The Federal government has created a new Incentive program designed to assist first time home buyers to enter the real estate market. The Incentive is managed under the Canadian Mortgage and Housing Corporation (“CMHC”) and allows CMHC to assist first time home buyers by increasing their down payment towards a home purchase and therefore reduce the principal needed for a mortgage.
CMHC is permitted to contribute to the buyer’s down payment up to 5% of the value on a resale property and up to 5-10% of the value on a new build home. In return, CHMC takes an interest in any equity or loss of the property equal to their percentage value contributed. I.e. CMHC provided 5% of the purchase price as part the down payment; they receive their contribution plus/minus 5% of any gain (equity) or loss in value on resale.
In order to qualify for the Incentive, a buyer must meet the following conditions:
1. The buyer must have a minimum 5% down payment from their own funds. These funds must not be borrowed but may consist of fund gifted to the buyer.
2. One of the buyers must be either a first time buyer, have come out of a divorce or common law relationship breakdown or have not owned property in the last 4 or more years.
3. The combined buyer’s income must not be more than $120,000.00
4. The value of the mortgage (total borrowing power) is not more than 4 times the buyer’s income.
5. The total down payment including CMHC’s contribution is less than 20%.
If you meet all the qualifications and are approved for the Incentive, CMHC registers a mortgage on your title and loans you the funds, interest free, to be used to complete the purchase.
When it comes time to repay the loan, CMHC will be repaid their contribution plus/minus their share of any gain (equity) or loss in the value of the property. What this means is that once the first mortgage (your lender) is paid out, CMHC will be entitled to be paid 5% of the fair market value at the time of repayment/sale. I.e. The purchase price was $400,000.00; CMHC provided $20,000.00 (5%) to the down payment. After 5 years, the house was sold at $420,000.00; CMHC is paid $21,000.00 (5%). If the home was sold at $380,000.00, CMHC is paid $19,000.00 (5%). CMHC shares in either the gain or the loss with the owner at repayment.
Repayment can occur in the following circumstances:
1. After 25 years the loan becomes due and payable at fair market value;
2. When the property is sold;
3. The loan can be repaid at any time at fair market value determined by an appraisal of the property.
How does participation in the Incentive impact costs on a purchase? Use of the Incentive will impact your purchase and costs in the following ways:
1. You will end up with two mortgages on your title. The first mortgage will be to your mortgage lender and the second mortgage will be to CMHC. This means that your lawyer will have to draft and register two mortgages, which will increase your legal fees and disbursements.
2. You must be able to qualify and be approved for both mortgages.
3. Your primary mortgage will be a CMHC insured mortgage, which means that a default insurance premium will be added to your principal amount.
4. All CMHC Incentive mortgages will be processed through First Canadian Title (FCT) who provide instructions and receive documents from your lawyer. FCT charges an administration fees payable by you for use of their services.
5. All costs of both mortgages are the buyer’s responsibility.
If you are planning to purchase property under the new Incentive and have questions, Galbraith Law will be pleased to assist you.