From the introduction of the First Home Savings Account to the termination of the work-from-home benefit (temporary flat rate method), there have been many changes to the tax benefits available.
This year brings another notable change: the discontinuation of the First-Time Home Buyer Incentive (FTHBI).
Whether you’ve been thinking about applying for the FTHBI or already have, read on to see how this discontinuation may affect you and your homeownership goals.
What Is The First-Time Home Buyer Incentive (FTHBI)?
The First-Time Home Buyers Incentive was introduced by the Canadian Government in 2019, to assist first-time homebuyers. Administered by the Canada Mortgage and Housing Corporation (CMHC), the program provided a shared equity mortgage, allowing the government to share in the property’s value changes.
The government would provide a 5%-10% interest-free loan to be used as a down payment to reduce mortgage size. This, in turn, would reduce monthly payments, making homeownership more affordable.
Eligibility criteria included being a first-time homebuyer, meeting income limits, and making a minimum down payment. Participants had to repay the shared equity mortgage upon selling the property or after 25 years. The maximum purchase price varied by location.
Why Is The First-Time Home Buyer Incentive Being Discontinued?
The First-Time Home Buyer Incentive has been discontinued due to several issues with the program, particularly with eligibility and its availability in expensive markets.
The program is meant to reduce the mortgage size you take on, which in turn, would make your monthly payments more affordable. Yet, its eligibility requirements made it difficult to access, particularly in high-priced markets like Toronto and Vancouver.
According to Daniel Vyner, the principal broker at DV Capital, the income level and maximum property value thresholds were too low, especially in areas where the “average purchase price exceeded this threshold”.
The FTHBI Was A Flawed Program From The Beginning
The FTHBI was expected to help 100,000 Canadians during the 3 years following its introduction in 2019. However, according to documents presented in Parliament, the FTHBI only approved 15,925 applicants out of the 23,411 applications received as of April 30, 2022.
Moreover, within that time frame, only a fifth of the program budget was distributed to the approved applicants.
These numbers not only indicate a lack of interest in the program, but a major issue in regards to eligibility. With housing prices on the rise, the program’s income limits and house price caps became too low.
Other Issues
Further criticism was directed at the FTHBI, specifically concerning the co-ownership arrangement that homebuyers would enter into with the government. Many argue that the government benefits from the appreciating value of the home, but doesn’t have to pay property taxes or home insurance like homeowners do.
Moreover, to reclaim the government’s stake in your property, you must repay the government loan after 25 years or when you sell your home. Most people after 25 years will be close to paying off their mortgage, yet they’ll still owe the government. What will happen if they can’t pay back the government? Will they be forced to sell or take out a new loan to pay the government?
Like some others, James Laird, co-CEO of Ratehub.ca says the FTHBI is a convoluted program that was poorly thought out.
When’s The Last Day To Apply?
Canadians interested in the FTHBI can still apply for the program until March 21, 2024. Those who have been previously denied can also resubmit their applications by this deadline.
Applicants who resubmit their application after the deadline will require a manual review. These reviews must be submitted by March 25, 2025.
No new applicants will be approved after March 31, 2024.
Would It Be Better To Allow Canadians To Have 30-Year Amortizations?
Some argue that instead of the FTHBI, the government should permit mortgages to be amortized over 30 years. In Canada, the prevalence of 30-year mortgages is limited due to regulations on mortgage default insurance.
Right now, the Canada Mortgage and Housing Corporation (CMHC) only insures mortgages with a maximum 25-year amortization period. However, those opting out of mortgage default insurance by making a minimum 20% down payment can secure a mortgage with an amortization period exceeding 30 years with certain banks.
Choosing a 30-year mortgage has advantages like increased borrowing power, lower monthly payments, and flexibility in payment adjustments. Still, it’s crucial to recognize that while a 30-year mortgage offers more flexibility and reduced monthly payments, it also means higher overall interest payments over the loan’s lifespan. Prospective borrowers should thoroughly evaluate their current and future financial situations before opting for an extended amortization period.
Other Programs Available To Help Homeowners
While the FTHBI may have been discontinued, there are other programs offered by the federal and provincial governments to help make homeownership more attainable.
First Home Savings Account (FHSA)
The First Home Savings Account (FHSA) is a registered plan aimed at assisting first-time homebuyers in saving for a qualifying home without incurring taxes on contributions (up to certain limits). The account not only allows you to earn tax-free interest but contributions made to the account can be used to reduce your taxable income. The definition of a qualifying first home may vary, and individuals should refer to the specific regulations and guidelines governing the FHSA.
When you open a FHSA, you can contribute up to $8,000 annually, with a lifetime limit of $40,000. It’s important to note that if you don’t contribute the full $8,000 in a given year, you can’t carry forward the unused amount indefinitely. Contribution room for the previous year can only be carried forward for one year. After that, any remaining contribution room for past years is forfeited.
First-Time Home Buyers’ Tax Credit (HBTC)
The First-Time Home Buyers’ Tax Credit (HBTC) in Canada allows first-time buyers to claim up to $10,000, resulting in a maximum tax credit of $1,500. Eligibility extends beyond those buying for the first time, including individuals eligible for the disability tax credit.
To qualify for the HBTC, you need to meet certain conditions. These conditions involve buying a qualifying home and not living in another property owned by you, your spouse, or common-law partner in the year of purchase or the four years before—unless the claimant has a disability. It’s essential to note that only one of the spouses or common-law partners needs to meet both conditions to be eligible for claiming this amount.
Home Buyers’ Plan (HBP)
The Home Buyers’ Plan (HBP) allows you to withdraw from your registered retirement savings plans (RRSPs) to buy or build a qualifying home, with the option to repay within 15 years. You can make withdrawals from multiple RRSPs as long as you’re the main account holder for each. Additionally, there is no tax withheld on amounts up to $60,000.
To qualify, specific conditions must be met, including being a first-time homebuyer, having a written agreement for the home, and intending to occupy it within a year. Eligibility is also extended in special circumstances, like for individuals with disabilities, separated spouses, and those with restrictions on withdrawal amounts and RRSP types.
Conclusion
The discontinuation of the First-Time Home Buyer Incentive raises questions about the evolving landscape of government housing policies and the challenges faced by first-time homebuyers. While the initiative aimed to assist individuals in entering the housing market, its end prompts a look at its effectiveness and the broader economic factors influencing government assistance and accessibility of the housing market.
