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What Is The First-Time Home Buyer Incentive In Canada?

Many countries have got incentives for first-time buyers to assist them in getting onto the property ladder. This is also the case for first-time buyers living in Canada.

The first-time buyer program offers 5% or 10% of the purchase value as a down payment. This is added on top of your own down payment, which reduces the overall mortgage costs, and allows easier access to those struggling to get onto the property ladder.

How does the First-Time Buyer Incentive Work?

This is called a “shared equity mortgage,” and it essentially means that the government is sharing the risk of the property’s upside and downside. They will provide 5% or 10% of the property’s value, and you pay back the same percentage of the value when you choose to sell it (whether the sale price is higher or lower than what you originally paid).

For example, if you bought a $250,000 property, the government could provide up to $25,000 (10%). However, if you then sold the property five years later for $350,000, you would be required to pay them $35,000 (10%) of the total received.

As the name implies, this incentive is for first-time buyers. However, this isn’t quite as simple as you may think. This is defined as:

  • Someone who has never purchased a home before
  • OR, you did not occupy a home that you or your current spouse owned in the last 4 years.
  • OR, you have recently experienced a divorce or marriage breakdown.

First Time Buyer Incentive Eligibility

Even though you may fall into the aforementioned categories to be defined as a first-time buyer, there are some other aspects that you will need to meet to qualify for the incentive:

  • Your total income cannot exceed $120,000 per annum.
  • Your total borrowing cannot exceed more than 4 times your qualifying income level.
  • It would help if you were defined as a first-time buyer (or your partner/spouse can be too)
  • You must be a Canadian Citizen, permanent resident or a non-permanent resident authorized to work in Canada.
  • You must meet the minimum down payment requirements.
  • Your mortgage must be more than 80% of the property’s value and therefore eligible for CMHC or mortgage loan insurance. However, you will not pay for mortgage insurance on the incentive you receive from the government, as it is classified as a part of your down payment.

The type of property you are looking at can play a factor in acceptance for the incentive. If you want to get the full 10% incentive, then the property will have to be a new-build construction. Otherwise, the maximum incentive amount is 5%.

It may sound like a given, but to apply for this incentive and be accepted, the property you are purchasing must be located in Canada and be used for full-time occupancy. This cannot be used to purchase an investment property.

Repaying Your Incentive

As previously stated, when you come round to selling the property, the incentive must be paid in full. This is also triggered if you have owned the property for 25 years. However, there are also a few other unique circumstances that can trigger repayment:

  • A change occurs in the intended use of the property. For example, you buy a second property, and the original property linked to the incentive becomes a ‘holiday home’ or an investment property.
  • If you port your mortgage, this will trigger repayment of the incentive.
  • If you go through a divorce or break-up from the partner you purchased the property with and wish to buy their share of the property; you will likely trigger the incentive in full if you require further mortgaged funds.
  • Partial release of the property’s security will be treated as a sale, and therefore trigger a repayment of the incentive fee.

Note: It is also worth discussing with your mortgage lender whether certain refinancing options they offer could also lead to a triggering of incentive repayment.

How to Apply for the Incentive

First-time buyer incentive example

John wants to purchase his first home for $300,000 and has put together his required down payment of 5% of the property value ($15,000)

As John has a down payment of less than 20% and qualifies as a first-time buyer, he also qualifies to get the first-time buyer incentive.

John is purchasing a new-build construction and is, therefore, able to get 10% of an incentive. This means John can get $30,000 additional through the incentive program.

This reduces John’s mortgage requirements significantly to only $255,000 (instead of $285,000 without the incentive). As a result, John’s monthly mortgage payments will be significantly lower.

Fast-forward 10 years, and John decides to sell the property. It is a great time to sell, and he sells it for $380,000

As John got a 10% incentive, he will be required to repay 10% of the property’s sold value. Therefore, John pays $38,000 upon the sale of his property.

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