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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.”

 

 

Home Ownership, Mortgage Education

The Reverse Mortgage: Why It May or May Not Work For You

Popular opinion says reverse mortgages are bad for borrowers, but that’s one of many misconceptions about these loans.

What is a Reverse Mortgage

A 71-year-old with limited income came up with a plan to better her financial fortunes.

She decided to convert her basement into a rental suite. The money she’d make each month from taking on a tenant would supplement her CPP and Old Age Security payments.

Knowing that a bank loan wasn’t an option at her age and with her income, she decided to take out a reverse mortgage for 25 per cent of her home’s value. The renovation got done, a tenant moved in, and now she’s earning an income that boosts her financial security. The best part is she gets to stay in her home.

What is a reverse mortgage?

A reverse mortgage is a loan secured against the value of a home. Unlike a regular mortgage, borrowers aren’t required to make regular payments. In fact, they don’t have to pay it back at all until they sell their home. 

The money is tax-free and can be used however homeowners want. Anyone over 55 can apply for a reverse mortgage, with the eligible amount calculated by age and other factors.

Reverse mortgages really come in handy in situations like that of the 71-year-old who put the money back into her home, says James Harrison, president of Mortgages.ca

“She still owns her home and her home’s still going to appreciate in value, so it’s great,” he says. 

A reverse mortgage is also an ideal option for older pensioners who want to continue living independently as they age, Harrison adds. 

“If they can set this up, they can have full-time care and be able to stay in their home, and that’s a big thing.”

Why do reverse mortgages get a bad rap?

Depending on the reverse mortgage, there can be high or hidden fees. But Harrison says the benefits of a reverse mortgage outweigh any disadvantages, especially if borrowers consider a private loan as an alternative.

For starters, the entire value of a reverse mortgage can be taken in one lump sum, or in monthly or quarterly installments. 

Interest rates are also reasonable compared to private loans, Harrison notes. The 71-year-old who converted her basement to a rental suite secured a variable rate of prime plus 1.75 percent, or 4.20 per cent as of May 2020. Private loans can clock 10-12 percent interest plus high fees just to get set up.

“There’s a lot of flexibility in a reverse mortgage,” Harrison says. “You can do a three-year variable, five-year variable or fixed and when you want to sell and move, you pay it back and keep the rest.”

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.

Home Ownership, Mortgage Education

Understanding Mortgage Deferrals during COVID-19

Heres what you need to know about pausing your mortgage payments

Getting through to a bank can be a test of patience right now.

Those trying to connect to a bank employee have two options: endure the long wait time by testing your music trivia knowledge against the on-hold soundtrack or hang up.

If you choose to hang up, its important to try again at another time, particularly if youre calling to defer mortgage payments during the COVID-19 pandemic.

What is a  mortgage  deferral?

Canadas six largest banks offered to pause mortgage payments for those who lost work or faced financial hardship after COVID-19 slowed our economy to a grind.

Large banks are allowing customers to postpone their mortgage payments for six months, and so far, more than 210,000 Canadians have requested the relief.

Some smaller non-bank lenders are offering mortgage payment deferral programs, too, but they may only suspend payments for a shorter time.

The strategy is to get everyone to just stay home,says James Harrison, president and mortgage broker with mortgages.ca. The thought is in six months well be back up and running and can make payments. But in the meantime, people can use that money to buy groceries and keep the lights on.

Whatever the case, its important to speak to someone directly about halting payments to ensure you and your lender are on the same page. Dont let the frustration of being on hold cause you skip payments without permission, assuming your bank will understand why.

What are the long-term effects of deferring mortgage payments?

Your credit score will nose dive if you dont make it official with your bank that you need a break from your mortgage payments. So stay on the line or try again, no matter how long it takes. Approval is typically automatic once you do speak to a bank employee.

However, keep in mind you will have to start paying your mortgage again. Payments will be higher when you do, Harrison warns, because interest is still accumulating on your principal and on the interest you were already paying. Do the math to ensure your mortgage will be manageable when payments resume.

A lot of people think its interest-free for six months and the government is covering it,he says. Theyre not.

The good news is deferring your mortgage officially — shouldnt affect your credit score. But it is up to banks to let credit monitoring agencies know whats happening on your behalf. Given the average bank employees workload right now, its best to get that guarantee in writing or ask for the name and employee number of the person helping you in case you need that information later.

Otherwise, this short-term gain could lead to long-term credit pain.

Home Ownership, Mortgage News

Changes to the Stress Test – What it means for buyers

 

 

 

The government has come out with another mortgage rule change. This time the rule change may actually increase affordability for people looking to purchase a property with less than 20% down. Now before you start jumping for joy let’s take a look at the numbers and how they will work out for increasing your affordability.

Currently, and until April 6th, the rule as it stands right now would require any buyer, whether insured or conventional, to use the bench mark qualifying rate of 5.19% or their actual rate plus 2%, whichever is higher.


The new rule, as of April 6th 2020, will allow “insured” buyers to use their 5yr fixed rate plus 2% and that number can be lower than the bench mark rate.


Using RBC as our industry benchmark, who’s current rate is 3.09%, if an insured buyer were to purchase something, they would qualify at 5.09% (3.09 plus 2%), instead of the current benchmark rate of 5.19%.

As you can see this difference here is 0.10% and will have a little impact on affordability.

Here is a real life example:

Jane Doe makes 100k/yr and wants to buy a condo in Toronto that has monthly condo fees of $400/month and property taxes of $200/month.

If Jane Doe puts 10% down, here is how the old versus new rules would look for her

(For our example, assume Jane has great credit and Zero Liabilities)

Old/Current rule = qualifying at 5.19%.

-Maximum purchase purchase Price = 500k

New rule = qualifying at 5.09%
– Maximum purchase price = $510k

So while it may not be a huge increase, it is still a net positive, especially for first time homebuyers. Want to find out exactly how much you can afford?

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