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UPDATE: CMHC First time home buyer incentive program (easier to buy a home?)

“Always pick your yard based on your Summer lifetstyle.”

~ KARL

July 25, 2019 - Karl Yeh

"The CMHC First-Time Home Buyer Incentive program is actually catered towards first-time home buyers. It's actually built in, to get people into their first home a lot easier than sooner. And it kind of helps alleviate some of the stress tests that was put in by the government or the Bank of Canada."

In this episode, we discuss new information about the first time home buyer incentive program from the Canada Mortgage Housing Corporation (CMHC). We discuss who can apply, impact on the mortgage stress test, down payment requirements and how it affects mortgage insurance. We also go through an example of how the Incentive Program works and if it actually makes buying a home for the first time easier.


 

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Transcription:

Hi everyone. I'm Karl. Welcome to another Homebuyer's School video, a channel where you get the latest strategies, tactics and tips from home buying experts. And remember if this is your first time on this channel and you want to get the latest strategies from the experts, hit the subscription button below. Hit the little notification bell so you don't miss anything.

So today I'm joined by  Mujtaba Syed, Mortgage Specialist with the Bank of Montreal, and today the ... Well actually, what we're going to talk about is the First-Time Home Buyer Incentive by the Canada Mortgage Housing Corporation, which we talked about before, but we have more details for you today. So let's recap again, [Mo 00:00:00:54].

What is the the CMHC First-Time Home Buyer Incentive?

Mujtaba Syed:                  

The CMHC First-Time Home Buyer Incentive program is actually catered towards first-time home buyers. It's actually built in, to get people into their first home a lot easier than sooner. And it kind of helps alleviate some of the stress tests that was put in by the government or the Bank of Canada.

Key requirements of the First Time Home Buyer Incentive Program include:

  • Annual household income for first-time home buyers shouldn't be more than $120,000
  • Can't have owned a home before
  • Home must be used for their primary residence 
  • The mortgage loan can't be more than $480,000.
  • CMHC will put in a 10% shared equity for a brand new home, 5% for a resale home

Meaning that purchase price has to be, I would say, within that range. It couldn't be too much of a high purchase price, so it'd be perfect for anything except the major urban markets in Canada.

All right? So in Toronto and Vancouver. Everywhere else, I think this would be a perfect, perfect program.

A couple more details about that.

So if you're buying a used home, so not through a builder, which is considered to be a resale home, CMHC will actually put in 5% as a shared equity. With a brand new home, it'd be 10%, which is, once again, shared equity.

So if you ever decide to pay them back or decide to sell your home in the future, it would be 5% of the appraised value or the sale price at that time.

Karl Yeh:                             

So just in terms of that, so let's say you buy a house at $350,000. Right? And the house gets appraised in, I don't know, 10 years, at $450,000, and you use the First-Time Home Buyer Incentive, and it's a brand new home.

So it's, what? 10%?

Mujtaba Syed:                   10%, yeah.

Karl Yeh:                             

10%. So the house ... So you owe the government, or the government takes back 10% of the $450,000, not the $350,000 price. Correct?

Mujtaba Syed:                   Absolutely.

Karl Yeh:                              Right, okay.

Appreciation and depreciation of a home

Mujtaba Syed:                  

Yeah, totally. That's dead on.

So it will be 10% of the equity. Right? But it works both ways. So let's say if there's any appreciation in your home price or home value, they would get that.

But there's also ... If there's decrease, in a decreasing market, they will also get that. So in a way it kind of works in both ways.

And then I respond to clients, when clients ask me this question, saying, "Well, what's the point of the government getting a little bit more than they put in, in the original?" And I explained to them is that, yes there was a benefit to the government, but there's also a benefit to you guys as well.

So putting an extra 10% on a brand new home, that means that's 10% less mortgage payments that you have to make, less interest, you have to pay on your mortgage balance, because it's been reduced by 10%, so your down payment originally goes from 5% to 15%, which makes a big difference.

