Imraz Ramani is always helping first-time buyers enter the market.
Whether it's his younger clients or even members of his own family, the Re/Max West Realty sales representative and head of the Ramani Real Estate team assists buyers entering the red hot housing and condo markets across the GTA.
And he is honest with them. He'll tell them whether the home they're looking at is a good investment, or if they can realistically afford that home they've set their sights on. There's nothing he doesn't assess with honesty and integrity, and the aid the federal government offers first-time home buyers is no different, which makes him the ideal realtor to answer this week's question;
Are Government Incentives for First-Time Home Buyers Worth It?
The incentive that everyone's talking about right now is the First-Time Home Buyer Incentive Program. The Liberals have recently announced its expansion if they are re-elected. Under the current terms, only those with incomes under $120,000 a year qualify, but if the Liberals return to office, they've promised to include those who make up to $150,000. In addition, only mortgages that don't exceed $480,000 currently qualify, but the Liberals will be raising that ceiling to $750,000 in hot markets like Vancouver, Victoria and the GTA.
As part of this program, the Federal Government's Canadian Mortgage and Housing Corporation (CMHC) receives equity in a first-time buyer's home in exchange for providing a loan to help them make their down payment. If a first-time home buyer pays at least five percent of the down payment, the government will kick in an additional five to 10 percent for the down payment on a new home and five per cent on an existing home, which will lower a first-time buyer's monthly mortgage payment.
Right now, we are at the all-time low in terms of interest rates. If someone cannot afford to buy a home when interest rates are this low, should we really be enabling them to get into the market, pushing them to where, if there's ever a little spike in interest rates, we've set them up with debt they can no longer afford?
This is why I'm not sure the First-Time Home Buyer Incentive Program is worth it for all potential candidates. That being said, I have helped a client who, because of this program, was able to buy something he can stay in for 10 plus years. Without the program he would continue being a renter. So, there are advantages to the program and it does help a select few, but there's a lot of risk associated with it and it's really important that clients are educated about the exit strategy.
Remember: by jumping in on this incentive, you are now partnering with CMHC. If they're putting in five percent of your down payment, they own five percent of your home and you will reimburse them that five percent when you sell. Yes, CMHC enables first-time buyers to get in, and it's good in the short-term for the Canadian economy because it promotes income exchange. It is, however, inevitable that interest rates are going to go up. At that point, you have to know what your exit strategy is going to be when you're partnered with CMHC.
The loans are amortized over 25 years, so if you leave sooner than that for another property, you will have to pay back the loan in full. Keep in mind that with any real estate transaction, there are transactional costs that these qualified first-time home buyers will need to take into account such as the land transfer tax, the agent fees, etc. If these buyers sell in five to seven years — as most buyers do —they will be out these transaction costs and they will need to pay CMHC back. Plus, if their property has increased in value, these buyers will need to be aware that CMHC takes part of that appreciation in five percent of the home value – not just the loan.
This first-time buyer incentive program works if you're going to stay in your home for 25 years. Otherwise — unless the market does really well — you're going to be in trouble and you need to know that. If there is even a slight correction in the economy with interest rates or job losses, those who could already just barely afford a home with this help are now going to be in a worse situation. I don't know if what we're doing is really thinking about first-time buyers or thinking about the short-term growth of the Canadian economy with this program. I think the program can benefit a certain select segment of the population, as long as they're aware of the risks.
I think other incentives such as The Home Buyer's Plan promote what we should be teaching those who are entering home ownership.
For example, in the past the Home Buyer's Plan allowed you to withdrawal $20,000 and now $25,000 from your RRSP for the purchase of a home, which teaches buyers to save money. When you save the money, you can benefit from it because you can withdraw it to buy a home. That's teaches people to manage money, manage expenses and save. This to me is what we should be doing to incentivize first-time home buyers. The TFSA also tells teens and adults that if they save enough money, by the time they reach graduation, they'll have a down payment on a home and it's tax-free. I'm a big fan of the programs that reward people for taking care of themselves financially, and that's where we need the education.
First-time buyers also are eligible for a first-time home buyer’s credit, which reduces the costs associated with purchasing a home. It's a 15 percent income tax credit on a maximum of $5,000 for things such as legal fees and land transfer tax. It can be claimed in the year you buy the home. You also get a break on the land transfer tax as a first-time buyer. All of this is good because it represents the Canadian Government helping first-time buyers get into the market without being selfish. I like these incentives because the tax break only comes as a reward because you've earned it. These first-time buyers who take advantage of the tax break still had to save the money and are rewarded for getting into the market their own way.