Hoping for minor tweaks to the mortgage stress test, the Liberal government’s 2019 budget instead left many in the industry underwhelmed and with more questions than answers.
The stress test was left untouched, and instead Finance Minister Bill Morneau announced two key changes aimed at easing affordability for new homebuyers:
Introduction of the First-Time Home Buyer Incentive (FTHBI)
A new initiative that will see the CMHC provide 5% of your down payment for the purchase of existing homes, or 10% for the purchase of a new build
The mortgage must be default insured
Your income must be less than $120,000
No monthly payments are required, and this amount can be paid back at any time, or upon the sale of the house
“There will be some sharing of upside and downside,” Morneau told reporters
The insured mortgage plus incentive cannot be more than four times the participants’ household income
Effective as of September 2019
The government expects 100,000 first-time buyers will take advantage of the program over the next three years at a cost of $241 million
Increasing the RRSP Home Buyers’ withdrawal limit to $35,000 from $25,000
Permits two first-time buyers in the same household to combine withdrawals for up to a $70,000 down payment
Available for first-time homebuyers. But as of 2020, this program is eligible for those who split from their spouse or common-law partner, even if they are not first-time buyers
The funds must be repaid within 15 years, or the withdrawal will have tax implications
“Finding an affordable place to call home is not just a challenge,” Morneau said in his budget speech. “For too many hard-working Canadians, especially for young people, it feels like an impossibility.”
But after a day of reflection, many in the industry are skeptical that the initiatives will have much impact at all.
“The RRSP withdrawal limit change is a nothing burger, since it was only being used less than 10% of the time for down payment,” said Ron Butler of Butler Mortgage. “So, essentially meaningless.”
Pitfalls of the First-Time Home Buyer Incentive
Concerning the FTHBI, Butler said more analysis is still needed given the lack of details provided by the government. Although, he suggested the delayed implementation until September could “actually create a drag on the economy as some purchase decisions are postponed for six months.”
Others agree, including RBC Capital Markets Senior Economist Robert Hogue. “First-time homebuyer activity is poised to slow down between now and September 2019, as many house-hunting millennials await more details and crunch their numbers,” he wrote. “This could depress the market even further during that period.”
James Laird, co-founder of Ratehub.com and president of CanWise Financial, called the measures “ineffective” in helping first-time buyers enter the housing market.
“I was disappointed that they did not bring back the 30-year amortization for high-ratio mortgages as that is the right policy decision to achieve their stated goal of helping first-time homebuyers,” he told CMT.
On the FTHBI, Laird explained how only a small number of buyers will find it useful, and how it actually decreases affordability—the opposite of its stated objective.
“This is because buyers are limited to the mortgage plus government assistance being a maximum of four times their income. Households can usually qualify for around 4.7 times their income,” he explained. “In either scenario, the homebuyers have to come up with the 5% minimum down payment, so it doesn’t do anything to decrease the cash required to close.”
A household with $100,000 of income and a minimum down payment of 5% ($23,994.40) qualifies for a $479,888 purchase.
The total mortgage amount with CMHC insurance would be $474,129.34, with a monthly mortgage payment of $2,265.75, Laird noted.
The maximum purchase price for the same household, if they participate in the FTHBI, drops to $404,858.29, with a 5% down payment of $20,242.91.
Making the combined total between their mortgage, CMHC insurance and government assistance of $20,242.91, exactly $400,000 (right on four times their household income limit).
“Unless they remove the four times income qualifying criteria, the rest of the initiative barely matters,” Laird added. “If they remove this and the government’s position behaves as an interest-free loan, then they will get a little bit of uptake. If it is equity that grows as the home appreciates, uptake will be minimal.”
He also noted a similar program that was implemented in British Columbia several years ago, which was cancelled due to a lack of participation. “Did the federal government not know or consider this?” he asked.
Mortgage Professionals Canada, which had been lobbying for some tweaks to the stress test as well as the introduction of 30-year amortizations as preferred ways to address housing affordability, nonetheless saw some positives in the initiatives.
“Further analysis is needed, however some aspiring homebuyers, especially at the lower end of the economic ladder, will have greater opportunities to purchase a home with the assistance of this new program,” MPC said in a statement to members.
“The budget included a lengthy defence of the current stress tests, but does suggest that adjustments may be made in the future,” the association added. “We will continue to discuss this issue with policy-makers.”
Robert McLister of RateSpy.com called the FTHBI a “botched rollout” for omitting so many key details, and for media representatives having no answers to simple questions like the maximum possible purchase price and maximum down payment. We hear that Finance officials and CMHC extensively modelled this program, so they should know exactly how it works. By not providing its key details to the public, the Department of Finance caused mass confusion in the media with miscalculations by even prominent economists.
Case in point, McLister noted that estimates from experts for possible maximum purchase prices under the program are all over the map, ranging anywhere from $480,000 to $600,000. Reading the budget announcement literally, McLister’s numbers suggested the maximum purchase price with 5% down could be as low as $490,844, effectively ruling out significant participation from buyers in Toronto and Vancouver.
“If that same [borrower] got a regular old insured mortgage, they could qualify for much more—up to a $557,413 home—without the government taking any piece of their future price appreciation,” he noted, adding this could slow uptake considerably.
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