And over the longterm, let's say in 10 years, that you sell your home, you could save just as much money in interest alone, and mortgage payments alone, that you would have to pay them out.

So in a way it's a win-win situation, and it's a great program, in my opinion.

How to finance your home

Who can apply?

Karl Yeh:                             

So let's un-package this just a little bit more. How about people who ... So let's go about who can apply.

So when you say first-time homeowners, can you un-package that? Because that can mean anything, right?

Mujtaba Syed:                   Mm-hmm (affirmative).

Karl Yeh:                             

So what is the definition of a first-time home buyer, according to this program?

Mujtaba Syed:                  

Yeah.

So definition of a first-time home buyer is someone who hasn't owned a home before. They're looking into their first purchase, or someone who's bought a home and then maybe have sold it and haven't been a homeowner for at least four years is also considered to be a first-time home buyer.

All of these people are considered to be first-time home buyers to kind of use this program and avail it.

But in this program, there's certain stipulations, as well, which is the household income portion, and the borrowing amount.

So you could be a first-time home buyer and you could be making, let's say, just slightly over $120,000. You wouldn't qualify for this program, so annual household income, meaning that includes you, your spouse or any other family member that's buying the home, has to be less than $120,000.

And another really big stipulation is the purchase price of the home. Let's say ... You can't go out and buy a home for $900,000 right? It does not work under this program.

I think the maximum mortgage amount is going to be around the $480,000 range, which is perfect for markets that are really needing this program.

And I think it's a great program that the government brought in.

Because I remember when the stress test first came out a couple of years ago, a lot of people thought that the government brought this in to actually cool down some really, really hot markets. But then all the markets got affected, which is everywhere in Canada except Vancouver and Toronto and everyone had to kind of go through the stress test.

This, I think, would kind of even in out and really alleviate some of the stress that's put in by the rising markets in Vancouver and Toronto or major urban areas in Canada.

Impact on the Mortgage Stress Test

Karl Yeh:                             

So one thing ... When we talk about the stress test, how does this impact the stress test? Right? Because when you take the stress test it has to be 2% above what you, I guess, qualified for. Right? [inaudible] was your rate.

So how does this impact ... How does the 10% for brand new homes or the 5% for resale home, how does that impact?

Mujtaba Syed:                  

Mm-hmm (affirmative), yeah.

So with the stress test, it's 2% over your posted rate or the bank account's posted rate, whichever is going to be greater. So that 2% can actually work out to be maybe a couple hundred dollars a month, maybe a little more depending on your mortgage amount.

But taking that 10% home buyer incentive program, you can actually take 10% less all borrowing needs.

So for example, let's say you're buying a house for $400,000, you come up with 5% which is the original, nothing's changed on that side. CMHC comes up with 10%, so let's say that's $40,000. Now you have $60,000 of down payment, right? So that's $60,000 less that you have to borrow for that purchase price.

So that stress test will be alleviated based on the amount you borrowed.

Even though the stress test is still there, it's just going to impact you less because you're borrowing less. And you'll be paying less interest on the borrowed amount. Right?

 So keep in mind in a mortgage, the more interest that you pay, it's in the first five years, which is compounding.

So a lot of people ask us that and saying, "Is this a benefit?" I think is a great benefit because whatever they put in, you will probably save that, or more based on just payments and interest alone, by the time you do have to decide to sell or buy or pay out or buy out that CMHC home buyer incentive program.

First Time Home Buyer Incentive Impact on down payment

Karl Yeh:                             

How about down payments? Does the 5% down rate still apply? And then ... Or do you have to pay more, or do you have to put down more?

Mujtaba Syed:                  

Mm-hmm (affirmative). So the minimum requirement's still the same. Nothing's changed. So it's a minimum 5% to buy a house, right?

There is no such thing as zero down mortgages anywhere in Canada.

Some lenders do have borrowed down, where you could use a borrowed down for down payment, but still has to be minimum 5%.

