UPDATE: NHBI Canada

Here is an UPDATE to the Canadian New First Time Home Buyer Incentive Program

A Calgary lawyer recently had an opportunity to review the program and attend a basic seminar. He said he would not recommend the “down payment equity share” program to a first time home buyer for the following reasons – BUT here are our replies  … and the Program DOES make sense to do.

NEGATIVE POINTS and the reasons FOR the program are below:

1. It will take much longer to be approved for this program than for a normal mortgage loan and sellers may not accommodate the longer condition time.

• We normally pre-approve buyers with these files and this program in advance so there is no extra time needed at the lenders for conditions.
• The math for this program is complicated and buyers that use this program need to be pre-approved as they need the mortgage to match the affordability guidelines and to shop in the right price range.
• The extra time is at closing when 2 sets of documents are needed by the lawyer. As long as this is known in advance, the closing date can be long enough to allow for the extra paperwork to be requested and completed.

 

2. Higher legal and appraisal costs will result as two separate mortgages have to be prepared and registered (one for the lender and one for the equity share) and an extra appraisal will have to be obtained and paid for by the owner if paying out the incentive mortgage prior to the ultimate sale of the property.

• A 1^st and 2^nd mortgages go on title at the same time as closing.
• Appraisal on purchase is not involved as it has to be a CMHC approved mortgage (CMHC is responsible for the appraisal in this case) and the program is based on the purchase price.
• If the owner wants to pay it off / back sooner, then an appraisal is needed at buyer cost ~$350.
• This would happen if the owner wanted to do extensive renovations to the home.
• An appraisal should not be needed on a bonafide sale, to a 3^rd party, via a realtor, and when listed on MLS.
• An appraisal MAY be needed – as the owners cost – if the sale if it is a “private sale” and/ or believed to be below market value.
• (This is to stop the owner from selling the home to a family member for $1.00 and then attempt to repay the loan with $0.05.)
• The buyer has already saved many times the extra costs, savings are about $100 – $150/ month, from day 1. Paying-out at 10, 15, 20 years later … they have already saved $100 x 12 x 10 years = $12,000, in the bank, already.

 

3. A disincentive to improve/renovate the property will exist as any appreciated value is shared with the government notwithstanding that they don’t contribute to the renovation costs.

• True.
• Upon repayment, improvements will be included when determining the market value, therefore the Homebuyer will have to consider the cost and benefit of the planned renovations, and decide whether to repay the Incentive prior to making any home improvements.
• IMPORTANT: It may be beneficial to the Homebuyer to repay the Incentive prior to conducting any major renovations to the home.

 

4. A potential trap is being created for non-permanent residents who are legally authorized to work in Canada who can qualify to buy under this program but will have extreme difficulty in selling when their work permit expires as they will not have sufficient equity to satisfy the required withholding requirements under the Income Tax Act

• We have been the largest Mortgage Alliance brokerage in Canada for 6 years in a row, and we do about 20 deals a year for 9xx SIN buyers; 99% of our customers are unaffected by this.
• Again, this program is surgical in for who it works for. The program is not for everyone.

 

5. It may be more difficult to refinance the property (it is not clear whether  the Government will permit refinancing of the first mortgage and postpone their security to the new financing)

Updated rules have been released:

• The home CAN be refinanced without triggering repayment of the incentive, however, the shared equity mortgage will only be postponed to the outstanding balance that would otherwise be owing under the first ranking mortgage (i.e. no equity take-out will be permitted ahead of the shared equity mortgage).

Note:

• The combination of all charges on a refinance must not exceed 80%.
• This program DOES allow Assumption of the mortgage. Standard rules apply: full requalification by the parties assuming the mortgage directly with the lender. The standard on-going ramifications to the seller still apply.
• This program does NOT allow a PORT of the mortgage to another property. It would have to be paid out at that time.

 

6. If refinancing of the first mortgage will not be possible without paying out the government’s equity share, then the first mortgage lender will have a captive borrower.  The lender will have no incentive to reduce posted mortgage rates on renewal resulting in substantially higher interest rates in the second and subsequent mortgage terms for the homeowner.

• As above, the rules do allow the home to be refinanced without triggering repayment of the incentive.
• The renewal rate offered by the lender is independent of the 2^nd charge on title.

Side note: We see that lenders are already applying the “Stress Test” under-the-covers on renewals when calculating the renewal rates. More on my blog here: http://markherman.ca/2019/06/

 

 We love this New Home Buyer Incentive Program – NHBI

Mortgage Mark Herman; Best, Top Calgary Mortgage Broker