2019 Federal Budget Incentives

2019-03-23 | 07:19:16

Brief Overview of the Announced Changes For Home Buyers

What are the changes?

1. Home Buyer Plan increase from $25,000 to $35,000 of a qualifying buyers RRSP.

•  This will have minimal impact for those who are actual First Time Buyers.
•  Less than 10% of First Time Buyers used $25,000 from their RRSP in 2017 towards their home purchase
•  The real help? Those who are recovering from the breakup of a marriage or common-law relationship would also be allowed to take part.  We are awaiting further input on how this will work.

2. First Time Home Buyers Incentive of up to 10% of the Purchase Price Towards Down Payment.  

What we know:

• Borrowers can qualify for 5% towards a pre-owned home and 10% towards a new build home.
• Household income must be below $120,000.
• Maximum loan amount is 4 times the Household income INCLUDING the incentive.
• Borrowers MUST already have at least 5% towards the down payment.
• Loan must be default insured.
• The Loan must be paid back.
• The insurer will have a share in the ownership and appears will share in profit/loss on the home when the loan is paid out. (This isn't 100% clear yet)

What we don't know:

• Will borrowers be able to refinance without paying the loan back?
• Will a borrower qualify if they have more money in the bank than 5% of the purchase price?
• Will there be a time limit to pay the loan back?
• Will the loan be registered as a mortgage, thus creating extra costs on closing?
• Will borrowers be able to switch lenders or will they be stuck until payback?    
• Is there something we haven't even thought of that could be detrimental?
• Will someone with a $500,000 down payment be able to fall under the program by simply asking for a default insured loan? (Default insurance can be charged on any mortgage loan upon a lender request, although rare below 65% Loan to Value).  The $500,000 is only an example.
• Will the loan be registered in 1st or 2nd position? Second Position Mortgages typically come with higher rates....
• Minimum Down Payment Rules change at $500,000 purchase price, do borrowers need the minimum or only 5% for these purchases should they qualify?
• What happens if someone defaults?
  

Help for First Time Home Buyers?

The increase in use of RRSP towards Down Payment will be negligible in the market.  The reason: less than 10% of buyers used the full $25,000 towards their first home in 2017 - you actually have to have those funds available and in your RRSP.  Then, if you forget to pay it back you get taxed on it.  The rest of the program is the same, except the fact that those going through a relationship breakdown may also be able to use this program - details pending.

The First Time Home Buyers Incentive (FTHBI), in my opinion, is rife with issues.  To see the issues it takes some math.

Let's use an example with the Median Income for Northumberland County in the 2016 Census Data.  That number is $70,208. The example will show what they qualify for on a pre-existing home, followed by a new build and finally how they would qualify without the incentive at all.  All using the current Mortgage Qualifying Rate of 5.34% and assuming 1% property tax rate along with ZERO debt on a Free Hold Property.  Keep in mind, the total mortgage + incentive the borrower can qualify for under this program is 4 times the total income.  Borrowers with total income of $120,000 or more, do not qualify.

Pre-Existing Home

5% Down of their own funds and 5% FTHBI for a total of 10% down.  Maximum Mortgage amount + Incentive is $280,832.00.  This gives the borrower a maximum purchase price of:

$287,175.00 borrower needs $14,358 for down payment

New Build Home

5% Down of their Own funds and 10% FTHBI for a total of 15% down.  Maximum Mortgage amount is $280,832.00. This gives the borrower a maximum purchase price of:

$288,627.00 borrower needs $14,431 for down payment

Without Incentive

5% Down of their own money, no incentive.  This gives the borrower a maximum purchase price of:

$428,000.00 borrower needs $21,400 for down payment.

You can see from the above that if a borrower wants the incentive, they will qualify for much less than without it.  

See You in September?

If I am a First Time Buyer, I am not waiting until September to buy.  That is when the Incentive is scheduled to roll out (pending Parliamentary Approval).  The incentive might be there for borrowers in the right price range, however; now is as good a time to buy as any.  

The examples above, show that the median income borrowers in Northumberland County are not going to be helped much by this program - if at all.  Average prices are simply too high for the average family to qualify for this incentive, at around $450,000.  There is some room for condos, so there could be a spike in interest in those within the low end of the price range.  

Keep in mind, each case will differ in what the borrowers qualify for, based on their income and debt load.  There are also too many variables still unknown that could affect a home buyers decision on whether this incentive will be good for them or not.  

What Next?

30 Year Amortizations?  Removal of the Stress Test?  I think it's possible the government held back some possibilities for their election platform.  That said, it is highly unlikely the stress test will be removed completely.  I'd watch for 30 Year amortizations being thrown around long before any changes to the stress test.

Should you require questions about the above or anything else regarding Mortgages, feel free to give me a call at 905-377-1684 and don't forget to download our smart phone app by clicking here ---> Smart Phone App

John Greenlee, Accredited Mortgage Professional