Adrian McInerney is an 18 year veteran of the independent mortgage industry in the GTA focusing on Oakville, Burlington and Hamilton. Adrian joined the Oriana Financial Group of Canada in August of 2001 and remains it’s longest standing mortgage agent. Adrian can be contacted at adrian@yourmortgagepro.ca or directly by phone at 905-510-0710.

If you are confused by these programs well then, join the club as many folks quite rightly are. Hopefully I can provide some clarity, or at least as much clarity as is available from our friends at The Canada Mortgage and Housing Corporation (CMHC). Both plans take effect and are available as of September 2nd 2019.

First we will address the revised RRSP Home Buyer’s Plan. Specifically the increased amount for withdrawal to be used as part of a First Time Buyer (FTB) down payment. Essentially this is a simple program with none of the existing rules having changed except for the maximum amount one can draw from their RRSP to put towards a down payment. This amount has been increased from a maximum of $25,000 per person to $35,000 per person. In my humble opinion this is of little help due to the shear fact that most FTB’s simply do not have enough RRSP funds available to reach the original $25K threshold much less the increased amount. Depending on which source you draw your information from you may get differing figures but on average we are seeing that only 4% of first time home buyers have an existing RRSP and roughly 10% of that cohort have the full $25K on hand to draw from. In short, a very small number indeed. Meaning if the above figures are correct this program will provide little or no relief for the vast majority of FTB’s.

The second option is the “First Time Home Buyer Incentive Program” which is where most of the confusion comes in. In fact we are not only finding confusion where it would be expected, in the public realm, but even in the professional ranks.

Even our CMHC representatives seem to be confused as to how exactly the program works and what the current and future effects of the Federal Government “owning” a portion of Canadian’s homes will be.

Again, depending on where you source your information you find different outcomes with regards to the program and unfortunately even referencing the program literature itself “placetocallhome.ca” one finds confusion and contradiction or at least verbiage and graphics that appear as such.

The good news is that the site does provide easy to use qualifying calculators so that the layman can at least work the numbers without trying to absorb a complete understanding of the process as a whole. The real challenge is for industry professionals who will be expected to lay out a cogent outline of the plan, understand its benefits and limitations - real or perceived, and wrestle through the cumbersome and complicated application process perhaps dragging past the typical 5 business day finance clause in most offers.

So, first and foremost we must understand this is a SHARED EQUITY program. Essentially the Federal Government, in exchange for providing funds to increase a buyer’s down payment will share in the equity position of the home, up or down. It’s purpose is to reduce the amount of the required mortgage in order to somewhat offset the effects of the required Stress Test allowing the borrower to purchase “more” home than would otherwise be possible with the down payment available solely from their own funds. On the surface this looks promising but again, it’s shared equity.

Let’s stick to the basics and try to provide some clarity for you

First the mortgage must be CMHC insured meaning a “High Ratio” where the total down payment including the incentive funds cannot exceed 19.99% of the homes price.

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The applicants must be “First Time Buyers” as defined by the Federal Government

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The combined gross income of the applicant(s) cannot exceed $120,000 annually.

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The total mortgage cannot exceed 4 X the total applicant’s income Max. $480k.

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The maximum purchase price cannot exceed the total of the allowable maximum mortgage plus the total down payment including the incentive funds. At a maximum this represents a limit of $575,952.

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The maximum incentive (equity investment by the Federal Government) is 5% of the purchase price of an existing home and 10% on new construction. The borrower must have down payment funds of at least 5% from their own resources.

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The incentive must be repaid either upon the sale of the home, or after 25 years has elapsed (whichever comes first) or can be repaid at any time in the interim period either in one lump sum or partial lumps sums without penalty.

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The incentive represents an equity stake in the property itself. Essentially government “owning” a 5 or 10 percent share of the property. So, if the property’s value rises the government shares in the upside. The same is also true to the downside. For example, you buy new construction using the 10% incentive of $30K for a purchase price of $300K. Five years later they sell for $400K. You are obligated to repay the incentive at 10% of the inflated price = $40K. Again, the opposite is also true if values deflate.

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The property value must be confirmed by independent appraisal at the time of repayment regardless of full or partial repayment. In other words, every time a partial repayment is made the home must be re appraised at the consumer’s cost to determine up to date value and as such the equity stake that must be accounted for under the shared equity scheme. Win all around for the government in a rising market!

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Does this work for the GTA? No, if for no other reason than the maximum limit does not represent a realistic market price for a purchase in or around the GTA even for a starter home. The CMHC has yet failed to cascade good information down to the lending community and as such lenders are confused and admit they do not yet fully understand the program or the implementation process. As one Big 6 lender representative said to me a short time ago, “We just don’t understand our process requirements but we will work with it if and when applications come through but we don’t expect many around the GTA as real estate are beyond the maximums allowed anyway”.

On the Upside I am of the opinion that this program represents confidence by our elected officials that real estate values will continue to increase or at least maintain as it’s doubtful that they would “invest” in a market they view as at risk of diminishing returns.

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