New initiative benefits for first time buyers

BY JAY BRIJPAUL

Dreams can become reality as the federal government, through CMHC, has launched its bold program with a 1.25 billion dollar stimulus over three years for first time buyers.  To qualify, the family income must not be higher than $120,000. The purchase price must not exceed $500,000 and the maximum mortgage amount after the stimulus must not exceed $480,000. Let’s explore this program.

First time buyers, buying a resale home, must contribute 5% towards the down payment and must have the required amount of money, about 2% of the purchase price to cover the cost, known as closing costs, to transfer the property in their name. If a family purchased a home for $500,000, then they would require a down payment of $25,000 and closing costs of $10,000. CMHC would lend the buyer an additional 5% interest free until they sell the home or after 25 years of ownership. For new homes, the rules are the same except that the buyer must contribute 10% of the down payment and CMHC will equal that. Let’s work out the figures.

Consider a resale home for $500,000. Prior to the stimulus, if a buyer were to invest 5% as a down payment, their mortgage amount would be $475,000. CMHC would charge the lender 4% of $475,000 to insure the mortgage and that’s $19,000. The lender would add that to the mortgage amount and the buyer would have a mortgage of $494,000. With the stimulus, CMHC would contribute 5% towards the down payment and the mortgage amount would be $450,000. With CMHC insurance premium, the total mortgage amount is $468,000. With a mortgage interest rate of 3%, without the stimulus, the buyer would pay a monthly mortgage of $2,342.57, and with the stimulus, $2,219.27, a savings of $123.30 every month.

CMHC will own 5% of the property and upon sale would be entitled to 5% of the profit or loss. As such, CMHC would have a say in what the homeowner does. For example, if after five years, the buyer plans on refinancing, then, CMHC, as an owner, must agree as well. As such, the equity in the home is protected. On a long-term, the homeowner would benefit tremendously by keeping 95% of the profit.

In the past, first time buyers could withdraw a maximum of $25,000 per person from their RRSP. Now, they can increase that to $35,000. A couple can withdraw twice the amount. However, the repayment plan remains the same. The loan must be repaid in 17 years. It’s a great idea to tap up on one’s RRSP and if married, assist their spouse with theirs. The family would pay less income tax and can build enough reserve to buy their first home. It’s a steep climb but worth it.

What $500,000 can buy is dependent on where we are shopping. An hour drive to places like Barrie, Shelbourne, Oshawa and Hamilton can land a buyer into a detached home. As we advance closer to the center of the city, prices increase. In the downtown core, one may be able to buy a bachelor suite. It is advisable to look at homes within a reasonable distance from work.

Many families continue to rent because they are comfortable living in the neighborhood they cannot afford to buy. Many are spending over 40% of their income towards rent and are caught in a vicious circle living from one pay cheque to the next. My advice is to move out of the comfort zone. There are schools, shops and beautiful neighborhoods elsewhere. Use the government incentive program and pay a mortgage instead. Wealth building in real estate is a slow but sure process.

For those who are interested in the program, the first thing to do is to get pre-qualified to buy a home. This can be done through a financial institution, a mortgage broker or a realtor. To qualify for a mortgage, the buyer must have good credit, the required down payment, closing costs and must be fully employed. The next step is exciting, house hunting. It is advisable to stay within your means and be a smart buyer. Consider buying a home as a triangle, with the base representing the location, the middle, the size, and the top, the smallest area, the upgrades. A buyer can always upgrade a home over time, but it would be difficult to expand a smaller home.