A Guide to the First Time Homebuyer Program in Canada

A Guide to the First Time Homebuyer Program in Canada

For many Canadians, the First Time Homebuyer Program remains an essential tool. With housing prices rising nationwide, aspiring homeowners encounter many barriers, including expensive down payment.

This program can help those who are ready to make the move from renting to owning a home realize their ambition.

By reducing the minimum down payment by 5% to 10%, the program enables new buyers to get into a home sooner. The reduced down payment is possible because of CMHC home loan insurance, which protects lenders against default.

Beyond the reduced minimum down payment, the program offers access to CMHC-insured mortgages with more favourable interest rates and flexible terms.

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While eligibility requirements must be met, the program provides a viable avenue for first time buyers to enter the market and start building equity. Learn more about this program, its benefits, and how to apply in this comprehensive guide.

What is the first time homebuyer program?

The First Time Homebuyer Program was launched in 2019 by the Canada Mortgage and Housing Corporation (CMHC).

It provides financial assistance and incentives to help eligible first time buyers purchase their first home. This federal government initiative aims to make homeownership more accessible and affordable.

How does the first time homebuyer program work?

The first time Homebuyer Incentive (FTHBI) program helps eligible first time buyers by providing an interest-free shared equity loan that supplements their minimum down payment.

The program’s Incentive provides an interest-free equity loan program contributing up to 5% of an existing home’s purchase price. It also offers up to 10% for newly constructed homes.

However, it is a shared equity loan that must be fully repaid in 25 years or when the home is sold. It’s a shared equity loan because the buyer owns a percentage of the home value equal to the incentive loan.

In contrast, the government owns the remaining percentage. When the home is sold, the buyer repays the government based on the home’s appreciated percentage value, not the flat dollar amount borrowed originally.

This upfront equity supplement can help first time buyers qualify for a mortgage more quickly and get into homeownership sooner.

However, the shared equity aspect means you don’t benefit from the upside of future home price appreciation. There are also eligibility requirements like maximum income thresholds to qualify.

The program provides a balance of immediate financial help through equity loans while ensuring the government shares in upside home equity.

First time buyers should fully understand the shared equity structure and rules before utilizing the FTHBI program. When used strategically, it can improve access to homeownership.

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Who is eligible for the program?

To qualify for the Canada first time homebuyer program, applicants must meet specific eligibility criteria. Here are some of the requirements for buying a home in Canada with this program:

Age minimums

Most programs require that you are 18 years of age or older to apply for first time homebuyer benefits and incentives. This ensures participants have the legal ability to enter into mortgage contracts and home ownership.

Canadian citizenship and permanent residency

Applicants must be Canadian citizens or permanent residents to access the First Time Homebuyer Program. Non-residents and foreign buyers do not qualify.

Permanent residents must provide documentation like a PR card as proof of status. Canadians may need to show their birth certificate, passport or citizenship card.

First time homebuyer status

The applicant cannot have owned a home or land before, either solely or jointly with another person. This includes homes outside of Canada. Applicants must be completely new to homeownership. Pre-approvals and mortgage commitments will verify first time homebuyer status.

Income thresholds

There are no set minimum income requirements, but applicants must demonstrate they can afford mortgage payments, taxes, heating and home maintenance.

As a rule, gross household income should not exceed $120,000 annually. However, income levels are considered along with other factors like location, property type, down payment and credit scores.

Occupying the home

To qualify, applicants must intend to make the purchased home their primary residence and live in it full-time. It cannot be used as an income property or rented out. Applicants must sign an affidavit confirming they plan to occupy the home.

Minimum down payment

The program requires a minimum down payment of 5% of the purchase price. Applicants must prove they can provide these funds from verifiable sources like savings, RRSPs, gifts or lender incentives.

Borrow limits

The total amount you can borrow through your mortgage and the program cannot exceed 4 times your qualifying income. This limit is increased to 4.5 times your income if the home is in Toronto, Victoria or Vancouver, where housing costs are higher.

