The federal government says thousands of Toronto-area families could get a hand onto the property ladder under a new shared-equity mortgage program even though it limits the maximum eligible home value to $560,000 — a tough price point to hit in the Toronto region. Mortgage professionals are having a mixed reaction to the program’s value, however.
The First-Time Home Buyer Incentive can lower monthly mortgage payments on a $500,000 home by as much as $300 a month, said Minister of Families, Children and Social Development Jean-Yves Duclos in Mississauga on Monday. Starting Sept. 2, first-time buyers with a minimum down payment for an insured mortgage and a household income of $120,000 or less can qualify for an incentive of 5 per cent on a resale home or up to 10 per cent on a new construction home.
The loans are interest free and can be repaid any time within 25 years or upon the sale of the home. Repayment must be in a single lump sum.
“Even here in Mississauga and Toronto, first-time homebuyers will have many starter home options. The savings will be significant,” Duclos told a press conference at a development site surrounded by the condos of Mississauga’s rising downtown.
The average price of a resale condo in the GTA was $590,876 in May, according to the Toronto Real Estate Board. New construction condos sold for $758,585 on average in April, according to the Building Industry and Land Development Association.
Mortgage professionals, however, said the program’s limitations mean it will have little appeal for most prospective home buyers.
Mortgage broker Rob McLister, founder of Ratespy.com, said he is struggling to figure out who is the ideal user of the program, because it allows a lower maximum mortgage level than if a borrower were to simply apply for a standard mortgage.
McLister said he has run many scenarios and cannot find one in which a home buyer would qualify for a bigger mortgage using this program. And given the need to share a portion of any gain in value with the government, he said there are major disincentives to using the program.
“Basically the government is building a bridge to nowhere for first-time buyers,” he said. “I don’t think anyone needs it and very few will want it. To me, this is vote candy. … Basically they are doing a little but trying to appear like they are doing a lot.”
The program continues to have the support of the Canadian Real Estate Association, chief executive Michael Bourque said. In an interview, he said his group appreciates the additional details about how the incentive will be paid back. He said those details suggest that homeowners would be wise to pay back the benefit before making major renovations that would significantly increase the value of the property.
“We think it will help and we think that it’s a good initiative because it’s going to help people get into a home where otherwise they wouldn’t be able to,” he said.
The federal Liberal government expects the $1.25-billion shared-equity incentive funds, announced in the March budget, to help about 100,000 first-time buyers over the three-year life of the program.
By adding an additional incentive for new construction homes, the government is encouraging development and preventing the housing market from overheating in high priced markets such as Toronto, Duclos said.
“If you facilitate the purchase of new homes by young, middle-class Canadians then apartments will be in lower demand and that means the price of rental will also be kept more affordable,” he said.
A $500,000 home, with a 5 per cent down payment of $25,000 and an insured mortgage of $475,000 ($494,000 including the insurance premium), would normally cost $2,473 a month. With the addition of the incentive that payment is reduced to $2,187. That translates to a saving of $286 a month or $3,430 a year, according to the government.
Some mortgage industry representatives expressed doubt about the effectiveness of the program that limits the income qualifications of applicants and the mortgage amount to four times their household income.
CanWise Financial president James Laird said many families would qualify for a mortgage amount of 4.5 per cent to 4.7 per cent times their income outside the program.
A household with $100,000 and a 5 per cent down payment would currently qualify for a home valued at $479,888 with a $2,266 monthly payment, he said. A participant in the government program reduces the maximum amount that same consumer could pay to $404,858, he said.
Qualified buyers won’t pay interest on the government portion of the mortgage but the repayment percentage is based on the home’s value at the time. So the buyer pays more if the home’s value has appreciated, less if the value declines.
Parliamentary secretary and Toronto MP Adam Vaughan said the incentives will help buyers who earn too much to access affordable housing and those who don’t have enough to access market-priced housing.
“Buying a new home in Forest Hill — probably unlikely. Buying a new home here in Mississauga — absolutely a possibility and on transit lines that get you to jobs right across the GTA,” he said.
Duclos defended the mortgage stress test introduced in January 2018 that has been accused of lowering the buying power of some purchasers. He said the government is committed to addressing the housing affordability challenge but also making sure the market remains stable.
“We need to have a housing market that protects against the risk of downturns,” he said. “If that were to occur it would be disastrous to every Canadian, to every community and to businesses across Canada,” he said.
Under the guidelines implemented by the Office of the Superintendent of Financial Institutions, home buyers must qualify for a mortgage at 2 per cent higher than the rate being offered by a regulated lender, including Canada’s big banks, or 2 percentage points above the Bank of Canada five-year rate.
In its last budget, the Liberal government also raised the amount that first-time home buyers can borrow from their Registered Retirement Savings Plans to $35,000 from $25,000.
A $100 million Shared Equity Mortgage Provider fund will also encourage the affordable ownership by non-profit developers such as Toronto’s Options for Homes, Vaughan said.
“You can cluster this mortgage support in that sector and therefore purpose build low-income affordable housing programs like the one we see at Lawrence and Bathurst that created 600 homes that were all in the $275,000 to $325,000 (price range) for families,” he said.