Buying a Home? CMHC Could Soon Kick in 10% of the Cost — For a Price
The government is earmarking $1.25B over 3 years for something it’s calling a ‘shared equity mortgage’
The 2019 federal budget includes a tantalizing pitch for prospective first-time homebuyers — one that could see Canada’s housing agency contribute up to 10 per cent of the purchase price of a home and bring down the mortgage load for borrowers.
The budget offers the program, known as the First Time Home Buyer Incentive, as a way to help with housing affordability. The government is earmarking $1.25 billion over three years for something its “shared equity mortgage.”
Functionally, it’s more like an almost interest-free loan — one where the repayment plan doesn’t require any payback until years in the future. In order to qualify, an applicant must have a household income of less than $120,000 per year and be able to come up with a five per cent down payment — the minimum requirement for an insured mortgage with the Canada Mortgage and Housing Corporation (CMHC).
CMHC is the Crown corporation that backstops the vast majority of Canada’s housing market by insuring the loans that finance it. This new program will make its role in the market even larger than it already is.
In addition to those stipulations, the program caps out at four times the applicant’s annual income, which means it can only help homeowners looking to buy properties where the mortgage value plus the CMHC loan don’t exceed $480,000.
But if a would-be buyer meets the conditions described above, under the program, the CMHC would kick in up to 10 per cent of the value of a newly built home, or five per cent of the value of a resale.
The CMHC would contribute that much to the home purchase in exchange for a corresponding equity stake in the home. That has the effect of bringing down the size of the homeowner’s mortgage — but comes with a bill to be paid down the line.
Precise details of how the program works won’t come out until later in the fall, but today the government provided a rough breakdown of how it might work for a prospective buyer. If a first-time buyer wants to get a home that costs $400,000, they’d have to come up with a $20,000 down payment, under both the new rules and the old ones.
Normally, they’d have to take out a loan for $380,000 to cover the rest of the purchase price — but under the new program (if it’s a newly constructed home), CMHC could kick in $40,000 toward the purchase price, in exchange for a 10 per cent stake in the home.
That brings the buyer’s mortgage down to just $340,000 for the home, instead of $380,000. On a standard mortgage at 3.5 per cent interest, that translates into a monthly mortgage payment more than $200 lower than it would have been for the 25-year life of the loan. That’s more than $2,700 a year in potential savings.
The catch is that the homeowner eventually has to pay back the CMHC’s stake in the property — but not until they sell (or sooner, but only if they want to).
The budget is far from clear on how much the buyer would owe; is it the same dollar amount the CMHC provided up front, or does the bill go up based on how much the house has appreciated in value?
Government officials say details of the plan will be hashed out in the coming months. Craig Alexander, chief economist with accounting consultancy Deloitte, calls the program a “clever idea” and says the benefits should outweigh the downsides.
“You want to be mindful that the government doesn’t put in policies that end up bidding up prices,” he said, adding that, on the whole, the plan could help more Canadians start climbing the housing ladder.
The government is estimating the plan could create about 100,000 new first-time buyers over the next three years.
But not everyone agrees there’s nothing but upside. Craig Wright, chief economist with the Royal Bank of Canada, calls the program “a solution looking for a problem.”
He cites research from the most recent government census in 2016: roughly 67.8 per cent of Canadians owned their own homes that year.
That’s higher than ownership rates in other countries — including the U.S., where the rate is 63.4 per cent and falling swiftly. Other world capitals such as Paris (33 per cent home ownership rate), Berlin (37 per cent) and London (47 per cent) stand in stark contrast to Canadian cities like Calgary (73 per cent) and Toronto (66 per cent).
Even rent-happy Montreal has an ownership rate of 55 per cent, which is why Wright said he’s not convinced Canada has a home ownership problem.