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Location of home

The property or home purchased must be located within Canada to qualify for first time homebuyer programs at both federal and provincial levels. Properties outside of Canada would not be eligible, even if purchased by a Canadian resident.

All provincial first time buyer programs will be limited to homes located within that province as well. Ensure the property you plan to purchase with these incentives is entirely within Canadian geographic borders.

Previous home ownership

Participants cannot have owned a home or property in the past, usually within the last 4-5 years, as mandated by most programs.

This restriction ensures that the program funds truly assist those purchasing their very first home, not those who have recently owned real estate.

Applicants will have to verify their first time buyer status by providing documentation confirming they have yet to own a home previously.

Shared home ownership

As a first time buyer, you may have additional eligibility requirements if you co-owned a house with a spouse or common-law partner.

Most programs do not want to provide funds to an applicant whose partner has recently been a homeowner, even if the applicant has yet to. You may need to prove you have been separated from any previous co-homeowner for a mandated period.

Furthermore, you may need to have your co-homeowner also apply as a first time buyer. The intention is to assist buyers with no previous experience owning a home.

Documentation needed

Applicants should be prepared to provide identity confirmation, proof of income and down payment funds.

Needed documents may include ID, tax returns, pay stubs, bank statements, investment records and gift letters. Working with a mortgage broker or advisor can help assemble documentation.

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How do I apply for the first time homebuyer program?

The application process for the First Time Homebuyer Program involves a few key steps: submit paperwork, get approved for financing, and finalize the home purchase.

  • Determine Eligibility: The first step is to confirm you meet all the eligibility requirements, including being a first time homebuyer, maintaining a minimum down payment, and meeting income thresholds. Review the full criteria to ensure you qualify before proceeding.
  • Visit FTHBI Website: Go to the First Time Homebuyer Incentive website and complete the application form to participate in the program. This includes submitting the SEM Information Package and SEM Attestation and Consent Form with personal details.
  • Get Pre-Approved: Work with a lender to get pre-approved for a mortgage before house hunting. The pre-approval letter confirms the maximum mortgage you qualify for, so you know your price range. Having this locked in makes for a smoother home-buying process.
  • Connect with a Real Estate Agent: Your real estate agent will help you find listings in your price range that suit your needs. Narrow down your choices and make an offer on the home you want to purchase. Your agent facilitates negotiations and paperwork.
  • Submit Lender Application: After accepting your offer, your lender will submit the First Time Homebuyer application and documentation to CMHC for approval. This includes identity verification, income docs, down payment info, and other required materials.
  • CMHC Provides Mortgage Insurance: CMHC will review your application and issue mortgage loan insurance if you meet the qualifications. This insurer allows the lender to approve a higher loan-to-value mortgage for first time buyers.
  • Close on the Property: With CMHC mortgage insurance approved, you can move forward with the closing process to take ownership. This involves finalizing legal documentation, transferring funds, and getting keys!

The application steps provide structure as you move from confirming eligibility through closing. With all the required documents and financing, you’ll be poised to take advantage of the program’s benefits when purchasing your first home.

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What are the benefits of the program?

The First Time Homebuyer Program provides several valuable benefits that make purchasing a first home more affordable and accessible. Here are some of these benefits:

Reduced minimum down payment

The most significant benefit is reducing the minimum down payment from 20% to between 5% and 10% for first time buyers.

On a $300,000 home purchase, a 5% down payment would be just $15,000 versus $60,000 with a 20% down payment. This reduction makes it feasible for more new buyers to come up with the down payment through their savings, RRSPs or other sources.

Access to CMHC insured mortgages

Since first time buyers have a lower down payment, their mortgages must be insured against default through the Canada Mortgage and Housing Corporation. CMHC insurance protects the lender, not the buyer.

However, CMHC insured mortgages offer lower interest rates, flexible qualification standards, and 120-day rate locks. First time buyers get exclusive access to these insured low-ratio mortgages.

