First-time home buyer incentive

Is it really? The Canadian Government offers first time home buyers the possibility to borrow 5 or 10% of the purchase price of a home. They call this program a shared equity mortgage, meaning the government shares in the upside and downside of the property’s value. You pay back the same percentage of the value of your home when you sell it or within a 25-year window.

Here’s how it works?

The purchase price of your home is $200,000, you receive 5% or $10,000. If the value increases to $300,000, and you decide to sell it, you must pay back 5% of this new value, or $15,000.

Simple math, $200,000 to $300,000 is a 33% increase therefore $10,000 to $15,000 is the same percentage.

According to Re/Max Canada Quarter Century Market Report, the average price for a home in the Greater Toronto Area (GTA) in 1996 was $198,150. In 2021, the average price was $1,095,475. That’s an increase of 453% and a compound annual growth rate of 7.08%

So let’s go back to our example: you purchase your house for $200,000, 25 years later, this same house will now be worth, benchmarking against the last 25 years of growth and a compound rate of 7.08%, $1,105,959.08. Meaning your 5% loan of $10,000, you would have to pay back $55,297.95.

If you had simply borrowed the same $10,000 using the average mortgage rate of 3.94%, over the same 25 years, the amount would be $26,522.90.

One of our clients purchased a home in January 2020, for $260,000, and at the bank’s recommendation they jumped on first-time home buyer incentive borrowing 5% or $13,000. In May of 2022, the couple decided to sell their home that had appreciated to $375,000 forcing them to pay back the government $18,750, that’s $5,750 or 31% more in just over 2-years. 

As much as the Canadian plan seems like a good option; it will cost you twice as much, in the long run, using statistical history. By using this program, the only wealth you are creating, is wealth for the government.

To make matters worse, the criteria to become eligible for this program is very restrictive, and the incentive is a like a second mortgage on your home that will bring with it additional fees i.e. you are closing on 2 mortgages.  

So even if you qualify — and that’s not a sure thing — the incentive asks a lot from you, including a potentially massive markup in the future.

If you need someone to demystify this or any other program that is currently being offered, call us at North East mortgages, and one of our brokers will happily meet with you in order what’s right for you and your budget.

Martin Spalding

Mortgage Broker

(514) 206-0488

mspalding@nordest.ca