Hot take on new budget!
My take on the housing changes in the federal budget:
At first glance, I would say “decent” at best. At second glance, I’d actually say it is vastly underwhelming. The feds have announced 2 main policies around home ownership.
1. An “equity share” program that will give you the choice to have the government own a portion of your home to lower your mortgage amount and monthly payments. The feds will buy 5% of a resale home, or 10% of a new construction home. You must be a first-time home buyer and have a household income of less than $120,000. No payments need to be made towards the loan, and it is not payable until you sell your home. $1.25 Billion will be dedicated to this over the next 3 years.
2. A bump in the amount a first-time buyer can use from their RRSP for their down payment: from $25,000 to $35,000.
The RRSP bump is nice, and I know it will positively affect our clients as we see a lot of first-timers using RRSP money for their down payment.
But the equity share program? Well, let me break it down a touch for you. An example of the equity share program would be a home purchase of $450,000 on a resale home calling for a $22,500 down payment if you want to put down 5%. You mortgage (not including your CMHC premium) would be $427,500. If you take advantage of the government program, they would chip in another $22,500, bringing the mortgage down to $405,000. This will roughly equate to a payment drop of $113. That amount might increase your purchase budget (something many are struggling with right now) by around $25,000.
Is $113/mo less per month, or an extra $25,000 in borrowing power worth giving up 5% of your home? I guess that would be for the individual to decide. The problem would lay in the fact that the feds might take 5% of the future value of your home back upon the sale of it (if it is truly an equity “share” program – these details have not been released yet). What if you are in your home for 7 years and the home has appreciated in value from $450,000 to $592,000 (assuming a modest increase of 4% per year). That would mean that the government will receive $29,600 back rather than the $22,500 they gave you – an extra $7,100! That’s a LOT of money. That’s $1,015 per year on $22,500 which equates to an interest rate of close to 4.5% - a full percent higher than what you are paying your lender assuming current rates.
Another question: what happens if you sell your home at a loss after a year or two? Are the feds taking part in that loss or do they want the full loan back?
There are too many blank spots in the equity share program to make a call on if it is good or not. The one good thing? At least the Federal government is doing something! (albeit and random and super targeted something) We have all been living through scale back after scale back, change after change, blow after blow to the lending rules lately and this move signifies a turn in that trend – so there’s at least one bright spot here.
My association, Mortgage Professionals Canada, has been lobbying for a few very important changes to federal policy that would have been a much better move; the main one being reintroducing the 30 year amortization to first time buyers. This would ease the pain of the stress test and give back a bit of buying power to the most important demographic in the real estate market – first timers. A lift to a 30 year amortization would increase a purchase budget by around $50,000! That is a lot of money in a quickly growing market like Nanaimo’s.
Anyway, there’s my $0.02 on the recent announcement. I’d give it 2 stars – just enough to not be a total disappointment. We’ll see how the details shake out by September. Call or email me if you have any questions about this stuff!
Nolan Smith – 250-591-5556 nolan@oceanvale.ca