Lower monthly payments

Between the smaller down payment and lower interest rates, monthly mortgage payments are reduced significantly for first time homebuyers using the program compared to conventional mortgages.

This improves affordability and cash flow, allowing buyers to manage ownership costs comfortably.

No mortgage loan insurance premium

While lenders need CMHC insurance, first time buyers get the mortgage loan insurance premium waived. This saving of 1.5% – 4% of the loan value adds up. Buyers avoid this extra expense and can put those savings toward other ownership costs.

Compatibility with other programs

The First Time Homebuyer Program can be used along with programs like the Home Buyer’s Plan. This allows buyers to leverage tax-free RRSP withdrawals of up to $35,000 to top up their down payment.

Combining programs maximizes affordability and the benefits available to new homebuyers.

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Pros and cons of first time homebuyer program

There are clear benefits regarding upfront affordability, but limitations like price caps and equity-sharing arrangements are tradeoffs. Let’s weigh the pros and cons in this section.

Pros of first time homebuyer program

  • Lower Down Payment and Monthly Costs: By reducing the down payment to 5-10% instead of 20%, monthly mortgage costs are significantly lower for buyers using the program. This improves affordability and cash flow during the critical early years of ownership.
  • Makes Homeownership Attainable: For many aspiring first time buyers, coming up with a complete 20% down payment is extremely difficult. The lower down payment requirement makes home buying attainable for more middle-class Canadians.
  • Builds Equity and Wealth: Despite the smaller down payment, buyers can still build equity through principal paydown and potential appreciation over time. Homeownership is a crucial way to build wealth.
  • Lender Protection: The lender receives default insurance from CMHC, encouraging them to offer better rates to first time buyers despite the higher loan-to-value ratio.
  • Interest-Free Incentive: The First Time Homebuyer Incentive loan is interest-free, reducing overall borrowing costs. Repayment is also deferred until the sale or 25 years.

Cons of first time homebuyer program

  • Strict Eligibility Requirements: Buyers must thoroughly prove they are first timers, have adequate income, and meet other requirements. This isn’t for everyone.
  • Home Price Limits: The program limits the purchase price of the home based on your region. Those looking for pricier properties may exceed caps.
  • Early Repayment Rules: You may pay back more than borrowed if you sell before 25 years due to the equity stake rules. This reduces flexibility.
  • CMHC Premiums: While lenders receive default protection, buyers pay fees to CMHC for this insurance, which adds to costs.

Other federal first time homebuyer programs

The federal government offers programs beyond the First Time Homebuyer Program to help buyers nationwide. These include:

The home buyers’ amount

This is a federal non-refundable tax credit worth up to $1,500 that first time homebuyers can claim on their income tax return. To be eligible, you must meet criteria like not having lived in an owned home in the last 4 years.

When you claim the credit, you receive tax savings of up to $750. This money can be put towards closing costs, legal fees, moving expenses and other costs associated with purchasing your first home.

It provides an extra bit of tax relief during the expensive process of buying your desired property.

GST/HST new housing rebate

First time homebuyers who buy a builder-built home under $450,000 may qualify for a GST/HST rebate. For new homes between $450,000 and $500,000, a partial rebate is still available. This rebate returns some of the GST or HST tax paid to provide savings you can apply to other ownership costs.

Submitting the rebate is straightforward when filing your taxes after taking possession of your new home.

Home buyer’s plan

This plan allows first time buyers to withdraw up to $35,000 tax-free from their Registered Retirement Savings Plan for a down payment.

You have to put this short-term loan back into your RRSP within 15 years. If you buy with an eligible partner, you can withdraw up to $70,000 combined.

First time homebuyer’s tax credit

This federal tax credit lets first time buyers claim $5,000 on their tax return after purchasing a home, which equates to a $750 credit.

To qualify, you must have lived in something other than an owned home within the last 4 years. Credit can help offset typical closing costs during the home-buying process.

