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Taking Another Look at the First-Time Home Buyer Incentive

Taking another look at the First-Time Home Buyer Incentive

 

What if someone offered you five to 10 per cent toward your down payment on your first home? It might just be enough to make owning property a reality, even if one day you do have to pay back that hand up at market value. Now, what if that someone was the federal government?

 

The idea of the government having a stake in your home, even if it is as little as five to 10 per cent, might make some squeamish. But Matt Imhoff, a Mortgage Broker with Mortgages.ca, suggests giving some serious thought to what that financial assistance can do for you, especially right now.

 

What is the First-Time Home Buyer Incentive

 

Ottawa unveiled the First-Time Home Buyer Incentive about a year ago with the intention of making home ownership more affordable for those just entering the market. It’s a shared-equity mortgage with the Government of Canada offering first-time buyers five to 10 per cent toward the purchase of a newly constructed home; five per cent toward the purchase of a resale or existing home; or five per cent toward the purchase of a new or resale mobile or manufactured home.

 

The buyer needs at least five per cent of their own money to qualify, but personal and federal contributions can’t add up to a down payment of more than 19.9 per cent. The intention is to help first-time buyers reduce their mortgage payments rather than add to the financial burden that can come with home ownership and, now, the uncertainty of a pandemic.

 

It’s not a forgivable loan, however. Anyone tapping into the program has to pay back the government based on the property’s fair market value at the time of repayment. That’s either when the homeowner decides to sell or after 25 years — whichever comes first.

 

Doing the Math on the First-Time Home Buyer Incentive

 

“For me, the benefits I really see are that it does reduce what your mortgage payment is,” Imhoff says. “So if someone is buying with five per cent down and not using the program and someone is buying with 10 per cent with program, it means a lower payment.”

 

That’s a particularly helpful scenario for growing families, he notes. Parental leave and the reduced income it brings can be less stressful with lower mortgage payments, for example. The savings on mortgage payments could also be used to pay off other debt or go into a vacation (when things open up), education or retirement account. But the biggest selling point might just be the fact you can pay off your mortgage quicker.

 

Let’s look at the numbers:

 

Not using the First-Time Home Buyer Incentive

 

Purchase price: $500,000
Down payment (5%): $25,000
Mortgage loan insurance premium (4%): $19,000
Total mortgage: $494,000

 

Payments (five-year fixed at 2.09%): $2,113/month

 

Balance after five years: $414,608
Payments over five years: $126,802

 

Using the First-Time Home Buyer Incentive (5%) – Existing Property/Resale Home

 

Purchase price: $500,000
Down payment (5%): $25,000
First-time Home Buyer Incentive (5%): $25,000
Mortgage loan insurance premium (3.1%): $13,950
Total mortgage: $463,950

 

Payments (five-year-fixed at 2.09%): $1,985/month

 

Balance after five years: $389,387
Payments over five years: $119,089

 

Note: The government shares in five per cent of the value of your property. This is paid either in 25 years, when you sell the property or if you decide to refinance.

 

Using the First-Time Home Buyer Incentive (10%) – New Construction

 

Purchase price: $500,000
Down payment (5%): $25,000
First-Time Home Buyer Incentive (10%): $50,000
Mortgage loan Insurance premium (2.8%): $11.900
Total mortgage: $436,900

 

Payments (five-year fixed at 2.09%): $1,869/month

 

Balance after five years: $366,685
Payments over five years: $112,145

 

Note: The government shares in 10 per cent of the value of your property. This is paid either in 25 years, when you sell the property or if you decide to refinance.

 

In short, paying $128 or $244 less a month on your mortgage, depending on whether you choose the five or 10 per cent incentive, means having $7,700 or $14,600 more in your pocket over the next five years while still coming out ahead on your mortgage balance.

 

Not convinced yet? Imhoff is happy to go through the pros and cons with clients, and discuss payback scenarios. “If a property goes up in value and the government gets five to 10 per cent of that, you still have 90 to 95 per cent,” he says. “I can look at the numbers to show people. I’m sure anyone who takes advantage of the program isn’t going to be kicking themselves if their property goes up significantly and they have to pay back the government.”

