Will Canada’s New Shared Equity Mortgage Make You a Homeowner?
Shared equity mortgages are likely an unfamiliar concept for most Canadians. Although they’ve been around for a while in the private sector, the First-Time Home Buyer Incentive marks the debut of these types of mortgages being offered by the government.
In this article we’ll look at what a shared equity mortgage is, how it differs from a traditional mortgage, for whom a shared equity mortgage is recommended (and for whom it’s less suited), and if the First-Time Home Buyer Incentive will actually help most Canadian homebuyers.
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A shared equity mortgage helps middle class Canadians who can afford the carrying costs of homeownership—mortgage payments, property taxes, home insurance, etc.—but don’t have a large enough down payment to purchase a home. Using this model, a lender offers a down payment loan that doesn’t have to be repaid until the property is sold. When the property is sold, the homeowner and the lender share in its price appreciation proportionally. The lender has an equity stake in the home, hence the name ‘shared equity mortgage.’
The homeowner and the lender both share the risk. If the property goes up in value when it’s sold, both parties benefit from the price appreciation. However, if the property is sold for less than its initial purchase price, then both share in the loss.
“The shared equity mortgage helps people get onto the property ladder and start building equity more quickly, by helping them with their down payment. Under a traditional mortgage, the buyer would be responsible for saving the entire down payment lump-sum on their own,” explains Heather Tremain, CEO at Options for Homes, a private sector provider of shared equity mortgages.
What Is the First-Time Home Buyer Incentive?
The First-Time Home Buyer Incentive is a $1.25B shared equity mortgage fund offered by the federal government, intended to help make homeownership more affordable for first-time homebuyers.
September 2, 2019 was the officially kickoff of the Incentive, with the first mortgage payments of those approved for the Incentive set to take place November 1, 2019. Under the Incentive, eligible homebuyers can receive 5% of a home’s total value toward the down payment of a resale home and 10% of the home’s total value toward a new home. You’re required to save a minimum of a 5% down payment yourself.
Who Qualifies for the First-Time Home Buyer Incentive?
Prospective homebuyers must meet the following requirements to be eligible for the Incentive:
- You cannot have owned a home in the last four years
- You must have an annual household income of $120,000 or less (this includes all applicants to the Incentive purchasing the home)
- The property you have an eye on must have a maximum mortgage amount of $480,000 (four times the maximum annual household income).
- You can spend up to a total of $565,000 on the property (maximum mortgage amount + down payment), although most applicants of the Incentive will qualify for a lot less.
First-Time Home Buyer Incentive Expansion – May 2021
The long-anticipated expansion of the First-Time Home Buyer Incentive finally came into effect in May 2021. First announced at the tail end of 2020, the expanded program makes it easier to qualify for the Incentive when buying in Canada’s most costly real estate markets: Toronto, Vancouver, and Victoria. The federal government has done this by tweaking the eligibility criteria.
- The maximum household income you can have to qualify for the Incentive is now $150,000, up from $120,000.
- As an eligible participant, you can now borrow up to 4.5 times your household income, up from four times.
Note that these changes are only for Toronto, Vancouver, and Victoria. The existing rules continue to apply to the rest of Canada.
The government made this change to help make the Incentive more helpful and relevant in the cities with the highest home prices in Canada. The change means that you can now spend up to $722,000 on a home in these cities, up from $565,000. This makes a lot of sense. Let’s be honest, buying a home for $565,000 in Toronto, Vancouver, or Victoria is a lot like finding a needle in a haystack. At least with a maximum purchase price of $722,000, you can afford a condo.
The change addresses a long-time criticism of the Incentive that it can only help you buy in less pricey housing markets like Winnipeg or Regina. Now the Incentive can help home buyers in the markets where they need help the most realize the dream of homeownership for the first time.
How Does the Incentive Help New Homeowners?
The Incentive can reduce a homeowner’s mortgage payments by up to $286 per month. Mortgage payments are reduced because you’re borrowing less by way of making a larger down payment, and as a result you’re paying less in mortgage default insurance premiums (this insurance protects your lender, not you, in case you fail to repay your mortgage).
Similar to private shared equity mortgages, you won’t have to pay interest on any money you borrow under the Incentive, although you’d be required to repay the loan in full—plus any appreciation—when you either sell your home or in 25 years, whichever comes first. If you haven’t sold your home 25 years after receiving the Incentive down payment loan from the government and you aren’t in a position to repay the Incentive amount, the Program Administrator says that it will work with you on a case-by-case basis to offer you solutions to the repayment requirements when you’re experiencing financial hardship. If you like, you can back pay the Incentive early without penalty. (In case you’re wondering, the Incentive is registered as a second mortgage on the title of your home.)
What’s the Catch?
The Incentive does have its limitations. Tremain emphasizes that, given the maximum mortgage amount of $480,000, there will be few opportunities for buyers in Toronto and Vancouver. However, she also points out that there are still condos available in Toronto under that price point (though few and far between).
While Tremain is generally optimistic about the Incentive, Ian Lee, a professor at Carleton University’s school of business, is less enthused. He sees the incentive as Ottawa’s admission that it overtightened the mortgage rules (i.e. by introducing the mortgage stress test) and is trying to backtrack.
“The government is now trying to undo the strictness of mortgage qualification, more lending rules by going around them by saying, gee whiz, if you can’t meet these tough stringent rules, don’t worry, we’ll give you an interest-free loan and we’ll take some of the equity in your home,” said Lee.
While Lee sees the Incentive as possibly helping homebuyers in more affordable real estate markets like Winnipeg and Regina, he thinks it will do very little to help homebuyers in Toronto and Vancouver, who need help the most.
Who Should Consider the Incentive (and Who Shouldn’t)?
My take as a Toronto homeowner? If I was buying a home in Toronto or Vancouver in today’s real estate market, with the mortgage stress test making it tougher to qualify, I’d take the following approach before considering the Incentive.
- Ask my parents/family if they’d be willing to co-sign on my mortgage to help me qualify for a higher purchase price.
- If my parents/family weren’t willing or able to co-sign or gift me part of my down payment, I’d try to save more aggressively in order to boost my down payment and the value of the home that I’d qualify for.
- If it would take me a really long time to save up enough and I was itching to buy a home now, I’d weigh the pros and cons of moving to the outskirts of the city and buying on my own without the Incentive, versus applying for the Incentive and buying a property closer to the city.
I personally find the Incentive to be too limiting in terms of the maximum property values that qualify, and I’m not so excited by the prospect of sharing in my home’s price appreciation with a lender. Tremain seems to agree.
“For Canadians who can afford to save a large lump-sum down payment, or who can receive down payment assistance from parents or family members, a traditional mortgage may be a more suitable choice,” she remarked.
The federal government expects that 100,000 or so Canadians will see things differently and take advantage of the Incentive. If you hope to be among them, note that you can’t apply for the Incentive directly–your lender or mortgage broker must apply on your behalf. An overview of the application process can be found here.
For even more tips and tricks for buying your first home, check out our first-time homebuyer’s guide.
If you’re planning to withdraw money from your RRSP towards the down payment of your first home under the RRSP Home Buyers’ Plan, there’s no issue with doing it regardless of the lender you’re working with. As long as you qualify as a first-time homebuyer under the RRSP Home Buyers’ Plan, you can still use the Incentive.
If you’re planning to utilize the Purchase Plus Improvements Program, some lenders won’t let you do it together with the Incentive, so be sure to ask.