I’ve heard a familiar story since I started as a mortgage agent and it goes a little something like this, “My parents/ grandparents/uncle that I only see at thanksgiving bought a house decades ago for $3 and a shoelace and now it’s worth millions. Obviously this is an exaggeration but the message rings true. That’s just the way it was years ago; houses were cheaper and there was less of a discrepancy from housing prices compared to annual income; although, interest rates cost an arm and a leg. At at least you had a property that was gaining equity.
The housing affordability “crisis” that Canadians are struggling with is affecting millions and needs to be addressed in the coming election. In my opinion, one group of Canadians has been dealt the shortest straw. First Time Home Buyers (FTHB) or should I say aspiring first time home buyers are having a hard time getting into the housing market. The price of housing combined with the mortgage guidelines that lenders have to abide by are making home ownership for FTHB more and more difficult.
Welcome to “Gillis Gets Political: Part 2” where I focus on what the three major political parties in Canada (Liberal, Convective and NDP) are doing for the FTHB.
The Liberal Party are planning to include a deferred loan option for the FTHB incentive, Raise insured deal cap to 1.25 million, create a 40k tax free saving account for the purpose of purchasing a home, 25% less mortgage insurance and double the FTHB tax credit.
The FTHB incentive is a failure and it is in desperate need of a makeover. “Portions of down payments would be provided, interest free, in exchange for a portion of equity in the home. There’s only one problem, it’s a failure (Alloway, 2020)”. The reason being is that it doesn’t really help you qualify; it just makes your payments slightly less once you do. You would then be giving up 5% of the equity you gain in a booming real estate market; it’s not worth it. The deferral loan would allow you to pay back the 5% you borrowed from CMHC at a later date (I’m assuming once the house is sold). This seems like a better option but it really depends on the interest rates they charge and if this loan affects borrowing power.
Raising the insured deal cap is something that has to happen as housing prices increase but isn’t worth advertising as something that will help the FTHB. Currently if a house is purchased over 1 million it becomes an uninsured deal so you have to provide at least a 20% down payment. An insured deal allows the buyers to place a 5% down payment. So, if the cap is raised to 1.25 million, a buyer could purchase a house over a million and still put a 5% down payment. Only issue? Is there a FTHB that purchasing a home for over a million? Almost everyone who can purchase a home for over a million isn’t really struggling with affordability.
I really like the 40k tax free First Home Savings Account; it works like an RRSP and TFSA to use up to 40k on a downpayment for a house. This will help a FTHB save a downpayment for a house and the idea of it will force young Canadians to think about homeownership earlier. If you want to learn more about this saving account and TFSA’s/ RRSP’s in general please reach out.
25% less mortgage insurance and double the tax credit I have included together because it’s a nice offer that will save the FTHB a couple grand but doesn’t really help them qualify. Mortgage insurance is amortized with the entirety of the mortgage for usually 25 years so this really only saves around $10 to $25 a month (estimation that depends on purchase price). Doubling the tax credit would allow the FTHB to receive $1500 instead of $750 as a rebate. As you can see these are nice gestures but not life changing.
The Conservative Party are planning to fix the stress test, increase insured deal cap and encourage 7 to 10 year mortgage terms.
When I first read that the conservatives are planning to fix the stress test I got really excited because this has a direct impact on borrowing power; however, they are only tweaking it. It’s a shame but it’s better than nothing. “Stress test ‘fix’ for small business owners, contractors and other non-permanent employees (Taylor, 2021)”. So, it will be a bit easier for Canadians who don’t have guaranteed employment like salaried or hourly workers; a step in the right direction, but how much will they actually “fix” the stress test? Only time will tell.
Just like the Liberals, the Conservatives also plan to raise the insured deal cap making it over a million except they haven’t pinpointed an exact number. Whatever the number is, I don’t know many FTHB’s who are planning on buying a house over a million.
The encouragement of 7 to 10 year terms is hard to comment on as I’m not sure if they will have some sort of government program that makes 7 to 10 year terms cheaper or will simply just encourage them. If it’s just a simple encouragement I’m unsure how this will help as 7 to 10 year terms have higher rates due to the chance that rates may rise within that time period. Also, 70% of Canadians break their mortgage in order to either refinance or purchase a new home so breakage fees would cost even more for the average Canadian. However, if rates skyrocket it could help Canadians keep these current rates for an extended period.
The New Democratic Party are planning to have 30-year amortizations for the FTHB for starter homes and double the tax credit.
30-year amortizations are only available for uninsured deals at the moment which requires borrowers to have a 20% down payment. The 5 extra years allows payments to be spread out longer to make qualifying easier. Insured deals (which almost all FTHB’s get) have a max of 25- year amortization. Allowing the FTHB to have a 30-year amortization will increase the amount of mortgage and thus make them more competitive in the marketplace.
The NDP has the same idea as the Liberals and want to double the tax credit making it $1500 instead of $750. Again, a nice gesture but not life changing.
I like the fact that all of the parties are acknowledging that First Time Home Buyers need some support. It’s a step in the right direction. It’s hard to say if they’re doing enough. If you read my last blog I talked about how increasing supply is the best way to cool this housing market. It’s possible that increasing supply will make it more competitive for the FTHB without addressing any specific FTHB issues but I doubt it.
The fact of the matter is that the FTHB (for the most part) are younger and because they’re young they have had less time to save money for a down payment and enhance their careers to earn a higher income so they depend on higher mortgage volumes to compete in the housing market. When they’re given the same guidelines as everyone else it becomes extremely hard to compete.
In my opinion, some extra initiative should be supplied to the FTHB. The First Time Home Buyer incentive is useless and either needs to be scrapped or needs some serious changes, possibly a deferral loan option with interest rates the exact same as inflation. A stress test fix that sees the FTHB capable of qualifying at a lower rate than others, even by a small margin would increase the mortgage amount. Another option would be a higher amortization limit to spread out payments. To be honest, there are tons of ways to help out the FTHB but we will see if the government lives up to their promises.
Alloway, B. (2020, May 25). The first-time home buyer incentive is a Failure: Here’s how to fix it. ReaLawState. Retrieved September 13, 2021, from https://realawstate.com/the-first-time-home-buyer-incentive-failure/.
Taylor, P. (2021). 2021 federal election. Mortgage Professionals Canada. Retrieved September 16, 2021, from https://mortgageproscan.ca/advocacy/2021-federal-election?utm_source=SilverpopMailing&utm_medium=email&utm_campaign=Major+Party+Housing+Policy+Summary+%28English%29+%281%29&utm_content=.