The 2019 budget includes a novel proposal – the shared equity mortgage. The shared equity mortgage or SEM would be backed by the CMHC as part of the First Time Home Buyer Initiative. This isn’t a brand new concept, since it has been tried in the U.S., Australia and U.K., though it hasn’t been introduced in Canada before. There isn’t a lot of hard data on how well the program works in making homes affordable, but encouraging new home purchases and helping people afford homes is the intent of the program.
How does a shared equity mortgage work? The mortgage insurer CMHC has an equity stake in the property being bought. This reduces the mortgage loan amount. Such an approach means home buyers could qualify for a more expensive home before they’re disqualified under the mortgage stress test rules. For those who buy a home at the original expected price, they save a bit of money each month on mortgage payments, depending on the size of the home loan.
For the typical $400,000 home, someone putting 5% down has $20,000 invested in the property. The average mortgage in this case is $380,000. The mortgage lender is allowed up to a 10% equity stake in the property if it is a new construction home; in this case, it would be $40,000. That equity stake by the lender reduces how large the mortgage needs to be. In our example, the mortgage would be $340,000 instead of $380,000. This doesn’t just save the average homeowner around $200 a month in interest. It also allows the home buyer to qualify for a larger or more expensive home, because they qualify for a more valuable property than they otherwise would. The program is designed to encourage purchases of new homes by giving up to a 10% incentive on newly built homes but only 5% if you buy an existing home.
What is the benefit of a shared equity mortgage? It allows people with a modest income to qualify for a home without having to change the stress test rules. It theoretically helps many more people buy a home, potentially preventing home prices from falling as far as they otherwise would. Conversely, allowing first time home buyers to pay 5% to 10% less for a property may result in them bidding up the prices of affordable homes. That would drive up the cost of cheaper homes, shutting out a number of other homebuyers. The effect of the FTHBI would be limited, because it is restricted to at most 10% of home buyers who would enter the market over the next three years. The budget also allocates roughly 1.25 billion dollars to this program – if they run out of money, that’s it.
Fort McMurray home buyers enjoy an affordable housing market that is far cheaper than it was just a few years ago. You don’t need to wait for the new CMHC program to go into effect to buy your first home. And many people don’t qualify for the FTHBI program. It is limited to households that earn less than $120,000 a year, and the loans can only be used to buy homes worth up to four times the household’s income. If you earn $100,000 a year, you can only buy a home worth up to $400,000 roughly depending on your current debt of course.
The risk lenders take with the First Time Home Buyer Initiative is that home values will go down, eroding the value of their equity stake. In a worst case scenario, they lose money on both the mortgage and the equity stake. Slightly inflating the number of home buyers may not be enough to prop up a housing market, there are many other economic factors that impact the housing market.
At the same time, there is nothing yet on how the CMHC will handle the equity stake. That would clearly have to be paid for when the property is sold. What isn’t clear is whether home buyers have to eventually pay interest on that equity stake. An issue that arose in the United States was mortgage investors claiming half or more of the increased home value when the property was sold, though there is no indication the CMHC would make such harsh demands. If home buyers have to pay interest on the equity stake, which wipes out part of the savings they’d see on the mortgage. It is also unclear if you have to pay CMHC back the 10% or 5% off original purchase amount or off the value when the home sells. If the market goes up you will be giving them an increased payback but if it goes down you might save some money you would otherwise have to pay back.
It is unclear if the incentives to buy new homes will increase supply in areas where housing supply is sufficient, raising the possibility that it won’t do much to add housing stock to markets where there is a dire shortage.
The government hopes to have the First Time Home Buyer Incentive program up and running by September, 2019. They also mentioned the First Time Home Buyer RRSP portion will go from the individual current $25,000 to an increase of $35,000.
Stay tuned for more information as they government unrolls this program! Follow us on our business Facebook page, link below, to make sure you do not miss the next blog update once the government unrolls the program.