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20 Mar

Federal budget 2019: Mortgage related commentary

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Posted by: Aneta Zimnicki

Summary of mortgage related items in the budget:

The federal budget announced a new first-time home buyer incentive. It is essentially a ‘shared mortgage’ or interest-free loan to be repaid when the property is sold. Loan of 5% (existing home) or 10% (new build) of purchase price on insured purchases with minimum 5% and maximum 20% down payment. Maximum household income of $120K, and purchase price no more than four times the buyers’ household income. This translates to maximum price of $505K. Borrowers still must qualify under the existing stress test. Details on exactly how this repayment will look like was not presented, ‘more details released later this year’.

The RSP first-time home buyers plan (HBP) limit is increased from $25K to $35K.  Can be used towards a down payment on a purchase. Repayment timeline is unchanged.

My interpretation:

  • This does not address much the issue of supply of housing.
  • It creates an already existing competition for entry level housing, as the maximum price translates to $505K (and can be lower, depending on your household income).
  • It shuts out most expensive regions like Toronto and Vancouver, due to their higher home prices.
  • Since this is still a ‘loan’, it just pushes borrower’s debt to the future, as they have to repay once property is sold.
  • This adds risk to the taxpayer, as the government-backed ‘interest-free home loan’ is tied to real estate values. What if values go down? Isn’t this the space the government wanted out of several years ago, and now they are back in the real estate business?
  • There are no specific details on how the loan exit will work. Let’s worry about that possibly ‘after the election’.
  • Their published example of a $400K home purchase with the incentive yielded a monthly mortgage payment reduction of approximately $200. If they just reverted back to allowing 30 year amortization from 25 years, it would be a similar reduction. Why create complexity, new bureaucracy and programs instead of letting go.
  • Similar local down payment assistance programs have been commented on as not as widely used as expected.
  • The increase in HBP can benefit some, but many younger first-time home buyers don’t have that much saved up anyway.
  • Although the government claims to listen and rely on industry experts, much of what was said from the mortgage industry fell on deaf ears.
  • A focus on strengthening our economy and jobs could be a better approach to address issues with debt loads and affordability.

We will have to wait and see the effects and market reaction.