Read this before applying for the First-Time Home Buyer Incentive

Before you text your real estate agent and start browsing available listings, there are a few things you should know about the FTHBI. First, you’ll have to meet certain eligibility criteria. Second, the incentive is not free money, but a form of loan from the Government of Canada—which will eventually need to be paid back. 

Let’s take a look at the specifics of the FTHBI, including recent changes to the program and the potential pitfalls home buyers should be aware of.

Watch: What is the First-Time Home Buyer Incentive

Who’s eligible for the First-Time Home Buyer Incentive?

Under FTHBI rules, first-time home buyers are Canadians who have never owned a home before, previous home owners who have gone through a divorce or breakdown of a common-law partnership, and people who have not lived in a home that they owned (or that was owned by their spouse or common-law partner) for the past four years.

To be eligible for the program, you also need to meet the following criteria:

1. Your qualifying household income is less than $120,000. Qualifying income includes money earned from investments and rental income, not just your employment income.
2. You have at least the minimum down payment. The minimum down payment is 5% of the first $500,000 of the home’s purchase price, and 10% for any amount above the $500,000. However, the total amount you put down must be less than 20% of the home’s purchase price. This maximum down-payment rule also assures that the FTHBI applies only to mortgage-default-insured mortgages.
3. You are borrowing less than four times your qualifying income. Since the maximum qualifying income is $120,000, the most any eligible buyer can borrow (and still be able to apply for the incentive) is $480,000. Lower-income earners who want to apply for the incentive are limited to borrowing even less, which would be challenging considering that the average price of a home in Canada was $711,000 in May 2022, according to data from the Canadian Real Estate Association. 

For those looking to buy in Toronto, Vancouver or Victoria 

In May 2021, the federal government and the Canada Mortgage and Housing Corporation (CMHC), which administers the FTHBI program, expanded the eligibility rules for home buyers in three of the country’s most expensive markets. So, if you’re buying a home in the census metropolitan areas of Toronto, Vancouver and Victoria, you must meet these amended criteria:

1. Your qualifying household income is less than $150,000. Again, this includes annual earnings from all sources, not just employment income.
2. You have at least the minimum down payment. These requirements are the same as above.
3. You are borrowing less than 4.5 times your qualifying income. In this case, because the maximum qualifying income is $150,000, the most any eligible buyer can borrow is $675,000. This amendment raises the maximum qualifying purchase price in these cities to $722,000 (from the previous $505,000 maximum purchase price, which still applies in the rest of Canada). However, it still falls short of the $1,261,800, $1,261,100 and $976,600 benchmark home prices in Greater Toronto, Greater Vancouver and Victoria, respectively, in May 2022.

“For people who live in larger cities, these limits probably seem ridiculous,” says Sandi Martin, a fee-for-service Certified Financial Planner and partner of the virtual services firm Spring Financial Planning. “But in smaller city centres, where incomes and home prices are lower, this incentive may be the difference between someone being able to afford a home or not.” 

For a quick estimate of what you can afford to spend on a home, consider using a mortgage affordability calculator.

What to know about repaying the incentive 

If you meet the eligibility criteria, you can apply for the incentive, which comes in the form of a shared equity mortgage with the Government of Canada. It’s called a shared equity mortgage because the government shares in any gains or losses on the home’s equity. More on this below. 

The government will loan buyers 5% of the purchase price for a resale home, or 10% for a new one. That works out to a possible $25,000 on a $500,000 resale property, or $50,000 on a new $500,000 home. That could save you a little bit on your mortgage payment and monthly insurance premium—somewhere around $100 to $300 per month, according to the federal government’s calculations.

Buyers aren’t charged interest on the loan, and they don’t have to make ongoing payments. But they do have to repay the incentive, either when they sell the house, or after 25 years—whichever comes sooner. 

It’s important to note that the repayment is not based on the dollar amount borrowed. Instead, borrowers must repay the same 5% or 10% share that they received through the FTHBI, but calculated as a percentage of the home’s fair market value at the time of sale, or at the 25-year mark. That’s because, as mentioned above, the government benefits from any increase in equity of the home and loses out if equity goes down. In other words, if the home has increased in value, you will need to pay back more than you borrowed; if the home has decreased in value, you’ll pay back less than you borrowed. 

So, while you’re not paying interest, there is a cost to using the incentive.

More changes to the First-Time Home Buyer Incentive

In June 2022, the CMHC altered the rules for repaying the incentive, capping the government’s potential gains and losses to 8% per year, with the goal to “better support first-time home buyers.” The modified rules limit the government’s share in the appreciation and depreciation of a participating home’s value. 

The organization said that, in the case of appreciation, the repayment calculation is retroactive to the day the program first came into effect (Sept. 2, 2022). In the case of depreciation, the new repayment calculation applies only to home buyers who signed their shared equity mortgage with the government on or after June 1, 2022. 

What does that mean in real terms?

Assuming that Canadian housing prices increase to the same degree over the next 25 years as they did in the previous 25 (that’s around 370%, since the average home in 1996 was worth $150,899), your $500,000 home in 2022 could be worth $2,350,000 million in 2047. 

That’s just considering normal appreciation of the home as it was when you bought it. What if over the 25 years you made significant renovations, adding to the base value of the home? It could now be worth even more—and so will the slice you owe the government. 

That sounds off alarm bells for Martin. “Will you have the money somewhere to pay that off?” she says to ask yourself. “Lots of people choose to stay in their homes and, after 25 years, they’re getting close to retirement. I’d be concerned that this repayment would come as a surprise 25 years after you buy your house.”

Those who sell well before the 25-year limit and must repay the incentive at the time of sale could also be in for a shock. “Whenever you sell this house, you need to count on giving back the percentage of your equity—and that’s on top of closing costs, legal fees, land transfer taxes and real estate commissions,” she says.

So, should you use the FTHBI?

“If all the numbers work out, the timing and price are right, and you’re willing to take the risk that you’d have to pay back more than you borrowed, then great,” says Martin. However, she cautions that those who are unable to save up an extra 5% down payment on their own should take that as a financial warning sign. She warns to pay close attention to all the risks of home ownership—including rising interest rates and unforeseen maintenance and repair costs—not just the risks related to the FTHBI.

Buyers should also be aware that there may be extra legal, appraisal and mortgage refinancing fees involved in the administration of the FTHBI. 

Those who do make use of the incentive would be wise to repay it before making any renovations that would increase the value of the home. Even without renovations, you may want to consider paying back the loan early (there is no penalty for early repayment), as that would limit the risks of a huge equity increase, says Martin. 

“To me, if you are going to take advantage of this program, you want to ask yourself, ‘Is there a way to protect myself from that 25-year risk?’ ” she says. 

More on real estate:

• The complete guide for first-time home buyers
• What home buyers should know about the Canadian mortgage stress test
• 7 smart strategies for first-time home buyers
• How much mortgage can I afford?