Do You Want Ottawa’s First Time Home Buyer Incentive?
It’s marketed as a way to help you pay for your first mortgage. But it has long-term downsides, and may not be right for you.
Does it help me buy a home?No. This incentive doesn’t help with your down payment. This only helps pay for the mortgage you already qualify for, and will not help you get a more expensive home.
You must already qualify for a mortgage, have a down payment, etc.
What do I get?In a nutshell, this is an interest free loan that you put toward your monthly mortgage payments. You get 5% of the purchase price for an existing home, or 10% if it’s a new build.
Say you purchase an older home for $373,000, which is the average price for a first-time home buyer in Canada. You’d get 5% from the FTHBI, which is $18,650.
But you don’t get cash in the bank. You only get a small fraction of the incentive to put towards your monthly mortgage payments. This is only around one or two hundred dollars.
What do I give back?The same percentage of your resale price.
This sounds reasonable, but keep in mind: in ten years your home will have gone up in value significantly.
This small percentage is a huge amount of money to pay back in ten years.
How much is 5% in ten years?It’s reasonable to expect house prices to fluctuate at the same rate they have so far this century. Resale prices in Canada rise 6.5% per year on average, according to the Teranet National Bank House Price Index.
Ten years from now, your $373,000 home could sell for $700,000. Immediately upon selling, you must pay back 5% of that. You’d owe $35,000.
You got: $18,650
You owe: $35,000
This incentive would cost you over $16,000. That’s like paying almost 9% interest every year, for ten years, on a loan that you never pay down.
That’s probably worse than your mortgage.
A closer look at the numbersHere’s how your home’s value could appreciate, if prices continue to fluctuate the way they have since 1999:
|Year||Start Value||Appreciation||Year-End Value|
Home resale prices go up that much?Yes. 6.5% per year has been the average for the last twenty years.
If you think that’s too optimistic, keep in mind that this is the average over a period that includes once-in-a-century market disrupting events, such as 9/11, the 2008 financial crisis, and the Great Recession.
According to the Canadian Real Estate Association (CREA), house prices rose by 38.12% over the last 5 years. This means house prices rose 7.6% every year.
So actually, 6.5% is pessimistic compared to CREA’s recorded 7.6% rise in house prices.
The incentive is no better than maxing out a line of credit, and paying nothing into it except for interest. And doing that for ten years.
Don’t buy an investment propertyIf your intention is to renovate and boost the house’s value, or you’re buying an undervalued home, or buying in a neighbourhood on the rise, you’ll be paying back more than you think.
If every dollar you spend increases your home’s value by $2, your paying back 5% or 10% of the $2 when you sell. That could be like paying $0.20 for every dollar you spend on renovations.
For this relatively small loan, giving away any percent of your resale price could be equal to paying credit card level interest rates. You’re paying too much for how little you’re getting.
How it can be good for youThis can be a reasonable deal if house resale prices only go up half of what they have, and if that unusual slowdown continued every year for ten years. Say resale prices only go up 3% per year. Then you’d sell your $373,000 home for $501,281.
You got: $18,650
You owe: $25,064
Even in that scenario, you’re still paying Ottawa more than you’re getting. But it would be like taking out a small loan and paying 3.5% interest.
But many of you can get a better rate from another mortgage. And that would be less of a hassle.
Does Ottawa really share your loss?Yes, but it’s not as good a deal as you’d think.
The largest monthly drop in resale value in the last twenty years was -6.52%. But say your home loses a total value of 10% upon selling. Here’s that breakdown:
You got: $18,650 (5% of buy price: $373,000)
You owe: $16,785 (5% of sell price: $335,700)
You lost almost $40,000, and you still owe Ottawa over $16,000. They’re not getting back everything they gave you, but the entire incentive nets you less than $2,000 overall.
After losing almost $40,000, is $2,000 really that helpful?
Don’t forget to pay the professionalsDetermining the capital gain or loss on your home is something you probably aren’t comfortable doing yourself. To determine all this, you need professionals to crunch the numbers, file paper work, register applications, etc.
And they need to be paid.
If you lost a lot of value in your home, you might only get $2,000 back from the First Time Home Buyer Incentive. After paying all the pros, your little sympathy earnings from Ottawa will end up looking smaller and smaller.
These incentives are betterThere are far better incentives for first-time home buyers.
RRSP Home Buyers’ Plan (HBP)You can borrow up to $25,000 tax-free from your RRSP to fund your down payment. The money must be in your RRSP at least 90 days before the purchase of your house. Click here for more info.
Land Transfer Tax RebateYou can get a rebate on some of the land transfer tax you pay in Ontario. Click here for more info.
First-Time Home Buyer’s Tax Credit$750 credit to help offset inspections, legal fees, and other closing costs. Click here for more info.
GST/HST New Housing RebateA tax rebate for Canadians who buy a newly built home, substantially renovate an existing home, or rebuild a home that was destroyed in a fire. In all three cases, the taxes you pay will be rebated if you qualify. Click here for more info.
I’ll help you navigate all thisIt’s an overwhelming amount of things to keep in mind. The numbers can be too much — I get it!
I’m here to help. I’ll always steer you towards the best plans, and help you avoid potential pitfalls.