I have been fielding quite a few questions about the announcement of the new First-Time Home Buyer Incentive program. To begin with, these programs are not scheduled to begin until September of this year assuming no governmental changes.
I have taken the time to break down the math a little further to show the potential savings.
Bear in mind that the incentive funds of up to 10% on a new home and 5% on an existing home are merely an interest free loan that must be repaid upon sale of the property. This is for first time home buyers and household income cannot exceed $120,000.00 per year.
I will use the example that was in the budget release that illustrates the very maximum benefit available.
Details of the example:
- New home purchase price: $400,000.00
- Household income: $120,000.00
- Down payment from the buyer: $20,000.00
- CMHC Incentive Loan: $40,000.00
- Assuming level fixed rate of 3.5% with an amortization of 25 years.
*Mortgage default insurance (CMHC) is required for a home purchase with less than 20% down payment. The insurance premium percentage decreases for each additional 5% down payment. The buyer with the standard 5% down mortgage pays a much higher premium.
When underwriting the original mortgages, the buyer that is using the CMHC incentive loan is allowed to have more ongoing debt payments outside of the mortgage. The incentive buyer can have monthly debt payments up to $1,650.00 per month, when the standard 5% down buyer can only have up to $1,100.00 per month.
I will take it a step further with the longer-term effects after the sale of each home. I will use a market value increase of 15% over 5 years bringing the sale price to $460,000.00.
It is very clear from the above financial illustration that the benefits of the CMHC incentive loan are realized in the up-front savings on the insurance premium and the reduced interest costs during the mortgage term. If this program comes into effect, I will be advising buyers to set the mortgage payments as close to the 5% down level as possible to further leverage the benefit and put more in their pocket after the sale.
If you have further questions about your next mortgage, please contact me directly at 3o6-533-1445.
Kevin Carlson – Mortgage Broker
DLC – The Mortgage Firm