Last week Ottawa cancelled the complex and illogical First-Time Home Buyer Incentive. The federal program was riddled with flaws and it not only didn’t help, but it actually left Canadians who enrolled in a worse long-term financial position.
The intention behind the incentive was worthy: to lower the size of the mortgage and monthly mortgage payments for first-time home buyers. The period immediately after buying a first home is often the most financially strained point in people’s lives, so reducing minimum monthly mortgage payments would be a huge help.
But there always was and remains a simpler way of doing just that. Even better, this easier way would help young buyers who need it most – those not getting financial help from their families.
‘It will not be missed:’ Ottawa cancels first-time homebuyer incentive
Under the incentive program, the amount the home buyer effectively “borrowed” from the government had to be paid back, with interest, set at an unknown market rate, that would likely be higher than a mortgage rate. This means that the amount owed to the government would grow year over year until the home was sold or at 25 years, whichever came first.
The result? A loan with an unknown rate, an infinite amortization, and a balloon-style payment, due all at once. If you still owned the home 25 years later, the government would come knocking to collect an amount many multiples higher than what you originally borrowed.
Here’s a better idea, one that mortgage experts have been calling on for years. Under current rules, home buyers with less than 20 per cent saved for a down payment can amortize their mortgage over a maximum of 25 years, while those with 20 per cent or more are able to amortize their mortgages over 30 years.
With the stroke of a pen, the government could and should level the playing field and allow all first-time home buyers to amortize their mortgage over 30 years, assuming they otherwise qualify. In my experience, most first-time home buyers who have 20 per cent or more in down payment funds have been gifted money from family members.
Young Canadians, who have secured good jobs and worked hard but who do not come from wealth, will rarely have such a large amount saved, especially if they are buying in one of the big cities. For most young adults, just paying off their student debt is an admirable achievement. Canadians believe our country offers equal opportunity to success regardless of background, and changing this rule would help give those from modest backgrounds the ability to enter the housing market.
Here’s an example: Cindy is looking to purchase her first home in Toronto. She finds a condominium that costs $600,000. Cindy has managed to save $60,000 toward a down payment, but she is fortunate – her parents have agreed to gift her an equal amount, which means Cindy now has $120,000 or 20 per cent for a down payment. Thanks to the help from her parents, Cindy is able to amortize her mortgage over 30 years, making her payment $2,559 monthly, based on a five-year fixed rate of 4.99 per cent.
Now let’s suppose Cindy comes from a different family that is not able to give her money for a down payment. In this case the $60,000 she has saved is only a 10-per-cent down payment, which forces Cindy to amortize her mortgage over a maximum of 25 years. The shorter amortization, plus the higher mortgage amount and Canada Mortgage and Housing Corp. insurance fees (mandatory for down payments of less than 20 per cent), causes Cindy’s payment to jump to $3,235. However, if she were allowed to amortize her same higher mortgage amount over 30 years, her payment comes out to $2,968. While it is not as low as if she had the gifted funds, it is still saves her $268 a month versus the payment based on 25 years.
It is important to note that the initial amortization simply sets the minimum monthly payment. All mortgages in Canada allow some prepayment, so most Canadians who start with a 30-year amortization pay it off sooner, once their financial position allows bigger monthly payments.
Allowing a 30-year amortization for first-time home buyers with less than 20 per cent down is the right policy to lower monthly payments for new homeowners, helping them achieve their home ownership goals.
The government has been reluctant to make this change because it sees longer amortizations as risky. What is a real head scratcher is that an additional five years is seen as too risky but a program in which the loan actually grows over time, creating an infinite amortization scenario, is not.
With the First-Time Home Buyer Incentive now scrapped, hopefully the government will look seriously at making this change. The 30-year amortization for first-time home buyers with less than 20 per cent down is a simple, sound policy that will help young Canadians struggling to buy their first home cross the threshold – especially those from modest backgrounds.
James Laird is the co-founder of Ratehub.ca and president of CanWise Financial mortgage lender.
