Chad Robinson B. Eco
The First-Time Home Buyer Incentive - the In's And Outs
By: K. Surca, Best Interest Mortgages
The First-Time Buyer Incentive Program really represents a shared equity mortgage (SEM). This is exactly as it states- The Government loan that you take out to help purchase your property is a loan that will need to be repaid in full at the end of the mortgage term ( or when you chose to sell). Simply put, any equity built up in your property is “owned” by the government. Funds that are matched by the Government for your down payment will be repaid by the money made on your property. THE GOVERNMENT IS INVESTING IN YOUR PROPERTY AND HAS A STAKE IN MONEY MADE ON THIS PROPERTY. It is crucial that you are aware that any funds lent to you will need to pay, interest free in full eventually.
The Government will provide 5% or 10% towards a New Construction property, 5% towards an Existing Home and 5% towards a New or resale mobile/manufactured home. To qualify, you must meet the criteria listed above to be first-time homebuyer. The total household income can not exceed 120,000 and the first mortgage + government incentive cannot exceed 4 times the total qualified annual income. You must have the required 5% of the property value to put down in order for the government to match your downpayment.To illustrate one can use a simple mortgage formula.
Your down payment of 5%- 15,000
Government Incentive of 5%-15,000
Mortgage amount- 270,000
The overall mortgage amount has been reduced by an additional 15,000 which in turn will lessen the monthly payments on your mortgage. Keep in mind, depending on the overall return on your property, that money needs to be paid in full eventually.
Ultimately, one must, like any investment, try to weigh the lessening of the upfront costs with the anticipated overall return on your property investment.
One way to look at the new Government initiative is to accept that along with helping with the upfront costs of a down payment, which can mean applying for a larger mortgage potentially, you are also forced to share in the eventual equity that will be built up in your property. The costs that the Government will match with your purchase cost will represent an investment for the Government. As such, they will have a share in the sale of the house. The equity will be shared directly proportional to the costs the Government put in with the initial purchase.
On a plus note, however, there isn’t any interest incurred on the funds that the Government will match on your down payment. Furthermore, you will not be required to pay principal payments on the loan amount. Rather, the loan you are taking out from the government is required to be repaid in full at the end of the 25 year mortgage term or earlier if you sell the house. If you sell the house before the length of the loan term you will not be facing pre-payment penalties.
One could argue that there are advantages to participating in the program. The obvious advantage is that Government funds may make the difference in the overall affordability of a home purchase. Having more available to put down on a property through this Government loan option can make a difference in the type of property you can potentially afford. The loan being an interest-free loan may be attractive as well. Having the freedom to sell your property at any
time without the prospect of facing potentially steep pre-payment penalties may represent another advantage.
It is clear the program is designed to help first time homebuyers get on the sometimes elusive property ladder, but nothing comes without a cost. Yes, the cost may come later in life after you have either met the 25 year term of your loan or earlier if you choose to sell. Either way, the Government is looking at their help as an overall investment and those monies that were provided at the outset of the loan will need to be paid back in full.
Another potential disadvantage to having a SEM is that any changes you want to make on your property in terms of overall home improvements or renovations need to be run by the Government as it is partially their property too. Stop and ask yourself if you are comfortable with the idea that you do not have the freedom to make decisions as homeowners as you would if you were to provide the downpayment without incentive.
Essentially it comes down to opportunity cost- is the advantage of added monies at the outset of your loan worth the shared investment of your property with the Government. Only you can determine if you want to wait to save up money for your future property or use new Government incentives to help you reach your home ownership goals faster.
If you are comfortable with sharing your investment which includes any major decisions regarding your future property, or you want to invest on your own accord- only you can determine. You have been armed with knowledge. Here is to hoping you can navigate the often confusing, but ultimately exciting mortgage sector with or without the Government’s help.
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