First home savings account

Canadians can use this savings account to accumulate up to $8,000 tax-free, up to $40,000.

Like a Registered Retirement Savings Plan, funds contributed grow tax-free until withdrawn to purchase a first home. This incentivizes disciplined saving in preparation for that major purchase through tax-preferred treatment.

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Provincial programs

In addition to the federal program, many provinces offer their regional first time homebuyer down payment assistance programs. Here are some provincial options you should know about:

British Columbia

The BC First Time Home Buyer Rebate provides a full rebate of the land transfer tax for homes under $500,000 and a partial rebate for homes between $500,000-$525,000.

However, with average home prices over $990,000 province-wide, many first timers may exceed the cap. If you can purchase below $500,000, the rebate saves significantly on transfer taxes.

Alberta

Land title transfer taxes in Alberta are very low compared to provinces like Ontario and BC, with maximum rates of only 0.064%.

On a $500,000 home with a $400,000 mortgage, total title transfer taxes would be just $320. This saves buyers thousands of dollars compared to other provinces.

Manitoba

The land transfer tax in Manitoba caps out at 2% of the purchase price, lower than provinces like Ontario or BC, where it can reach 5%. On a $300,000 Winnipeg home, the land transfer tax would be $3,720 after a $70 registration fee, providing savings.

New Brunswick

The NB land transfer tax is a flat 1% of the purchase price or assessed value, whichever is higher. This is below rates in provinces like BC or Ontario, where taxes exceed 2% on higher-priced homes. It keeps costs lower for first time buyers.

Nova Scotia

Municipal land title tax rates in NS are 1.5%, below provinces like Ontario or BC. On a $300,000 Halifax home, the rate would equal $4,500 based on the 1.5% municipal rate. Though not the lowest, it remains under 2%.

Ontario

ON land transfer tax hits 2.5% on more expensive homes, among the highest provincial rates. But ON also offers rebates up to $4,000 for first timers. In Toronto, there is an additional municipal land transfer tax with a similar maximum rebate.

PEI

Has a total land transfer tax exemption for homes under $200,000 and a rebate for homes up to $300,000, as long as it’s your primary residence. With average prices over $330,000, some buyers won’t benefit, but it helps lower-priced homes.

Quebec

QC land transfer tax ranges from 0.5% to 2.5%, depending on price and region. While not the lowest, it remains under Ontario’s rates. QC also provides a provincial tax credit of up to $750 to help offset costs.

Saskatchewan

The land title transfer fee in SK is just 0.3% of the purchase price, which is extremely low compared to all other provinces. On a $300,000 home, this equals just $900, providing huge savings for first time buyers.

Conclusion

The First Time Homebuyer Program remains an invaluable tool for aspiring homeowners in Canada. By reducing down payments and offering favourable financing, the program bridges the affordability gap for middle-class buyers.

First timer can access layered benefits tailored to their region and situation, combined with complementary provincial incentives.

While eligibility rules must be met, the program provides critical assistance at a pivotal life stage. For Canadians ready to shift from renting to building lasting equity, this program offers a proven pathway to make homeownership possible.

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FAQs about first time homebuyer program

Is the first time homebuyer program still in effect?

Yes, the First Time Homebuyer Program is still active and available nationwide to assist eligible first time buyers with purchasing their first home. The program has been in place since 2019 and provides benefits like reduced minimum down payments and insured financing.

What does the first time homebuyers program do?

The key benefits of the First Time Homebuyer Program include reducing the minimum down payment. It also includes securing insured financing at favourable rates, waiving mortgage loan insurance premiums, and compatibility with other federal and provincial programs. This makes home-buying more affordable.

How much do I need for a down payment as a first time home buyer?

As a first time buyer using the program, you only need a minimum down payment of 5-10% of the purchase price rather than 20%. Exact requirements vary by factors like the type of property.

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November 14, 2023
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