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2019 Federal Budget Adds More Help For First-Time Home Buyers

2019 Federal Budget Canada

With rising housing costs across the country, the federal government has been pressured to do something to help younger first-time home buyers who have been priced out of the higher priced areas such as Toronto and Vancouver. The federal budget for 2019 has been released and there are two main additions regarding real estate and first-time home buyers.

CMHC First-Time Home Buyer Incentive

The budget introduced the Canadian Mortgage and Housing Corporation (CMHC) First-Time Home Buyer Incentive. This allows prospective buyers who have the minimum down payment for a home to apply to finance between 5% and 10% of their mortgage via a shared equity program. Buyers can get up to 10% on newly constructed homes while 5% applies to existing homes. This would lower the mortgage amount borrowed and would help first-time home buyers qualify for a higher mortgage, even with the mortgage stress test, while also lowering their monthly mortgage payments.

This incentive would only apply to insured mortgages and the buyer would still have to come up with the minimum 5% down payment. Applicants must have a maximum household income of no more than $120,000 and the purchase price of the home can only be 4 times their household income. So, for a family of first-time home buyers with an annual household income of $80,000 the total mortgage size would be $320,000.

The budget document states “For example, if a borrower purchases a new $400,000 home with a 5% down payment and a 10% CMHC shared equity mortgage ($40,000), the borrower’s total mortgage size would be reduced from $380,000 to $340,000, reducing the borrower’s monthly mortgage costs by as much as $228 per month.”

Buyers will still have to repay the loan, although it is unclear at this point what the terms would be. Applicants still must qualify under the federal stress test, which ensures that borrowers will be able to keep up with their payments if their interest rates were to increase. However, the lower mortgage means the borrower would only need to qualify for the lower mortgage amount.

The finance department is hoping the new program will pass in time for a September, 2019 launch.

First-Time Home Buyer Incentive

Home Buyers’ Plan (HBP) Gets An Increase

The amount a borrower can withdraw from their RRSP for a down payment using the Home Buyers’ Plan (HBP) has been increased for the first time in 10 years. With increasing home values the federal government has increased the amount you can withdraw from your RRSP account from $25,000 to $35,000, or $70,000 per couple. The new limit will apply to withdrawals made after March 19, 2019, making it effective immediately.

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Mortgage Terms Explained

Mortgage Terms Explained

Buying a house can be a bit confusing at times, especially if it’s your first time buying one. It’s even more confusing when big words are thrown at you like “amortization”, and don’t even get me started on compounding interest rates. Hopefully this list of mortgage terms will help you feel more confident when sitting down to discuss lending options with your bank or mortgage broker

Amortization: One of the more confusing words you’ll come across but it’s actually an easy one – it’s the amount of time you will take to pay off the loan. Typically this will be 20 or 25 years.

Term: The amortization (expalined above) is usually divided into several “terms”. At the end of a term you can either pay off the remaining balance of the mortgage without any prepayment penalties (expalined below) or you can renew the loan for another term. For example: John gets a mortgage with an amortization of 20 years and a term of 5 years. At the end of the 5 year term John has the option to pay off his mortgage or renew it for another 15 years with a new 5 year term.

Principal: This is the total outstanding balance of your loan.

Interest: Interest rates on mortgages in Canada are compounded semi-annually. This means the interest rate is applied twice per year.

Open vs Closed Mortgage: An open mortgage allows you to pay off your mortgage or change lenders at any time without incurring a prepayment penalty. A closed mortgage gives you a set payment schedule that you must follow. If you make any lump sum payments before the end of your term you will have to pay a penalty. Interest rates for closed mortgages are lower than for open mortgages and most closed mortgages give you options for making extra payments to avoid penalties.

Fixed Rate vs Variable Rate: A fixed rate means your interest rate stays the same throughout the term of the mortgage. A variable rate (also called a floating rate) means your interest rate as well as your monthly payment will change if the prime lending rate changes. By assuming the risk of fluctuating interest rates and payments you will typically be offered a lower rate than for a fixed rate mortgage.

Prime Rate: The Prime rate is linked to the Bank of Canada’s overnight lending rate, which reflects the rate they charge when they loan funds to other banks; it is tied to global financial markets and monetary policy.

Portability: Because not everyone is happy paying a prepayment penalty, lenders came out with an option that keeps everyone happy – mortgage portability. This allows you to transfer your current mortgage to a new property that you are buying. All the terms of the mortgage typically stay the same. You can take advantage of this feature if your interest rate is lower than current rates. Instead of breaking the mortgage and getting a higher rate you can just “port” your mortgage to the new property.

Conventional vs High-Ratio Mortgages: High-ratio mortgages are when you loan more than 80% of the home’s value (ie. less than 20% down payment). Most mortgages are high-ratio mortgages. If you are putting the minimum 5% down on your home then it is considered a high-ratio mortgage because you are taking out a loan for more than 80% of the homes value. Anything less than 80% of the home’s value (or a down payment of 20% or more) is considered a conventional mortgage.

Pre-Approval: The first step in getting financing is getting a pre-approval. This is a way for you to find out how much you qualify for before you go house shopping. You can also usually lock in the rate for a specified period of time.