The End of The First-Time Homebuyer’s Incentive

For many aspiring homebuyers, the first-time homebuyer incentive seemed like a great solution to the struggle of saving for a down payment. Unfortunately, the reality of the program, and its complicated logistics, led to less than ideal results for most applicants. As such, the program has been officially discontinued by the CMHC (Canada Mortgage and Housing Corporation), with the deadline for new applications to the program falling on March 21, 2024.

Through this guide, we aim to arm you with the information you need to navigate this new change. Why was the program discontinued, and what does it mean for you?

What is the First-Time Homebuyer’s Incentive?

The CMHC first-time homebuyer’s incentive is a program run by the Canada Mortgage and Housing Corporation with the aim of lowering monthly mortgage costs for first-time buyers. Launched in 2019, the program offered new homebuyers an interest-free government loan (the incentive) to go towards their down payment. The incentive, which could be up to 10 percent of the home’s purchase price, would allow the government to take on partial ownership of the property in exchange for a larger down payment. This increased down payment would reduce the size of the buyer’s monthly mortgage payments, helping to ease a financial burden.

Homeowners would repay this 5-10% loan at the end of a 25-year period, or whenever their home was sold — whichever came first. While this loan seems enticing at first glance, many homebuyers did not realize that they were entering a shared equity agreement with the government. This means that if the home appreciates in value, the amount owed to the government also appreciates in value — as they still own 10% of your home. Any asset appreciation (up to a maximum of 8 percent) would be shared by the government as well.

Why Is the First-Time Homebuyer’s Incentive Being Discontinued?

Although the first-time homebuyer’s incentive began as a great concept, its execution over the years fell short of expected results and benchmarks. For context, the program launched in 2019 with a $1.25 billion commitment, but by 2022, the CMHC had only committed $329 million, which only accounts for about 18,500 applicants—in all of Canada! The lack of reach exhibited by the program was a large factor in its eventual discontinuation.

One of the largest problems faced by the first-time homebuyer’s incentive was overly stringent eligibility limitations. The program was hampered by its strict limits on household income and the size of a mortgage the buyer could take on. In order to qualify for the program, applicants had to have a combined household income of no more than $150,000 in Toronto, Vancouver and Victoria, or $120,000 in the rest of Canada. Given the increasing cost of living and growing inflationary pressures, many Canadians outside of this range could have significantly benefited from the program.

On top of the income requirements, there was also a cap on mortgage size. The total size of the mortgage could be no more than 4.5 times the size of the qualifying household income, translating to a maximum of $675,000 in Toronto, Vancouver and Victoria, or $540,000 elsewhere. Given the severe lack of housing supply, most homebuyers would be pressed to find any home within that price range, much less one that is within their desired parameters. While the CMHC’s incentive program often looked great on paper, it did little to help home buyers in Canada’s most expensive housing markets.

What’s more, homebuyers were also increasingly concerned about the equity agreement portion of the incentive program. Many did not feel comfortable letting the government maintain a stake in their home, and furthermore were worried about the unpredictability of their required repayment amount — due to the shared appreciation. When they understood that they'd be entering a co-ownership agreement with the government, many applicants simply elected to pull out of the application process altogether.

Ultimately, the aforementioned factors were enough to justify the discontinuation of the program, prompting an announcement from the federal government. As of now, the deadline for new or resubmitted applications to the program is midnight ET on March 21, 2024.

What Alternatives are Available to First-Time Homebuyers?

As a first-time homebuyer, saving for a down payment can be incredibly daunting. Luckily, there are a number of different ways to achieve this goal, even without the help of the first-time homebuyer’s incentive program:

• RRSP Home Buyer’s Plan: This program is still operational, and allows you to withdraw up to $35,000 tax-free from your RRSP for a down payment towards a new or resale home. With this plan, the funds need to be repaid within 15 years (to your RRSP), and your first repayment must occur no later than two years after your withdrawal.
• First Home Savings Account (FHSA): The First house Savings Account, which was introduced in April 2023, is a registered plan designed to assist first-time house purchasers in saving for a down payment. Contributions are tax-free (up to the plan's annual and lifetime limits), and withdrawals are not taxed.
• Local Assistance Programs: Many municipalities offer their own incentive or assistance programs. These are often designed to boost lending activity within the area, or to help temper unbalanced housing markets. Make sure to read up on your area, and familiarize yourself with the options available to you
• Get Pre-Approved: If you are having trouble figuring out the right size for your down payment, a pre-approval might be exactly what you need. A Clover Mortgage broker can help you lock in a favourable rate and well-suited terms for up to 120 days, letting you know exactly how much mortgage you can afford, and therefore making it easier to shop around for homes within your price range. Contact Clover Mortgage to get started today!

Sources: