How the First-Time Home Buyer Incentive works

The idea behind the FTHBI is simple: by covering a portion of your down payment, the government reduces the size of the mortgage you need to borrow, which has the added benefit of lowering your recurring mortgage payments. But don’t get the wrong idea: You will have to pay the money back, and depending on what happens to the housing market, it could be more than you originally borrowed (or planned for).

Watch: What is the First-Time Home Buyer Incentive

How does the First-Time Home Buyer Incentive work? 

Through the FTHBI, first-time home buyers can apply to have the government cover 5% or 10% of the home’s purchase price. It comes in the form of an interest-free loan, to be put directly towards your down payment, that must only be paid back once the home is sold or after 25 years, whichever comes first.

This is considered a shared-equity mortgage, because the government retains its portion of the equity in your home. When the value of your home increases, so does the amount you will have to repay. By contrast, if the value of your home declines, you owe less money back. That’s because the size of the loan is tied to the percentage the government covered up-front.

For example, if you received 5% on a home worth $600,000 and then sell it for $800,000 five years later, you’d be required to repay $40,000—even though you only borrowed $30,000—because the amount owing is based on the current sale price. On the other hand, if you sold the same home for only $500,000, you would only be on the hook for a repayment of $25,000.

The table below illustrates various repayment scenarios, based on a home purchased for $600,000.

The type of property you are purchasing has an impact on the amount of incentive you are eligible to receive.

• For new builds, first-timer buyers can receive 5% or 10% of the home’s value.

• Resale homes—those that have been previously occupied by owners or tenants—are capped at 5%.

• New and existing mobile/manufactured homes are also only eligible for the smaller 5% incentive. 

First-Time Home Buyer Incentive or Home Buyers’ Plan: What’s the difference? 

Though it has a similar name, the federal government’s Home Buyers’ Plan (HBP) is different. Unlike the FTHBI, the HBP isn’t a financial incentive—it’s a program that allows qualifying first-time home buyers to withdraw up to $35,000 in funds without penalty from a registered retirement savings plan (RRSP), which they can put toward buying or building a home. There are no penalties for withdrawal, but the money must be repaid within 15 years. 

Depending how long you reside in your home, repayment starts sooner with HBP than FTHBI and it is incremental. With HPB, within two years of being withdrawn from the RRSP, you must begin paying that money back. If you don’t make the required payments for a given year, it counts towards your net income on your tax return, which results in higher taxes and possibly even a higher income tax bracket.

If neither the FTHBI and Home Buyers’ Plan is for you, there are a number of other government incentives to consider. Note that each has its own list of eligibility requirements. 

Who’s eligible for the First-Time Home Buyer Incentive?

To be eligible for the FTHBI, you have to be—as the name suggests—a first-time home buyer. You will meet those requirements if: 

• You have never bought a home before
• You have not lived in a home that was owned by you or your partner within the last four years
• Your marriage or common-law partnership has recently ended (regardless if you have owned a home before or not)

To meet the requirements, you must also be a Canadian citizen, permanent resident or non-permanent resident authorized to work in Canada. 

The property you are purchasing must be located in Canada, and you must plan to live in it full-time—it cannot be an investment property or a vacation home.

There are also limits on your total annual income and the maximum you can borrow for your mortgage. In most parts of the country, buyers must have an annual household income of no more than $120,000. In May 2021, the income limit was raised to $150,000 for buyers in the Toronto, Vancouver and Victoria census metropolitan areas, to help make the program more attractive and accessible to buyers in those expensive markets.

What’s more, the maximum you can borrow must be no more than four times the qualifying household income. In Toronto, Vancouver and Victoria, buyers can’t exceed 4.5 times the qualifying household income. In other words, the maximum you can borrow to be eligible for the FTHBI is $480,000, except for in Toronto, Vancouver and Victoria, where the new eligibility rules have raised that limit to $675,000. 

Like with any other home, you still need to pull from traditional sources (such as savings, including RRSPs, or a gift from a family member) to come up with the minimum down payment required in Canada—between 5% and 10% for homes valued at less than $1 million. And when all is said and done, the mortgage must represent more than 80% of the purchase price. Put differently, the total down payment, including the incentive, must represent less than 20% of the purchase price. 

This means you will have to pay for mortgage default insurance. But you will only pay insurance on your portion of the mortgage, not the amount the government contributed.

How to apply (and receive) the First-Time Home Buyer Incentive

There are a lot of eligibility rules with the FTHBI, but the good news is the application process itself is fairly straightforward, says Tuli Parubets, a mortgage agent in Toronto. You fill out the Shared Equity Mortgage Information Package and Shared Equity Mortgage Attestation and Consent forms and give this paperwork to your lender or mortgage broker when you apply for your mortgage. 

Just make sure you meet the qualifications, says Parubets. She has her clients go through their T1 general income tax form to confirm that the annual household income doesn’t exceed the limit. 

“It’s the best way to know income, because a lot of times you’ll have somebody who may qualify in the sense that they’ve got the [$150,000] as a base income, but their parents have put investments in their name that have generated income,” she says. “It’s not just a matter of your pay stub or your T4. CMHC [the Canada Mortgage and Housing Corporation] will look at the notice of assessment to see if there are any other sources added.”

Once you receive the incentive, there’s not much to think about unless you decide to sell your home, the 25-year time limit is up, or you want or need to pay it back (more on that below). If you opt for repaying early, you must do so in a single lump sum—installments aren’t allowed. 

To repay the incentive, you will have to contact CMHC and provide documentation of the property value, either from a third-party appraiser if you’re paying it back outside of a sale or the purchase and sale agreement if it’s from a sale. And you’ll have to cover the cost of the appraisal. That is typically around $500, according to Parubets. 

CMHC will then send repayment instructions. Once it’s paid off, a lawyer on your behalf will work with CMHC to discharge the mortgage. It’s a registered debt so the lien must be removed, says Parubets. That costs from $1,000 to $1,500. 

Finally, according to CMHC, while refinancing your mortgage doesn’t require repaying the incentive, you could face additional legal fees for changing the “main” or “first-ranking mortgage” on the property (the lender who gets paid first in the event of a default). The incentive is considered the second-ranking mortgage. 

You got the First-Time Home Buyer Incentive. Now what?

There are a few situations that trigger a repayment of the funds or in which you may want to consider voluntarily repaying them early.  

According to CMHC, you will have repay the incentive if: 

• Your relationship ends, and you want to buy out the co-borrower through additional insured funds
• You port your mortgage, meaning you move your mortgage from one property to another, like when you move

In both of these situations, you’ll need a third-party appraiser and a lawyer.

And, if you’re planning renovations, which will increase your home’s value, CMHC suggests paying the incentive back before doing so, as it could increase the value of your home—and increase the size of the repayment. You don’t want to lose out on the upside of renovating, after all.

Is the First-Time Home Buyer Incentive right for you?

To date, far fewer Canadians have made use of the program than anticipated. When it was first announced, the federal government projected as many as 100,000 people would apply for the FHTBI over three years. But as of March 31, 2021—around two years in—fewer than 10,000 applications had been approved, for a total $178 million of the $1.25 billion originally set aside for the program. 

Parubets, who works in Toronto, says the high cost of housing means most her clients aren’t able to make use of the FTHBI. The buyers that are tend to buy a new build because of the 10% limit on the purchase price, she says. “[That] seems to have been more of an attractive position for some of the buyers, as opposed to the 5% top-up for existing properties.” 

In competitive markets, like Toronto, the limits imposed on household income lower the amount buyers can afford, she explains. For example, under different circumstances, a family with an income of $150,000 per year could probably qualify for a $730,000 mortgage with a 25-year amortization. But under the FTHBI eligibility rules, they wouldn’t be able to borrow more than $675,000. In other words, they would lose around $55,000 of potential room in their budget.

Finally, Parubets cautions that participants need to be mindful of eventually needing to repay the incentive. “It’s very easy to forget a debt that’s not in your face,” she says. 

She’s had clients decide they want to upsize, think they may be able to afford a home in a certain price range because of the increase in the value of their home, and forget that they need to repay the incentive based on the increased value—not the price they bought the home for. 

In the end, with its limitations, the FTHBI may not be the right choice for all first-time homebuyers. But it may be the answer for those with a small down payment or those worried about the size of their mortgage payments.

Just remember that you’ll eventually need to pay the money back.

MORE ON REAL ESTATE:

• The complete guide for first-time home buyers
• What’s the best mortgage for first-time home buyers?
• 7 smart strategies for first-time home buyers
• How much mortgage can I afford?

About Alex Mlynek

Alex Mlynek is a writer and editor with more than 20 years’ experience. She's written for such magazines as Report on Business and Reader's Digest. Her first job out of journalism school was at MoneySense.

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