 

Expanded Program Now Live!

 

First-time home buyers purchasing a home in the Toronto, Vancouver, or Victoria Census Metropolitan Areas are now eligible for a qualifying annual income of $150,000 versus $120,000 previously, and an increased total borrowing amount of 4.5 times their qualifying income, up from four times previously.

 

For more information, please visit the following link:

 

https://www.placetocallhome.ca/fthbi/first-time-homebuyer-incentive

 

Written by Matt Imhoff

 

blog, Home Ownership, Mortgage Education, Mortgage News, Uncategorized

Change to the Stress Test

 

A New Stress: What the new mortgage stress test really means

 

There’s a reason it’s called a mortgage stress test. And as of June 1, it’s about to get a little more stressful.

 

That’s when homebuyers applying for an uninsured mortgage — typically, those with at least 20 per cent down — will need to show they can withstand a contract with an interest rate of 5.25 per cent or two per cent more than their actual mortgage rate, depending which is higher. That’s up from the current qualifying rate of 4.79 per cent.

 

Homeowners looking to renew their mortgage, tap into the equity in their home by refinancing to take on additional debt, or expand their real estate portfolio by purchasing additional property will also need to prove they can handle can navigate rising interest rates, especially if they’re forgoing mortgage insurance.

 

What does the new mortgage stress test rate mean?

 

Put in context, the new qualifying rate of 5.25 per cent is about four times the average mortgage interest rate at the moment. It was determined based on the average five-year rate posted by Canada’s Top 5 banks.

 

The change is meant to insulate homeowners when the ultra-low interest rates ushered in by the economic travails of the pandemic start to return to normal, pre-pandemic levels.

 

It appears to be only a slight increase over the previous stress test rate at a glance. But that 46-point difference translates to a five per cent reduction in affordability or purchasing power, explained Scott Nazareth, a mortgage specialist with Mortgages.ca. “At face value, it’s something to indicate to the market that it’s being consistently monitored and these changes are a reactive approach to the rise in property values, especially in the Great Toronto Area and Vancouver area.”

 

How to avoid the stress of the new mortgage stress test

 

If the new stress test is a concern, Nazareth encourages homebuyers and homeowners with uninsured mortgages to get their financing in order now.

 

There is a workaround for those who aren’t yet at that point, however: Credit unions are provincially regulated, so they don’t fall under the purview of federal mortgage stress tests.
But Nazareth suggests the most foolproof hack of them all: “Don’t let the stress test stress you out,” he says. “Feel free to reach out to a mortgage professional to help navigate the rules.”

 

 

blog, Home Ownership, Mortgage Education

Should I Set Up a Home Equity Line of Credit?

Home equity lines of credit can be a financial lifeline when emergencies happen.

But waiting until retirement to set one up can throw homeowners a real curve-ball.

An older adult couple living in a million-dollar home called it quits on their careers after their mortgage was paid off.

They considered applying for a $600,000 home equity line of credit before retiring but decided against it in the end. They figured if they ever needed to access a large amount of cash, they could easily get it because of the equity they had in their home. A year later, they decided they wanted to spend less time in the city and more time enjoying the peace and quiet of lake life. They wanted to buy a cottage. 

Bad news came when they applied for a mortgage: their retirement income wasn’t enough to qualify. Had they secured that home equity line of credit before retiring, however, they could have used that to pay for their slice of heaven by the water.

Whether retirement is on the horizon or you have dreams of giving up corporate life for self-employment, it’s important to have the conversation with a professional about shoring up financial safety nets, including a home equity line of credit, before making the leap.

How does a home equity line of credit work?

A home equity line of credit is secured against the value of your home but approval is based on your income at the time you apply for it. 

You may never need to tap into it, but if you do, the interest rate with a home equity line of credit is better than with any credit card or unsecured line of credit. It really is the cheapest line of credit on the planet.

Paying off a home equity line of credit also comes with greater flexibility. The balance can be paid in full, unlike a mortgage, or you can choose to pay the interest only.

