In the 2019 Federal Budget, Finance Minister Bill Morneau announced a new plan to help First Time Homebuyers. The idea is to improve affordability by providing a government 5% Equity Interest (10% on new construction) on home sales: effectively an interest-free loan, with actual repayment terms undetermined, but due upon sale of the home.
Which sounds great, but the devil is in the details: it only applies to Insured mortgages (so 5% – 20% down payment) and is limited to household incomes of less than $120,000. Moreover, the total amount of the mortgage cannot exceed 4x the total household income, and it is there that the whole thing falls apart:
Consider a family with total household income of $100,000, good credit, minimal debt, and 5% down payment. Making some reasonable assumptions (about strata fees and property taxes):
- they would qualify under the existing rules (including the onerous Stress Test) for a $500,000 home: $25,000 (5%) down payment and $ 494,000 mortgage (= $475,000 base mortgage + $19,000 CMHC fees);
- but in order to take advantage of the new program, they are limited to a $400,000 home (= 4 x $100,000)!
As it is currently proposed (final details won’t be announced until fall of 2019), only Buyers who are already well within their means can even participate, and unless the terms of repayment are extremely forgiving, one can’t help but wonder who will want to take “advantage” of this program. We note further that in a continuing low-interest rate environment, the cost of borrowing the 5% – 10% is going to be very low anyway, and will avoid the headache, uncertainty and legal cost of having an additional interest on Title. So what’s the point?