Toronto is Canada’s largest city, and of course the country’s business hub. Since the 1970s, it’s ascendance to a cosmopolitan metropolitan city was marked by its open attitude towards immigrants (thanks to the policies of the then Government of Canada in part).
To curb urban and suburban sprawl, it began developing vertical housing projects. Lofts, condominiums, apartments, semi-detached homes, and row houses were among those projects.
In the early days, housing prices in Toronto were much affordable than most American cities, if not by large margins but moderate margins. The onset of the 90s saw a rise in the housing prices of Toronto which however rose drastically during the late 2000s and the 2010s.
From 2017, the housing price situation started worsening in the Greater Toronto Area. Despite former mayor John Tory implementing price controls and rent controls, property prices skyrocketed, and it became next to impossible for the average Torontonian to afford a home in Toronto.
With downtown and other inner-city areas becoming expensive, the average Torontonian is now looking for homes in suburbs in places like Mississauga, Oakville, Oshawa, Pickering, Markham, Brampton, and Richmond Hill.
However, there is a ray of hope because there is something that can help prospective buyers from the middle class cut home purchasing in Toronto, other than mortgage and rent. Presenting the first-time homebuyer incentive.
First-time homebuyer incentive – what is it?
The first-time homebuyer incentive is geared towards first time home buyers from the middle class. This is designed to help them purchase a home and reduce their monthly mortgage payments. This incentive is a shared-equity mortgage with the government, where the government has a share in the upside and downside of the property’s value.
Simply put, those who are looking for Toronto Condos for rent can consider a first-time homebuyer incentive with ease.
The first-time homebuyer incentive allows prospective home buyers to borrow around 5 or 10 percent of the home’s purchase price. It is an interest-free loan that they pay back when they sell their home with the same percentage of the value of their home, or within a window of 25 years.
The incentive took effect in September last year with a budget of C$ 1.25 billion. As of April 2020, there have been 4,414 applications and around 2,061 applicants (Canadians that are) have received their money out of 3,708 approvals.
Numerous experts decided to share their views on such a rate of approval and why applying for the first-time homebuyer incentive might not be desirable at the initial start of USD$ 480,000. However, there has been a sort of miscommunication because what Prime Minister Trudeau promised was to raise the threshold to C$ 789,000, making the first-time homebuyer incentive a worthwhile deal.
How does the first-time homebuyer incentive work?
The First-time home buyer incentive is an interest-free loan and is also a ‘shared equity mortgage.’ This means that the government shares in any gains and losses in the property’s value. For instance, if the homeowners/buyer’s property takes a knock, the value of repayment will reduce.
The Canadian Mortgage and Housing Corporation (CMHC) has broken it down in easier points for everyone to understand:
- Buyers receive an incentive of 5 percent of the home’s purchase price i.e. C$ 20,000 of the value of C$ 400,000. If the home’s value increases to C$ 600,000, then the payback would be C$ 40,000 i.e. 5 percent of the home’s current value.
- Buyers receive a 10 percent incentive of the home’s purchase price, say C$ 30,000 off a home value of C$ 300,000. If the home value decreases to say C$ 200,000 then the repayment value will be 10 percent of the current home value i.e. C$ 20,000.
Who are eligible for the First-Time Home Buyer Incentive?
As the name implies, the first-time homebuyer incentive is only for those who are buying homes for the first time. Buyers qualify for this based on the following factors:
- Buyers did not occupy a home that they or their spouse or common-law partner owned in the previous 4 years (that 4-year period begins on January 1 of the fourth year before the incentive is funded and ends 31 days before the date the incentive’s funded).
- Buyers recently went through separation in a marriage or common-law partnership (even if they do not meet the other requirements of the first-time homebuyer incentive).
The requirement for mortgage loan insurance
This incentive is similar to a second mortgage on the home. The first mortgage should be greater than 80% of the property’s value. This is subject to a mortgage loan insurance premium. Mortgages must be eligible for mortgage loan insurance, either through CMHC, Canada Guaranty, or Genworth.
The premium is based on the loan-to-value ratio of only the first mortgage, which is the first mortgage amount divided by the purchase price. The incentive amount is then included with the total down payment.
One key point should be noted that mortgage loan insurance premiums can be subject to provincial taxes.
Despite its perceived advantages, why aren’t Canadians applying for the First-Time home buyer incentive?
In the Greater Toronto Area, Canada’s largest metropolitan area; there were 116 applications of which there were 57 approvals with funds handed out. The program was established to help more Canadians become homeowners for the first time in three years.
At the current rate of 2,000 people getting the incentive over the first five months, it would take around almost 20 years to reach the initial target. This may be original, the first time the home buyer incentive was doing only little to aid prospective homebuyers in Canada’s expensive markets, such as Toronto, with a cap of C$ 480,000.
Since then, Prime Minister Trudeau promised to raise the threshold to C$ 789,000 which might increase the number of applicants. Based on the May 2020 market report of TRREB, the average price of a home in Toronto is C$ 838,250. This will hence make it easier for homebuyers in Toronto to buy a home with the First-time homebuyer incentive.
First time home buyers will have a lot of questions about starting this process. Hence, they should not hesitate in consulting with their real estate agents in inquiring more about it. If they believe they are up for it then they should go for it. Still, they should tread softly when applying for this incentive.