The Federal Liberal government tabled their fourth and final pre-election budget yesterday – titled Investing in the Middle Class, the spending plan continues with the theme of stimulus aimed at the middle working class while carrying a deficit, expected to grow to $16.8 billion over the next fiscal year.
The highlights include funding for new skills training programs, as well as financial support for seniors and indigenous communities. It also includes a couple of notable changes for first-time home buyers, to help ease their entry into the housing market.
There had been considerable pressure on the federal government to take action to improve affordability for homes for sale for this buyer segment, arguably the hardest hit by a combination of rising interest rates as well as a newly introduced mortgage stress test, over the last year.
In the months leading up to the budget announcement, the real estate industry had called on the feds to eradicate or reduce the stress test, or to extend the maximum amortization period to 30 years for first-time buyers. As well, a recent national survey found Canadians wanted a greater payout than the $750 they currently receive from the First Time Home Buyers’ Tax Credit.
Government to Share First-Time Buyer Mortgage Burden
However, the government has opted for two different approaches, to be implemented over the coming year:
- An expansion of the maximum amount of RRSP funds first-time buyers can access under the Home Buyers’ Plan (HBP), from $25,000 to $35,000, or $70,000 between couples buying together.
- A brand-new $1.25-billion mortgage equity sharing program called the First Time Home Buyer Incentive, which will help offset mortgage costs for those entering the market for the first time.
How Will the First Time Home Buyer Incentive Work?
Under this new initiative, the government will provide first-time buyers with interest-free mortgage loans, up to 10% for new builds and 5% for existing housing stock, via the Canada Mortgage and Housing Corporation (CMHC). The CMHC then retains the equity percentage in the home until the loan needs to be paid back, either when the home is sold or the mortgage matures.
To qualify, buyers must be first timers and have a combined household income of $120,000 or less – an amount that is still inclusive of those trying to purchase a home in one of Canada’s larger urban centres, who may earn a higher wage but still face a steep income gap compared to local real estate prices. However, they must have a minimum down payment (at least 5%) for an insured mortgage, and the mortgage value cannot exceed four times their household income – which, with a cap of $480,000, may still fall short in markets like Toronto and Vancouver where home values outpace wages by considerably more.
While the new initiative, which will go into effect this autumn, doesn’t reduce the tougher qualification hurdles borrowers must satisfy, having a smaller mortgage amount up front will effectively shrink monthly payments, which will make it easier to pass the stress test.
For example, Finance Minister Bill Morneau said that on a $400,000 home with 10% equity sharing, the Incentive would reduce monthly payments by $225 per month, or $2,700 per year. It is anticipated 100,000 first-time buyers will benefit from the Incentive.
“That’s real help for people who want to own their own home. For young people. For families. For Canadians who need just that little extra help to make their dream of owning a home a reality,” Morneau stated in his speech to the Speaker of the House in the Budget’s unveiling.
The Canadian Real Estate Association has also spoken in favour of the new measure, with President Barb Sukkau stating, “Millennials are passionate about owning their home, but many are worried they will never be able to because of higher home prices and tougher mortgage qualification rules. REALTORS have been advocating for the modernization of the HBP and are pleased to see it addressed in Budget 2019. The measures announced today will help today’s millennials in a tangible way, while also addressing some longer-term concerns related to housing supply and sustainability.”
Other housing-related measures included in the Budget are:
- A Rental Construction Financing Initiative that would help build 42,500 new housing units across Canada, with a particular focus in areas of low rental supply. An additional $10 billion in financing will be made available over nine years, extending the program until 2027–28.
- A new Housing Supply Challenge that will invite communities and other groups to propose initiatives that break down barriers limiting new housing. It will run through the Impact Canada Initiative, with funding of $300 million.
- An Expert Panel on the Future of Housing Supply and Affordability. Jointly established between the federal government and the provincial British Columbia government, it will involve CMHC investing $4 million over two years to support the Panel’s work, and $5 million over two years for state-of-the-art housing supply modelling and related data collection in order to make better supply policy decisions.
- New efforts to counter money laundering in the housing market, including CRA audit teams to monitor transactions, as well as $1 million in funding for StatsCanada to conduct a further data needs assessment.
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