The Canadian government’s ‘shared equity mortgage’ plan is one that earmarks nearly $1.25 billion over a 3 year period.

2019’s federal budget is one that may be somewhat endearing for those looking to buy a house or their first home or any house at all for that matter. One specific pitch among the budget is that Canada’s respective housing agency could potentially cover a portion of the price of a home. This allows aid for citizens, and a significant decrease in stress in regards to borrowing money.

First Time Home Buyer Incentive

With nearly $1.25 billion, the budgeted proposal is one that is attempting to increase housing affordability. It’s important to note that this money does need to be paid back, however, there is no interest. The money can be paid back multiple years in the future, for there is no early required payment plan.

The program will only go into effect for mortgages that are less than four times your annual household income. This means you cannot attempt to receive a loan for a mortgage that is equal to or more than $480000. So why is this?

Do You Qualify?

In order to qualify for this program, you need have a household income of less than $120,000 a year. You must also obtain a five percent down payment. To put the down payment in perspective, this is the requirement at the minimum level when requesting an insured mortgage from the Canada Mortgage and Housing Corporation (CMHC). Don’t know who the CMHC are? Well, they’re basically the company responsible for insuring loans. They are a crown corporation, and are likely to play a much larger role in this program in the near future.

Have you met all of the conditions? Well, the CMHC will help you out. They will contribute 10 percent for a home that has just been built, or 5 percent for an older home (resale value). However, the CMHC’s contribution requires an equity stake. In the home you are purchasing of course. This means your mortgage will be much smaller, however you’ll have to pay a few more bills down the line. Free of interest of course.

To put everything into perspective, if you have a home that is worth $400,000, you’d have to provide a down payment of $20,000. This would come into play regardless of whether or not you look at the old or new rules. The program’s precise details won’t be coming out until fall.

If you took out a down payment of $20,000, you’d then have to obtain a loan for $380,000. This is according to the above hypothetical situation of course. When taking this new proposal into account, they’d throw in $40,000. This means you’d now only have to obtain a loan of $340,000. When considering a standard mortgage, your interest rate is 3.5 percent. This means approximately $2,700 a year in savings (potentially).

In regards to a “catch”, you will certainly have to pay back the CMHC for its stake in your new home. However, you don’t have to do this until you sell the property. You can pay it back sooner, but that’s completely up to you. As specific details have not yet been revealed, it’s important to note that it is unclear as to just how much the buyer would owe. Perhaps you’d have to pay the same as what the CMHC provided? Maybe it’s based on the current value of the house upon selling? We won’t know till the total proposal is released later this fall.

According to Craig Alexander, the benefits of this program should certainly outweigh the downsides. He even calls the proposal a “clever idea”.

“You want to be mindful that the government doesn’t put in policies that end up bidding up prices,” Alexander mentions. This proposal, according to Alexander, could actually allow more and more Canadians to climb the housing ladder, which is considerably difficult to do when considering the fact that this program won’t be existing for a while.

It is important to note that this plan could actually enable around 100,000 people to buy their first home. This estimate is one that is to hopefully take place over only three years.

Although many believe the program is a good one, and its benefits outweigh the downsides, some disagree. Chief economist Craig Wright, of the Royal Bank of Canada, believes that this proposed program is one that is merely “a solution looking for a problem,” and “is more about politics than policy.”  

What else does this budget propose?

The budget also goes as far to state that $100 million every year for five years will be provided to non-profit organizations that are already attempting to help out homeowners. These groups already maintain some sort of shared equity mortgage program, and this new budget will boost their efforts significantly.

Stay tuned, for specific information in regards to this budget will be released this fall.