CMHC to pitch-in 10% of house cost for first-time buyers

BY JAY BRIJPAUL

Canada mortgage and housing corporation (CMHC) is a government-controlled body that ensures high ratio mortgages for financial institutions, allowing a large part of buyers to become homeowners. The federal budget considers measures to assist first time buyers, where CMHC will lend 5% of the purchase price on resale homes and 10% for new homes. First-time buyers are those who never owned a home before anywhere in the world.

This is considered as an interest-free loan that must be paid back to CMHC when the home is sold sometime in the future. In addition to CMHC stimulus, first-time buyers can withdraw, tax-free, $35,000 from their RRSP to put towards their down payment. The initiative is designed to assist over 100,000 Canadians to achieve homeownership in the next three years.

The details of how the program works are not available until later this fall but the framework implies that to qualify, the household income must be less than $120,000 per year. The buyers must be able to provide a five percent down payment plus applicable closing cost. Based on the income, the buyer cannot have a mortgage greater than $480,000 which tops out at four times their income of $120,000.

If a first-time buyer bought a home for $400,000, their minimum down payment is 5% or $20,000. The buyers would normally take a mortgage of $380,000 but with the new rules, CMHC will lend 5%, on a resale home and 10% on a new home. Buyers will enjoy a savings of about $200 per month on a new home purchase and $100 per month on a resale home. There is a catch.

CMHC will be a part owner of the property and if the buyer plans on refinancing in the future, CMHC must approve it. What is not clear is whether CMHC will settle for just the money lent or will want a portion of the profit in the future.

RBC chief economist Craig Wight said that this is a “solution looking for a problem.” It’s just another form of debt that the homeowner must repay in the future. According to Mr. Wight, the program has the potential of undoing some of the cooling off methods introduced by Ottawa. David McDonald, an economist with the Canadian Centre for Policy Alternatives said that “Taking out new loans from CMHC or retirement savings doesn’t make housing more affordable.”

CMHC could be of much more help to first-time buyers by reducing their premiums. Take, for example, a first-time buyer with 5% down payment will have to pay 4.5% of the loan amount to ensure the mortgage, leaving the buyer with only half percent as their true down payment. With stringent mortgage rules and high home prices, default mortgages are very real and in the few cases, where the properties are sold under power of sale, there is enough equity to cover the mortgage.

The new initiative failed because it is not designed to provide more affordable housing. Incentives should be geared towards building more houses at a reasonable cost. For resale homes, a home buyer will pay almost 5% in premium and then CMHC will turn around and lend that money back for a piece of the pie in the future. It is a win-win. CMHC wins on both sides.