank, does not necessarily mean you need to go through them for a loan. Shop around for different rates. Do the research behind the different mortgage options too. There are certain ones that will fit your needs and others that may not be the best option for you, depending on your situation.
It cannot be stressed enough that your down payment and mortgage payments are not the only costs to budget for. You will need to take into consideration moving and closing costs. Your REALTOR® can tell you what closing costs will be involved and go over them with you, since they will be outlined in the contract.
Buying a home is the most expensive purchase you will ever make, so why not make the process as easy as possible. Break down each step, stay organized, and remember to stay positive. Just because you have to go with a smaller home now does not mean you will live in it forever.
So, What Does This All Mean for You?
As you can see, there are a wide variety of options available to first-time homebuyers looking for assistance with buying a home. Whether you intend to use the CMHC first-time homebuyer’s incentive or participate in another province-led plan or tax credit, you must be aware of everything available to you.
Work with your lender to maximize all of the benefits you can receive during the home buying process. They can help you determine which programs you qualify for as well as apply for them - just make sure that they know this is your first time buying a home!
Mortgage Interest Calculator
What Is A Mortgage?
When you purchase a house, you are making monthly payments to pay it off. You borrow money from a bank in order to pay for the mortgage and are paying the bank back. Learn more about mortgage
The down payment is the amount you will pay upfront to obtain a mortgage. Learn more about down payment
An interest rate is charged with your mortgage since you are borrowing money from them. The smaller the amount you borrow, the lower your interest charge will be.
Mortgage Term or Amortization Period
The amortization period is the total length of time over which you plan to pay off your mortgage.
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