Budget 2019: Housing strategies
Budget 2019 was heavy on housing strategies. Among other things, it claims to modernize the Home Buyer’s Plan, which went 10 years without being increased or even adjusted for inflation. Budget 2019 also proposes to introduce the First-Time Home Buyer Incentive, and to start a $100 million fund for third-parties providing shared equity mortgages. The much discussed stress test for insured mortgages hasn’t gone anywhere.
Shared Equity Mortgage Fund
Our non-profit readers may be familiar with the shared equity mortgages. Many Canadian non-profits provide shared equity mortgages to lower income individuals and families to help them afford their mortgage payments. Shared equity mortgages enable qualified home buyers to reduce the amount of money required from a mortgage without increasing (or decreasing) the amount they must save for a down payment. Because the non-profit or other third party chips in a percentage of the mortgage, the home buyer’s monthly mortgage payments are reduced. Depending on the price the borrower sells the house for later, it may even be a good deal for the non-profit.
Budget 2019 proposes to establish a fund to assist providers of shared equity mortgages, helping eligible Canadians achieve affordable homeownership. The fund, to be administered by the Canada Mortgage and Housing Corporation (CMHC), would provide up to $100 million in lending to shared equity mortgage providers over a five-year period, starting in 2019–20. The programs are currently expected to be operational by September 2019.
The intention here is to help existing shared equity mortgage providers scale-up their business and encourage new players to enter the market. Our office anticipates receiving a few calls in the upcoming year from individuals interested in starting up new not-for-profits to provide shared equity mortgages in their area.
The First-Time Home Buyer Incentive
In addition to the fund, the Liberal Government has proposed the First-Time Home Buyer Incentive, which would to directly offer the same kind of shared equity mortgages described above. The Incentive would be offered to qualifying Canadians through the CMHC. The qualifications for participating in the incentive are as follows:
- Participants must meet all the same qualifications as participants in the Home Buying Plan;
- Their household income must be under $120,000 per year;
- The mortgage must be insured
- The insured mortgage and the Incentive amount cannot be greater than four times the participants’ annual household incomes.
Here’s an example of how it would work:
… if a borrower purchases a $400,000 home with a 5 per cent down payment and a 5 per cent CMHC shared equity mortgage ($20,000), the size of the borrower’s insured mortgage would be reduced from $380,000 to $360,000…
In this example, the home buyer can already afford the minimum 5% down payment. The 5% buy-in from the CMHC lowers the borrower’s monthly mortgage bill. The CMHC would be repaid their 5 or 10% share later, when the house is sold. Given the state of the Canadian housing market, now is a reasonable time to introduce an incentive like this. We certainly prefer that our tax dollars be invested in Canadian housing at a time when housing prices are at a ten year low in certain cities, rather than starting the incentive at the peak.
Under the proposed Incentive, the CMHC would provide a 5 or 10% incentive, depending on the kind of home. The 10% shared equity mortgage would only be available for a newly constructed home, and the 5% shared equity mortgage would be available for an existing home. The intention behind this distinction is to encourage the construction of new housing.
The up-front cost of this equity sharing would be to the tune of up to $1.25 billion over the next three years.
Modernizing the Home Buyers’ Plan
The Home Buyers’ Plan (HBP) allows “first-time” home buyers to withdraw up to $25,000 from their Registered Retirement Savings Plan (RRSP) to purchase or build a home, without having to pay tax on the withdrawal. The withdrawal is not taxed, so long as it is used correctly and repaid on time over the course of 15 years.
Budget 2019 proposes to increase the Home Buyers’ Plan withdrawal limit from $25,000 to $35,000. This would be the first time the limit has been raised since 2009. As the limit is per person, a couple purchasing house together would both be able to withdraw $35,000 from their RRSPs to apply a combined sum of $70,000 towards a home.
Budget 2019 also proposes that individuals that experience the breakdown of a marriage or common-law partnership be permitted to participate in the Home Buyers’ Plan, even if they do not meet the first-time home buyer requirement.