Shared Equity Mortgage Pros and Cons

Shared Equity Mortgage

The First-Time Home Buyer Incentive will be ready to receive applications on September 2, 2019 (barring any unforeseen circumstances). The first closing will take effect on November 1, 2019. If you are considering using this program, make sure you learn the pros and cons that come with the shared equity mortgage.

PROS OF FIRST-TIME HOME BUYER INCENTIVE

• The program will help eligible first-time home buyers who have a minimum down payment for an insured mortgage with CMHC, Genworth or Canada Guaranty, to finance a portion of their home purchase through a shared equity mortgage with the Government of Canada.

• The government says the incentive will reduce monthly mortgage payments for first-time buyers without increasing their down payment, reducing monthly mortgage carrying costs.

• Default insurance premiums will be reduced because of the larger down payment.

• As you can pay off the shared equity mortgage in full at any time, if you were able to do so during a down market, you would be paying less than you originally borrowed.

• Qualification for a first-time home buyer is standard — at least one person on title must have never owned a home. Home buyers may also qualify if they are divorced and applying on their own for the first time, or if they haven’t owned a home for four years.

• If first-time home buyers are enticed to buy before the program is capped at $1.25 billion over three years, it may result in home prices increasing and give the housing market a boost.

• It will have more of an effect on markets like Edmonton, where the average home price is still attainable for first-time buyers with an annual income under $120,000.

 

CONS OF FIRST-TIME HOME BUYER INCENTIVE

• If the value of the property increases, so does the value of the governments share. Any improvements that increase the property’s value are included in the government’s portion.

• You must repay the incentive if the property is sold. If the value depreciates, you are still responsible for repaying the percentage owed to the government.

• Lawyer fees will increase; the incentive would be a second mortgage on the title of the property and paid in full by year 25.

• Having a sharp income cutoff means that home buyers with incomes just under $120,000 would have a significant advantage over those just above the threshold, who would not qualify for the incentive.

• The incentive is meant for mortgages greater than 80% of the home value. The incentive is not for first-time home buyers who have a down payment of 20% or more.

• The amount of the insured mortgage plus the incentive would be capped at four times the home buyers’ annual incomes, maximum $480,000. The maximum home value under the plan would be approx. $500,000-$550,000, depending on the size of down payment.

• The new program would force borrowers to settle for cheaper homes (4X their income) than they would otherwise be able to afford. Those not participating in the program can qualify for a mortgage that is 4.5 to 4.7 times their income, assuming their TDS and GDS are within guidelines.

 

Speak with a mortgage broker to see if this program fits with your financial goals. To learn more details about the incentive when they are made available, click here.

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