So 5% still has to come either from borrowed sources or your own sources.

And then the other 10%, depending on a brand new home, will come from CMHC, or 5% will come from CMHC if it's a resale home. So that doesn't change, right?

So it just adds towards your down payment. So it could be anywhere between 5% to 10%, or 15% depending. You might even be able to do a 20%.

Let's say you have a 10% down payment, and you want to borrow another 10% for a brand new home, you would still qualify under this program.

Do you still need mortgage insurance?

A lot of clients also ask me, like, "Hey, if we come up with 10%, and CMHC gives us 10%, can we bypass CHMC altogether?" And my understanding is you can't because it's their program. Right?

You can't just come up with 10% and then they give you 10%, and then you don't use them at all. Right? That doesn't work.

So you would still have to kind of pay some insurance. Insurance costs would be less at 20% than it would be at 10%, for example.

So it's still a benefit, but in my opinion you can't bypass CMHC just because you're coming up with 10% and they're coming up with 10%.

Karl Yeh:                             

And that was actually my next question, is can you come up with 15% and they come up with 5%, and yeah, can you bypass, and stop paying insurance at all?

But you still have to, because you yourself have only come up with less than 20%. Right?

Mujtaba Syed:                  

Yeah, exactly. So that's a good point. But the other point I look at is, it's their program, right? You can't bypass them out and take their money and not use their services, because they are providing a service, right?

They're providing a shared equity service and then that is what they're going to be compensated on. But we are still waiting for a lot more details to come out.

Like I said, September 2nd feels like it's around the corner, but everyday we get a little bit tidbits more of information that we can share with you. But as of right now, this is our basic understanding of how the program works.

Karl Yeh:                              So for September ... And you actually raised a good point.

When is this program active?

Mujtaba Syed:                  

This program goes live September 2nd, 2019. So it gives a lot of lenders to get around it, put their policies in place, and put their systems in place to actually accept this. And yeah, we will be going live September 2nd across the board.

Karl Yeh:                             

And just to add to that too, because what we saw is it's $1.25 billion over three years, right?

So if you actually think about it, there's actually only a limited time that someone can apply because there's only a limited amount of money. Right?

And so as a buyer, you probably think that all the other buyers in regions that are not in major metropolitan areas would want to take advantage of this.

And then how much time do you have left to actually get the $1.5 billion that's going to be spread across the country? Right?

Mujtaba Syed:                  

Mm-hmm (affirmative), 100%. So like Karl said, very limited time, very limited resources. Right? So in my opinion, it's first come, first served. Right?

So you got $125 billion earmarked over three years.

So let's say the $1.25 billion, it might not even last the three years depending on how many people are getting in, want to avail these services or this program. So based on CMHC, initial ... what they're were thinking initially, they were thinking that it would actually add 100,000 new first-time home buyers depending on which market they're in.

So it could be in markets that are are looking at the maximum $480,000. It could be in markets using less than the $480,000, but in my opinion, this program won't last too long because it is going to be a ... There's only very limited resources, right? It's not unlimited.

Is it only through CMHC?

Karl Yeh:                             

Is it ... And then the second thing I want to point out is, is it only provided by CMHC? So how do you actually apply this program? Is it to any lender?

Mujtaba Syed:                  

So the way it works is that ... So as of right now, we know it's CMHC's program, but there are three insurers or three insurance providers in Canada: CMHC, which is Canadian Mortgage Housing Corporation is first.

They're actually a crown corporation, meaning that they're an arm of the government.

So it was their program that was actually brought out, which was actually asked of them by the federal government, to see what they can do.

So they came up with this program and this is usually the case that when they roll out a program or make a change, the other insurers follow suit.

The other two insurers are Genworth Canada and Canada Guaranty.

They're more private insurers, but they act exactly the same. And all banks have to deal with these three insurers. Right?

So any time that you're putting less than 20% down, it is mandated that we actually go through insurance providers to get that lending, and every bank has to follow that.

