How the First-Time Home Buyer Incentive Can Help You Buy a House

Launched in September 2019 by the federal government and administered by the Canada Mortgage and Housing Corporation (CMHC), the First-Time Home Buyer Incentive (FTHBI) is a shared-equity mortgage that gives eligible first-time home buyers help with their down payment by giving them an extra 5% or 10% based on the property’s market value.

While technically an interest-free loan, the shared part of the mortgage means that the federal government shares in the appreciation of the home (to a maximum 8% gain) until the house is sold, or after 25 years, whichever comes first.

The FTHBI, also known as the Shared Equity Mortgage or SEM, works by giving first-time home buyers an additional 5% or 10% of a home’s purchase price to add to the down payment. The intent of the program is to reduce your monthly mortgage payments, and the amount of interest paid over time, with the aim of making homeownership more affordable.

The incentive amount depends on whether you are purchasing a new build, resale home or mobile or manufactured home and is as follows:

The program was originally expected to run until March 31, 2025, according to the federal government’s Budget 2022. However, the CMHC announced on March 1, 2024, that the program would be discontinued at the end of the month.

Assuming a 25-year mortgage at 6.2% interest, the CMHC provides the following illustration of how the FTHBI could work for a fictional family with the following details:

• Annual qualifying income: $100,000
• Living location: Ottawa
• Base down payment: $40,000
• Property type: New build (eligible for the 10% incentive)
• Maximum purchase price: $440,000
• Shared equity mortgage (SEM) amount: $44,000 (10% of $440,000)

(*) For down payments of less than 20%, homeowners must purchase mortgage default insurance. The cost of the insurance depends on the size of the mortgage, which depends on the size of the down payment. In this example, the standard purchase premium is 4% or $16,000 without the FTHBI, and 2.8%, or $9,968 with the FTHBI.

With the FTHBI, this family could save $326.08 per month on their mortgage payments (or $3,912.96 per year) for the term of their mortgage.

There are no upfront application costs or processing fees for the FTHBI. However, instead of paying interest on your loan, you must pay back the original loan amount, plus a certain percentage of the appreciation of your home (up to 8% maximum) when you sell or at the end of 25 years.

If your home appreciates in value, you’ll need to pay back the incentive, plus a percentage of the appreciated amount equal to the amount of the incentive percentage; that is, the share will be 5% if the original incentive was 5%. Conversely, if your home depreciates in value, you’ll pay back less of the incentive, up to an 8% loss.

Unlike a conventional loan where the annual percentage rate, or APR, is known for the term of the loan, the FTHBI’s APR will change according to the size of the shared equity amount, the length of time you own the house before repayment and any closing costs, such as the cost to discharge the mortgage.

The CMHC provides these examples to illustrate how the loan value is calculated:

Using an appreciation of $80,000, the CMHC’s gain is the lesser of:

1. Shared equity amount: ($480,000 – $400,000) x 5% = $4,000, or
2. Maximum shared equity amount gain: ($20,000 x 8%) x 5 years = $8,000

In this case, the repayment amount is $24,000 ($20,000 incentive + $4,000 gain) and the equivalent APR is 4.00%.

If the house is sold for $560,000, or a $180,000 appreciation, the maximum shared equity amount, or $8,000, will be met. Any further appreciation will not be included in the incentive calculation.

Using a depreciation of $70,000, the CMHC’s loss is the lesser of:

1. Shared equity amount: ($330,000 – $400,000) x 5% = -$3,500, or
2. Maximum shared equity amount gain: ($20,000 x 8%) x 5 years = -$8,000

In this case, the repayment amount is $16,500 ($20,000 incentive – $3,500 loss) and the equivalent APR is -3.50%.

To be eligible for for the First-Time Home Buyer Incentive you must meet the following requirements:

• Total combined qualifying annual income must be less than $120,000, or $150,000 for properties in Toronto, Vancouver and Victoria Census Metropolitan Areas (CMAs).
• Total borrowing must be less than four times the qualifying income, or 4.5 times the qualifying income for properties in the Toronto, Vancouver and Victoria CMAs.
• Borrowers must be a Canadian citizen, permanent resident or a non-permanent resident legally authorized to work in Canada.
• At least one homebuyer must be a first-time homebuyer.
• You meet the minimum down payment requirements with “traditional funds,” such as savings, withdrawal from an RRSP or a non-repayable gift from a relative or immediate family member.

Definition of a First-Time Home Buyer

Under this program, you are considered a first-time home buyer if:

• You have never purchased a home before.
• In the last four years, you have not occupied a home that you or your current spouse (or common-law partner) owned.
• You are experiencing a breakdown of a marriage or common-law partnership.

Additional Eligibility Requirements for the First-Time Home Buyer Incentive

Before applying for the incentive, it’s important to read the fine print, including:

• Your mortgage must be eligible for mortgage loan insurance, also known as mortgage default insurance, through CMHC, Canada Guaranty or Sagen.
• Your mortgage must be greater than 80% of the value of the home and therefore, as a high ratio mortgage, be subject to a mortgage loan insurance premium.
• The maximum down payment is 20% of the home’s purchase price. For a 10% incentive, the maximum down payment is 9.99%. For a 5% incentive, the maximum down payment is 14.99%.

