Buying a home—and managing associated ongoing costs—might now be easier for eligible clients who are first-time buyers, thanks to measures introduced Tuesday in the federal budget. But, because the measures include amounts that must be repaid, clients might require your planning help.
The Liberals introduced a first-time homebuyer incentive in their final budget before the federal election later this year. The new rule allows clients who have the minimum down payment for an insured mortgage to apply to finance a portion of their home purchase through a shared equity mortgage with Canada Mortgage and Housing Corporation (CMHC). (Insured mortgages are required where a client makes a down payment of less than 20% of a home’s purchase price.)
To be eligible, the client must be a first-time buyer and have an annual household income under $120,000, and the insured mortgage and incentive amount can’t be greater than four times the annual household income.
The shared equity mortgage will be 5% or 10% of the purchase price, depending on whether the purchase is for an existing or newly constructed home, respectively. (The greater percentage for new homes aims to encourage housing construction needed to address supply shortages.)
The budget document provides an example of the incentive in action: an eligible client who wants to buy a new condo for $400,000 would receive $40,000 in a shared equity mortgage, and the client would pay $228 less in monthly mortgage payments—$1,745 versus $1,973 (see table below).
Note that the client must repay the incentive, “for example at re-sale,” the budget document says, without offering a timeline.
First-time homebuyer incentive example
|Home price (new condo)||$400,000|
|Down payment||$20,000 (5%)|
|First-time homebuyer incentive||$40,000 (10%)|
|Insured mortgage||$340,000 (85%)|
|Monthly carrying cost*||$1,745|
*Assumes an amortization period of 25 years and a mortgage rate of 3.5% Source: Budget 2019
To further help first-time buyers, the budget allows greater access to RRSP savings for home purchases, increasing the withdrawal amount under the homebuyers’ plan to $35,000 from $25,000. The withdrawal amount hasn’t been adjusted for 10 years, the budget says.
Further, a client who experiences a breakdown of their marriage or common-law relationship can participate in the homebuyers’ plan even if they’re not a first-time buyer (available for withdrawals made after 2019).
Doug Carroll, practice lead for tax, estate and financial planning at Meridian Credit Union, notes that withdrawal amounts must still be repaid (along with the incentive), which could challenge some clients—and result in tax owed when payments can’t be managed. For clients considering their options, advisors “need to crunch the numbers” and focus on planning, he says.
Saving for a home within a TFSA might be a better strategy relative to withdrawing RRSP funds, because “you’ve got after-tax money used for an after-tax purpose,” Carroll adds.
Through the first-time homebuyer incentive, CMHC would provide up to $1.25 billion to eligible homebuyers over three years, starting in 2019-20, the budget document says. The incentive would be administered by the agency through a fund to provide up to $100 million in lending to shared equity mortgage providers over a five-year period. This lending would encourage existing providers to scale their businesses and encourage new players to enter the market, the budget document says.