So all the banks will be following it. There's a really good chance all three insurance providers will be following it. So it's going to be available, technically every home buyer, first-time home buyer, and all the banks available.

First Time Home Buyer Incentive Home Buying Example

Karl Yeh:                             

Okay, so let's go through a quick specific example. Right? Just to make sure that if somebody says ... As a first time on buyer, let's say I want to buy a house for $350,000. Right? If it's a resale, it's 5%.

Mujtaba Syed:                   Mm-hmm (affirmative).

Karl Yeh:                              If it's new home, it's 10%.

Mujtaba Syed:                   Mm-hmm (affirmative).

Karl Yeh:                             

And and how would you apply that? Do you go to the bank and just ask them to use this 5% or 10% insurance? How would that ... Specifically, how does that work for a first-time home buyer?

Mujtaba Syed:                  

Yeah, so let's say you come in and you're applying. So let's say September 2nd.

The program's now live. You're coming into your bank, you're talking to your mortgage specialist or to your lender and you say, "Oh, we want to take availability of this new program." Right? The First-Time Home Buyers program. And I really want to ask you to stress that.

So let's say ... This program, it's definitely still is one of the availabilities that you have to actually help you.

It's not that you have to use it every time.

Some of my clients come and ask me and saying, is this a great program for them. And I explain it depends on your specific scenario. But let's say you're buying a house. Right?

Let's say, it's a little bit run down, but you want to put some sweat equity into this program and you're qualifying just fine, or we can get a co-signer; like your parents that want to help you out. Or you could come up with your own down payment.

And then let's say you buy the house for $250,000, you put your sweat equity into it, you make it a lot nicer, a lot bigger, whatever you want to add to the home, and you sell it for $350,000.

Is this a great program to qualify under CMHC? Probably not. Right?

You could probably get help from, let's say, a family member. You could still get extra down payment, let's say, gifted through a family member and bypass some.

And then the equity growth that you actually do based on your own hard work stays with you.

So once again, this is something that you want to have a discussion with your specialist or your banker at that time to see, is this program right for me?

And then once you guys have figured out that this program is right for you, you would tell them, "I would like to go ahead and avail this program," and then the banker or the specialist at the time would know what to do, because now all banks systems will actually be set up to actually have this provided.

So does the 10% come right away? Does the 5% come right away? All that stuff we still don't know too much about.

But we will find out closer to that time how bank systems are set up. All you have to worry about is that the purchasing amount that you're borrowing is going to be decreased by that amount, whatever the home buyer incentive program is bringing on.

So it doesn't change anything on your end, but it's going to be something that the bankers and the specialists or the lenders will actually have to sit down and figure on their end and work with CMHC hand-in-hand to make sure that this is a smooth process and nothing is going on.

And I can guarantee you banks are technically just doing that as of not just today, but as soon as a program was released to see.

That's the reason why it took such a long time. People were asking, "Why is it taking such a long time for this to come out?" It's because they wanted to make sure this program is perfected, so when it does go live, there is no issues, there's no hiccups; that when you're ready to buy your first home, that it's a smooth process altogether.

Question of the Day

Karl Yeh:                             

Perfect. So the question of the day I have for you is:

Are you actually going to take advantage of the CMHC First-Time Home Buyer Incentive?

Let us know in the comments section below.

We got a great video series on how to get your first mortgage approval right here, as well as videos on mortgage rates, which you can see right here. Also, don't forget to subscribe to keep hearing from the experts. We'll catch you in our next video.

 

Your turn:

Let us know if you have additional mortgage or financing related questions that we can answer by submitting them in the comments section below. 

Homebuyer's School publishes new content weekly so subscribe or check back regularly for the latest information, strategies and tips from home buying experts.  

About Mujtaba Syed:

Mujtaba is an experienced mobile mortgage specialist with a demonstrated history of working in the banking industry. Skilled in Negotiation, Commercial Lending, Banking, Sales, and Credit Analysis. Strong product management professional.

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