Buying a home can be a daunting experience, especially if it's your first time. One of the biggest challenges for many first-time homebuyers is coming up with a down payment. However, with the First-Time Home Buyers Incentive, eligible homebuyers can increase their down payment from 5% to 15% and save thousands of dollars in the process. In this blog, we will explore how the incentive works and how purchasing a new construction property can help first-time homebuyers take advantage of the 10% incentive and enjoy significant savings.
What is the First-Time Home Buyers Incentive?
The First-Time Home Buyers Incentive is a program launched by the Canadian government in 2019 to help first-time homebuyers afford a home. The program allows eligible homebuyers to borrow a portion of the down payment from the government, which reduces the amount of their mortgage and monthly mortgage payments.
Under the program, eligible homebuyers can borrow up to:
TYPE OF PROPERTY | INCENTIVE AMOUNT |
Existing | 5% |
New Construction | 10% |
The government provides the funds as an interest-free loan, which must be repaid within 25 years or when the property is sold, whichever comes first. Homeowners will pay back up to a maximum gain of 8% per annum (not compounded) on the Incentive amount from the date of advance to the time of repayment, in addition to the original amount borrowed.
How does the incentive work?
Let's say you're a first-time homebuyer looking to purchase a home for $500,000. If you have a down payment of 5%, you would need to come up with $25,000, and your mortgage would be for $475,000. However, if you're eligible for the First-Time Home Buyers Incentive and decide to purchase a new construction property you may be eligible to increase your down payment to 15% by borrowing an additional 10% from the government.
In this scenario, your down payment would be $75,000 ($50,000 from your savings and $25,000 from the government), and your mortgage would be for $425,000. By increasing your down payment, you would have a smaller mortgage, which would result in lower monthly mortgage payments and less interest paid over time. This means that you could save thousands of dollars over the life of your mortgage.
In addition to reducing your monthly mortgage payments and interest paid, having a larger down payment can also help you qualify for a lower mortgage interest rate, which could save you even more money over time.
Assuming a home purchase price of $500,000 and a mortgage amortized over 25 years at a fixed interest rate of 4.54%, the below table compares the financial impact of a 5% down payment versus a 15% down payment with the First-Time Home Buyers Incentive.
DOWN PAYMENT | $25,000 (5%) | $75,000 (15%) | FINANCIAL DIFFERENCE |
Default Insurance | $19,000 | $11,900 | $7,100 |
Total Mortgage | $494,000 | $436,900 | $57,100 |
Monthly Payment | $2,745.15 | $2,427.85 | $317 |
Term Interest (5 Years) | $104,710 | $92,607 | $12,103 |
Principal Paid | $59,999 | $53,064 | $6,935 |
*Rates are subject to change without notice. This table is for illustrative purposes only.
As you can see, by taking advantage of the incentive, you could increase your down payment by 10% and reduce your mortgage amount, resulting in lower monthly mortgage payments and less interest paid over time. By increasing your down payment to 15%, you could potentially save over $60,000 in interest over the life of your mortgage
Why should you consider purchasing a new construction property
If you're a first-time homebuyer looking to take advantage of the 10% incentive under the First-Time Home Buyers Incentive, purchasing a new construction property could be a smart choice.
Purchasing a new construction property offers several advantages, such as energy efficiency, warranties, and modern features that can save you money on maintenance and utility bills. Additionally, it eliminates the immediate need for costly repairs or renovations, providing long-term savings and reducing stress.
To sum up, the First-Time Home Buyers Incentive is a game-changer for those entering the housing market. By utilizing the incentive, eligible buyers can boost their down payment, lower mortgage payments, and save a substantial amount over the loan term. If you're considering purchasing a new construction property now is an ideal time.
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