In September 2019, the CMHC launched their Shared Equity Mortgage Provider Program for Canadians. The goal is to make it easier for middle class home buyers to reduce their mortgage burden by almost $300 a month. The program aims to help Canadians to buy their first home over the next five years. Here’s a quote regarding the program from CMHC:
“Through the National Housing Strategy, more middle-class Canadians – and people working hard to join it – will find safe, accessible and affordable homes. Our proposed measures will reduce the monthly mortgage for your first home by up to $286. This will mean more money in the pockets of Canadians and will help up to an estimated 100,000 families across Canada.” — Jean-Yves Duclos, Minister of Families, Children and Social Development and Minister Responsible for Canada Mortgage and Housing Corporation
Like most people, you are probably having one of two reactions right now:
Where do I sign?
If it sounds too good to be true, it probably is.
Here are a few details to help you decide whether this initiative is worth considering:
- CMHC provides a repayable loan as part of the down payment; 5% on a resale home, and up to 10% on new construction.
- It is available to those who already have at a least 5% down payment from their own resources (savings, RSP, non-repayable gift from a family member) and whose total family income is less than $120,000 a year.
- The top purchase price that will qualify for most buyers will be somewhere between $480,000-$565,000 since the loan and incentive amount can be no more than four times the total income of the borrowers. Sadly this rules out many markets in the GTHA.
- Qualifying properties are single family homes or condos, year-round mobile homes, or multiple unit dwellings with up to 4 units where the borrower lives full-time.
Here’s how the program would work for a purchase price of $400 000 on a newly constructed home:
John and Mary find a brand new house for $400,000. They have a down payment of $20,000 from their own resources (5% of the purchase price).
They apply to receive $40,000 in a CMHC shared equity mortgage (10% of the cost of a new home).
The higher down payment lowers their total mortgage amount, reducing monthly expenses.
As a result, John and Mary’s mortgage is $228 less every month, saving them $2,736 a year.
How the Loan is Repaid:
There are no partial or incremental payments to be made on the shared equity loan. At the latest, it must be repaid in full after 25 years.
The incentive must also be paid in full under these circumstances:
- The home is sold.
- The home is re-financed.
- A divorce or break up where one partner wants to buy the other out and requires additional insured funds to do so.
- A buyer wishes to port their mortgage to another property.
- A partial release of security is treated like a sale. (Requires repayment in full)
- The intended use of the property changes. (eg, Borrower decides to rent it to tenants instead of occupying)
What Exactly is Shared Equity?
This is where investment decisions are made. Shared equity is another way of saying shared ownership – for better or for worse. It is important to remember that this program is not a simple or a zero-percent loan.
CMHC has positioned itself as a speculator and investor. Once a buyer enters into this program, the government, through its Crown Corporation, owns 5-or-10% of their home. Upon the sale of the property (or when repayment is triggered by one of the other circumstances listed above), profits and [unlikely] losses must be shared in proportion to ownership. The buyer will repay, not the original loan amount, but a percentage of the value of the property.
Is the Program for You?
While the CMHC’s First-time Home Buyer Incentive may be a compromise that works for some, many mortgage professionals feel that it gives up too much growth potential for first time buyers.
One factor to consider is that, in some cases, a family income of $120,000 may qualify borrowers for a larger mortgage without the shared equity plan. The shared equity program may actually reduce buying power for some.
The biggest consideration for most buyers, though, is the fact that a home is typically the largest investment they will make – and is often the one that offers the most significant returns.
Buyers still have to provide a 5% down payment, which may qualify them to carry their loan with only the usual mortgage insurance that CMHC (and others) have always offered. Will the monthly savings from sharing equity be worth giving up 5-10% of the value of the house when the incentive is repaid?
Consider Hamilton’s real estate market over the last 5 years. According to the MLS Home Price Index, properties on the Hamilton Mountain have increased in value by around 80% over the past five years. Other areas of the city have experienced even larger gains.
Let’s imagine that the program had existed in 2015. A first time buyer who bought a house on the Mountain for $400 000 using the shared equity program (at 5%) would have borrowed $20,000 to reduce monthly expenses by about $120 a month. The total savings over five years would amount to about $7200.00.
By 2020, that house could be worth $720,000. Upon sale, the loan to be repaid would be $36,000.
If a buyer can justify paying $16,000 ($36,000-20,000) to save $7200, the program might be something to consider.
Build Your Own Team of Professionals
When you are ready to make one of the biggest financial decisions in life, it is wise to get as much reliable information as you can. We are always happy to help you with your real estate questions and to direct you to other industry professionals who can help you analyze your own situation so that you can make the best decisions for your circumstances.
Give us a call anytime – we are here to help!