To be eligible for the incentive, the property must be your primary residence, be suitable and available for full-time, year-round occupancy and be located in Canada.

Residential properties can be either resale or new construction and include:

• Single family homes
• Semi-detached
• Duplexes
• Triplexes
• Four-plexes
• Townhouses
• Condominium units
• Mobile or manufactured homes

If you’re thinking about applying for the FTHBI, it’s important to be clear of the criteria before you start house hunting. Then you can:

Find an eligible home: The first step is finding a home less than the maximum borrowing amount (plus your down payment), depending on where you live and your total household income. The incentive can be applied to both a new build or a resale house.

To recap, here are two examples, remembering that the maximum borrowing amount is not your maximum purchase amount, which can be increased by the amount of your down payment:

Get a mortgage pre-approval: Getting a mortgage pre-approval provides you with a price range so you know how much you can afford, and shows sellers you’re serious about the offer.

Complete the required paperwork: The CHMC has two application forms, namely the SEM Information Package and the SEM Attestation and Consent Form, which are available at www.placetocallhome.ca/fthbi. Once completed, your mortgage lender or broker will submit the application on your behalf.

Activate your incentive: Once approved, and at least two weeks before closing, contact FNF Canada, the closing service provider, to provide the name of your lawyer or notary who will be closing the deal for you. The incentive will be registered as a second mortgage on your property.

The deadline to apply for the FTHBI is now March 21, 2024. No new approvals will be granted after March 31, 2024.

The FTHBI must be repaid after 25 years from the date of purchase or when the property is sold, whichever comes first. The repayment amount is based on the property value at the time of repayment.

If you sell the property, you’ll need to contact the CMHC and provide the program administrator with proof of the current market value of the property with an agreement of purchase and sale.

If you choose to repay the incentive early or at the 25-year mark, you’ll need to provide proof of fair market value by a third-party appraiser.

If you’re eligible for the program, the FTHBI offers the following benefits:

• You don’t need to save as much of a down payment for a home.
• Your monthly mortgage payments are lower.
• The amount of interest you pay over the mortgage term is lower because the overall mortgage is less.
• The maximum gains (and loss) of the incentive repayment is limited to 8% per year.
• There is no interest charged on the loan.
• You can repay the incentive at any time without any prepayment penalties.

Uptake of the program has reportedly been slow, likely due to its stringent qualification guidelines and price caps on eligible properties. Specifically, the downsides to the program include:

• The total borrowing amount is capped at $480,000, plus the down payment, or $675,000, plus the down payment in Toronto, Vancouver or Victoria CMAs, per the total borrowing limits of 4 or 4.5 times qualifying income. Given the high cost of housing, these caps may significantly limit the housing options available.
• You can’t make a down payment of more than 20% as your mortgage must be greater than 80% of the value of the home.
• Homes above $1 million are not eligible for the incentive as these homes are ineligible for mortgage loan insurance.
• Renovations will increase the amount of the incentive you need to pay back due to the appreciating value of the home.
• You may pay higher legal fees as your lawyer is responsible for closing two mortgages.
• Non-traditional down payment sources, such as unsecured personal loans or unsecured lines of credit, are not eligible for the program.
• You can not make partial repayments of the incentive. You must pay it all at once based on a fair market appraisal that will cost you money.
• Investment properties and vacation homes are not eligible.

The FTHBI is a unique program that can help boost your down payment amount significantly, but there are other assistance options available for first-time buyers:

RRSP Home Buyers Plan (HBP): This program allows you to withdraw up to $35,000 tax-free from your RRSP for a down payment towards a new or resale home. The funds need to be repaid to your RRSP within 15 years, with repayments starting two years after the initial withdrawal. Otherwise, that scheduled repayment will be considered taxable income for that tax year.

First Home Savings Account (FHSA): Introduced in April 2023, the First Home Savings Account is a registered plan that helps first-time home buyers save for a down payment. Combining the features of an RRSP and a TFSA, contributions are tax-free (up to the plan’s annual and lifetime caps) and the amount withdrawn is not taxable.

First-Time Home Buyers’ Tax Credit (HBTC): While not an alternative, per se, the HBTC helps make home ownership more affordable by offering a maximum $1,500 tax rebate to help cover closing costs and legal expenses.

Reception to the First-Time Home Buyer Incentive program has been mixed due to strict eligibility requirements, borrowing caps and consumer concerns over the federal government’s share in a property. In addition, without a set APR, the total cost of the loan over the term of the mortgage is uncertain, especially in a volatile housing market. However, the FTHBI could help homeowners outside of expensive real estate markets get into a house sooner to start building equity. A mortgage professional can help you decide if this program is right for your financial and home ownership goals.

Related: How Much Does It Cost To Build A House In Canada?