Federal Budget 2019 – does it offer help to new homebuyers?

new homebuyers

The budget offered help to new homebuyers, many of whom find it very difficult to afford to purchase in some of our more expensive cities.

There were two measures targeted at first-time homebuyers:

Maximum withdrawal from RRSP’s increased:   Currently, with the federal government’s Home Buyers’ Plan (HBP), you can use up to $25,000 (or $50,000 for a couple) of your RRSP savings, to help finance your down payment on a home.

Effective immediately, the allowable withdrawal for first-time buyers will now be $35,000. The new limit would apply to HBP withdrawals made after March 19,2019.  Those taking advantage of the higher HBP limit, will have to keep in mind that the repayment timeline is unchanged.  Home buyers must put the money back into their RRSP over 15 years to avoid full ordinary income taxation on HBP withdrawal. 

The CMHC First-Time Homebuyer incentive:  A fund of $1.25 billion, administered by the Canadian Mortgage and Housing Corporation (CMHC) over three years, will provide 5% of the cost of an existing home and 10% of the price of a new home through what amounts to an interest-free loan, to be repaid when the property is sold.   The money would go to first time home buyers applying for insured mortgages.  The key stipulations are:

  • Users must have a down payment of at least 5% but less than 20%
  • Household annual income must be less than $120,000
  • The purchase price cannot be more than four times the buyer’s household income.

Example:  Say you’re hoping to buy a $400,000 home with the minimum required 5% down payment, which works out to be $20,000.  with the new incentive, you could receive up to $40,000 (for a new home) through the CMHC.  Now, instead of taking out a $380,000 mortgage, you’d need to borrow only $340,000.  This would lower your monthly mortgage amount from over $1.970 to less than $1,750.  The incentive is 10% for buyers purchasing a newly built home and 5% for exisiting homes.

Homeowners would eventually have to repay this so-called ‘shared mortgage’, likely at resale, though it is unclear how this would work.  CMHC might share in any capital gain (or loss) – receiving 5% or 10% of the sale price (not the purchase price).  The details had not yet been hammered out.

These stipulations effectively limit purchases under this plan to properties priced at less than $500,000 ($480,000 maximum in insured mortgage and incentive, plus the down payment), which is close to the national average sales price of $468,350.  However the national average price is heavily skewed by sales in Greater Vancouver and the Greater Toronto Area, two of Canada’s most active and expensive markets.  Excluding these two markets from the calculations cuts close to $100,000 off the national average price, trimming it to just under $371,000.    This of course means that the relief for first-time homebuyers is pretty meagre for young people living in our two most expensive regions , Vancouver and Toronto, where the average home prices sit at $925,000 and $765,000, respectively.

Mortgage applicants under this plan, still have to qualify under the federal stress test, which ensures that borrowers will be able to keep up with the payments, even if interest rates rise by roughly two full percentage points.

The government is hoping to have the plan up and running by September.

Original article: www.dominionlending.ca