The 2019 budget includes a new solution to the Canadian housing market collapse and housing affordability crisis – shared equity mortgages or SEM. This would be through the First Time Home Buyers Initiative or FTHBI.
The 2019 budget doesn’t include a lot of details for the FTHBI. Instead, it proposes a concept that has been tried in the U.S., the U.K. and Australia to support home buyers who are barely able to afford homes while balancing risk with reward. Yet we can analyze those programs to get a better understanding of how it would be set up here and how it would affect Grande Prairie home buyers.
In a shared equity mortgage, the lender has an equity stake in the property the person buys with the mortgage. That stake is up to 10% of the value of the property for new construction and only 5% for existing homes. If a home buyer buys a $400,000 home with $20,000 or 5% down, a conventional mortgage would be for $380,000. With an SEM, the CMHC could have an equity stake of up to $40,000 if it is new construction. That equity stake would have to be repaid when the person sells the home. It isn’t clear from the proposal if the home buyer has to pay interest on that equity stake, though they’d have to pay interest on the mortgage. The equity stake, though, reduces the value of the mortgage. In our $400,000 house with a 5% down payment, the loan would actually be for $340,000, not the standard $380,000. This saves the average Grande Prairie mortgage holder $228 a month for the life of the loan. Note that a Grande Prairie mortgage customer could save that much by shopping around for a good mortgage rate or saving more down payment.
This program doesn’t just help people afford a home by reducing the mortgage payment. It also qualifies many more people for homes, because it gets around the mortgage stress test. The potential risk is that this will lead people putting just 90% to 95% down on homes to bid up the price of homes they can afford, pricing others in the same market out of affordable properties. The bidding war, however, would not go out of control, because the FTHBI program would benefit – at most – 10% of the possible home buyers throughout Canada in the market over the next three years when the funds run out as set out by the government.
The program is limited to lower income candidates. A household only qualifies if they are buying their first home. They must earn less than $120,000 per year. And they cannot buy a home that costs more than four times that annual income. This means that more people could bid up the cost of a $480,000 home, but you can’t use the program to pay for a million dollar condo in Toronto.
Another potential problem for people using the First Time Home Buyer Initiative program is what happens when they sell their home. The equity stake has to be paid off. Depending on the terms of the program, the government incentive program from CMHC could claim a share of the property’s increase in value in addition to getting their equity stake back. In the privately funded equity sharing mortgage program in the U.S., investors claimed half or more of the increase of the value of the property. However, Canada couldn’t find private investors to set up SEM, which is why the program would be run through the CMHC.
This program shows that the government understands that home buyers are only part of the housing equation. This program would increase the supply of first time home buyers, and it could increase demand enough to encourage more new home construction. It would do so without generating a wave of luxury home construction, since you cannot spend more than $480,000 on a new home with an SEM.
The CMHC is also taking a risk if it implements this program. Housing prices are starting to stall across Canada due to policies implemented to cool the overheated housing market. There is certainly a risk that the equity stake in these houses would go down in value if home prices start to fall. This could leave the CMHC with capital losses.
The FTHBI program would certainly help people who meet the income requirements and live in Grande Prairie. They could afford even an upscale home in an affordable housing market. One criticism of the program is that it doesn’t do enough to solve the housing affordability crisis for people in large cities and the uncertainty of what it will do for lower priced home due to the cap and supply and demand.
They also mentioned the First Time Home Buyer RRSP portion will go from the individual current $25,000 to an increase of $35,000.
Call your trusted mortgage brokers in Grande Prairie to discuss more about your options. We will update you again with another blog in September when the program comes out. Follow us on our business Facebook page, link below, to make sure you do not miss the next blog update once the government unrolls the program.