Today’s federal budget offered help to young homebuyers, many of whom find it very difficult to afford to purchase in some of our more expensive cities like Vancouver and Toronto. There were two measures targeted at first-time homebuyers:
1. Maximum Withdrawal from RRSPs Is Increased
The simplest to understand is the $10,000 increase in the federal Home Buyers’ Plan (HBP) maximum tax-free withdrawal from registered retirement savings plans (RRSPs) to $35,000, effective immediately.
This allowable withdrawal for first-time buyers will now also apply to people experiencing the breakdown of a marriage or common-law partnership who don’t meet the usual requirement of being a first-time homebuyer.
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. Homebuyers must put the money back into their RRSP over 15 years to avoid full ordinary income taxation on HBP withdrawal. Now Canadians using these funds will have to repay a maximum of $35,000 – instead of $25,000 – over the same period.
2. The CMHC First-Time Homebuyer Incentive
A $1.25 billion fund 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 income must be less than $120,000;
- The purchase price cannot be more than four times the buyers’ household income.
For 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. On a standard mortgage at 3.5% 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.
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).
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).
This relief for first-time homebuyers is pretty meagre for young people living in Vancouver – Canada’s (and the worlds) most expensive city – but I guess it might be beneficial to those who a just shy (i.e. $10,000) from getting into a home in the neighbourhood they want to live in (that they may not have been able to afford otherwise) or might get them a place closer to Metro Vancouver or the tri-cities as opposed to Surrey or Langley etc.
It’s important to note that 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 2%. The incentive, however, would substantially lower the bar for test takers, as applicants would have to qualify for a lower mortgage.
Before the budget, many stakeholders had been arguing that with the rapid slowdown in the economy and the Bank of Canada unlikely to raise interest rates this year, the B-20 stress test is too onerous and should be eased. The government is hoping to have the plan up and running by September.
The Bottom Line
These housing measures (like last month’s provincial budget) are focused on the demand side of the market, rather than encouraging the construction of new affordable housing. And while the budget does earmark $10 billion over nine years for new rental homes, it does not propose tax breaks or reduced red tape for homebuilders.
Dr. S Cooper, “Federal Budget 2019 – action for homebuyers”, Sherry Cooper, accessed March 19, 2019, https://sherrycooper.com/articles/federal-budget-2019-actions-for-homebuyers/