Home equity lines of credit also remain in place as long as you own your home.

When should you get a home equity line of credit?

Most people are never offered a home equity line of credit by their bank, but they should speak to a mortgage professional about applying for one as soon as they’ve built up equity in their home — and while they’re still earning a secure and stable salary.

The key is to be prepared for whatever life might throw your way, and that includes getting a home equity line of credit in place sooner than later regardless of career ambitions or retirement plans.

blog, Mortgage News

Getting a Mortgage During a Pandemic

Home buyers getting into the market and home owners looking to refinance wonder whether a new mortgage is possible right now.

It is, but with some caveats.

A recent first-time home buyer decided honesty was the best policy when he lost his job during the current COVID-19 crisis.

With just two weeks before the deal closed on his new home, he told his bank what happened. His parents co-signed on the mortgage and the deal moved forward, but the home buyer could have landed in serious financial trouble without that safety net.

He was at risk of losing his deposit and being sued by the sellers for money they would have lost had the deal fallen through.

Can I get a mortgage right now?

All this to say Canada’s large banks are still financing home purchases, even with an economy that’s all but halted. But they are being more conservative with their lending, says James Harrison, president and mortgage broker with mortgages.ca.

For starters, they’re no longer making exceptions on debt-service ratios and they’re eliminating discounts on prime and variable mortgages. Self-employed applicants will also have a harder time getting a mortgage with banks more thoroughly scrutinizing the industries in which they work.

Updated letters of employment are now essential for approval. Banks have started asking mortgage applicants for pay stubs up to two weeks before deals close, too, and they’re calling employers to confirm clients still have a job.

“Get your files in order,” Harrison advises. “Get your conditions met as soon as possible so there are no problems later and deals can close.”

Be prepared to wait.

Still, it will take longer for deals to be funded because banks are swamped right now. Mortgage applications were up 400 per cent when the pandemic started taking its toll economically, Harrison says.

Home buyers were taking advantage of low fixed rates at the time. Homeowners looking to refinance also jumped at lower interest offered after the Bank of Canada dropped rates.

Approval on financing can now take up to 10 days with clients waiting up to four weeks to get that cash in hand.

The key is to work with an experienced mortgage broker who can help navigate financing during these unprecedented times and get the best rates for homebuyers and homeowners in the process.

“It’s not the time to drag your feet and rate shop,” Harrison says. “Have the conversation with an experienced mortgage broker, know what’s out there and get your approval in place. Don’t be left in the dark because everything is changing so fast.”

 

blog, Home Ownership, Mortgage Education, Mortgage News

CMHC’s New Incentives for First-Time Home Buyers

Everything You Need to Know About CMHC’s New Incentives for First-Time Home Buyers

First Time Home Buyers

James Harrison, AMP
Mortgage Broker
Mortgages.ca

 

Breaking into the Canada mortgage market as a first-time homebuyer can be daunting, especially when it comes to navigating incentives, offers, and financial hurdles. Luckily, CMHC’s newest Home Buyer Incentive Plan for 2019 is full of incentives tailored perfectly for first-time homebuyers, the most important of which are broken down below:

 

Payment for Equity

As part of the latest First-Time Home Buyer Incentive Plan, CMHC will pay 5% of the purchase price for an existing home and up to 10% for the value of a new home as part of a down payment assistance program in exchange for an equity stake. This means that the Government of Canada partners with you in a Shared Equity Mortgage, taking a share of the increase (or decrease!) in the property’s market value. To qualify for this incentive, first-time homebuyers must meet a short set of criteria:

 

  • Minimum down payment amount based on mortgage amount
  • Qualifying income is $120,000 or below
  • Total mortgage is no greater than four times the qualifying income
  • Homes must be below the purchase price of $500,000

 

The government’s equity stake, otherwise referred to as a Shared Equity Mortgage, is then repaid as a percentage of the selling price, which takes into account the gain or loss in property value.

 

Taking Advantage of Your Money: RRSP Withdrawals

The Home Buyer’s Plan, a federal program that acts as a first-time homebuyer incentive, allows you to use a $35,000 RRSP withdrawal (in one year) towards your new home purchase. Making your RRSP withdrawal requires you to fill out a Home Buyers Plan Redemption Form to declare the amount that is being withdrawn, whether in a single amount or in installments. 

 

Why First-Time Homebuyer Incentives?

In today’s housing market, it can take individuals years to save up enough for the minimum down payment of 5% on a home. With the help of the First-Time Home Buyer down payment assistance incentive and the RRSP withdrawal allowance, purchasing a home can come much sooner. 

 

These incentives, developed for Canada’s real estate market and the first-time homebuyer, offer a number of benefits that help one transition into home ownership, such as: 

 

  • Purchase a home with the future in mind
  • Reduce the financial burden without delaying property purchase
  • Shared equity mortgage means interest-free down payment assistance
  • First-Time Home Buyer Incentive allows choices for repayment based on property value, not interest
  • Savings on mortgage payments of up to $3,430 per year

 

Your first home is one of the biggest, most important purchases of your life. The Government of Canada has developed a system to help first-time homebuyers comfortably acquire and pay back a mortgage, with assistance that is based on property value, rather than an established interest rate. With CMHC’s First-Time Home Buyer Incentive, buying your first home just got much easier.

 

Apply now for a mortgage with Mortgages.ca and learn more! 

blog, Home Ownership, Mortgage Education

How To Pay Down Your Mortgage Faster

Paying down your mortgage will not only lower your debt, but it will also reduce the amount of money you spend on interest.

Happy Couple Saving Money

By: Scott Nazareth
Mortgage Broker

Your mortgage is one of the biggest and longest-running debts you pay. Your monthly payments can consume a big chunk of your earnings, reducing your cash flow. Paying down your mortgage will not only lower your debt, but it will also reduce the amount of money you spend on interest.

You can pay off your mortgage fast with lower interest rate loans and short amortization terms. Amortizations can range from thirty to thirty-five years. Many homeowners opt for longer time frames to lower their regular payments, but those increase the total amount of interest paid over the life of the mortgage contract. If a short timeline is not financially viable, here are some ways you can pay off a mortgage fast.

 

Lump Sum Payments

Paying a lump sum payment on your mortgage will shorten the time it takes to pay off your loan. Whether you put extra money down monthly, quarterly or yearly, the long-term savings will be substantial.

Every year, you can pay a lump sum of up to 20% of the outstanding principal. An annual lump sum payment will not only reduce the total amount of interest you pay, but it can also shave years off of the life of your mortgage.  For example, if you paid 10% of the remaining mortgage each year for five years, you will have paid 50% of the mortgage and halved the projected amortization period.

 

Accelerated Payment Plans

If your mortgage payment schedule only includes monthly payments, consider opting for an accelerated payment plan. An accelerated payment breaks your monthly bill into smaller amounts that are withdrawn weekly or biweekly. Accelerated plans with more frequent installments reduce the interest you’d pay over time. That is the equivalent of making one extra payment each year.

 

Same Payment on Lower Interest Loans

If your mortgage renewal has a lower interest rate, request to keep your monthly installments the same as they were with your previous rate. By maintaining a consistent payment plan on a lower interest loan, you will be paying more of your mortgage without impacting your budget. That will reduce the total interest you pay and the length of your mortgage.

 

Increase Mortgage Payments

When refinancing your mortgage, ask to increase your payments rather than accept the monthly rate set by the lender. Even a small increase of $100.00 more per month will lower the total interest you pay and take years off the life of your mortgage.

A home loan is typically the biggest debt most Canadians have, taking much of your hard-earned money, especially considering the interest fees. There are many simple and highly effective measures you can take to pay off your mortgage fast. Talk with a mortgage broker about the best mortgage renewal terms as well as strategies to lower debt so that you can be debt-free sooner.  

 

To find out how you can pay off your mortgage faster, contact one of our mortgage brokers for your free consultation by clicking on our ‘Apply Now’ button, emailing us at info@mortgages.ca, or by calling #647-795-8700 ext. 0 today.

 

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