# Is there any situation where the new CMHC incentive makes sense?



## milo (May 31, 2016)

So some more details came out on the latest pointless scheme to help first time buyers, but I'm wondering if it ever makes sense for anyone, and specifically myself, to use it.

I'm 32, live in Calgary, have an income of about 100,000 and may buy a home in the next year or so, for about 350,000 - 400,000. I've got total savings of about 180,000 and about 110,000 of that available for a downpayment, although I probably would only put 20% down.

Instinctively, I don't see any reason for myself (or anyone) to use this new CHMC incentive, but I would be eligible to use it so it's worth investigating. I'd have to put down less than 20% and pay the CMHC insurance (but get a better interest rate), but I'd get an 'interest free' loan of about 17-20K. But also lose a portion of the potential upside (or downside).

Thoughts? Now that I've written that I'm pretty convinced it's not a good idea for me, but is there any situation it is a good idea?


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## tavogl (Oct 1, 2014)

Why let the governmet own a % of your home? Never.


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## sags (May 15, 2010)

If people have the 20% down payment there would be no benefit.

For people who don't have the 20% down payment, the CMHC loan may help them qualify and save money on their monthly payments.

If home prices go up, the people gain on a house they may not have otherwise been able to purchase. If home prices go down, the CMHC shares in the loss.

I think this is also an important factor the government has considered 

Many parents are borrowing to provide the 20% down payment for their kids, putting their own retirements at risk.

If the kids can buy with this type of assistance from the CMHC, it is better for the parents to not be involved with their kid's home purchase.

The CMHC is introducing this to keep homes selling and perhaps stop the decline in home prices that is already underway.


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## Mortgage u/w (Feb 6, 2014)

I already commented about this incentive in another post.......ultimately, this incentive is useless and to be avoided.

Its not an "interest free" loan as you mention - you can be sure of that. What will most likely happen is the government will take a percentage of your gain once you sell. Most likely the same percentage that was 'loaned'.

The best "incentive" you should consider is putting 20% down to avoid mortgage insurance premium. Yes, the interest rate is slightly higher than an insured rate - no more than 15bps. But given our historic low rates which are here to stay for several more years, the rate difference is negligible.


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## kcowan (Jul 1, 2010)

milo said:


> Thoughts? Now that I've written that I'm pretty convinced it's not a good idea for me, but is there any situation it is a good idea?


Here is some history on government-sponsored investment:


> While the two types of tax avoidance are quite different, they both involve risk. Consider, for instance, the sad history of MURBs â€” a bureaucratic designation for Multiple Unit Residential Buildings, or what most of us would call apartment buildings. Back in the 1970s, Ottawa decided to encourage investment in this sector by allowing investors in new apartment buildings to claim their annual depreciation against other income for tax purposes. Promoters quickly took advantage of that offer and constructed leveraged deals that allowed MURB investors to put down as little as 10% of their total investment while giving them an immediate tax break almost as big as their initial cash outlay.
> 
> All of which was fine until the real estate market crashed in the late 1980s, vacancy rates soared and a lot of clever taxpayers found they couldn’t sell those lovely tax-assisted MURBs for love or money. The lesson? “The prospects of immediate tax savings blinded people to the economic reality of the underlying investment,” says Robert Brown, former CEO of PriceWaterhouse Canada, former head of the Canadian Tax Foundation and a long-time observer of the tax planning industry. “Investors weren’t thinking about the long-term implications.”
> 
> ...


I lived through both of these. In fact, I partnered with a builder to construct a 3-story apartment building (MURB) and made a quick $150k profit in 2 years. The incentive helped developers and not buyers.

Since then, I have considered all government incentives as interference in the free market that will not help the individual tax-payer in the long run. YMMV!

Source

PS Ask anyone who recommends them how they have made out investing their own money in the program.


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## Gruff403 (Jan 30, 2019)

Told my kids don't go anywhere near this program. Don't let the gov't own part of your home. Buy what you can afford and work your way up like the rest of us did. Calgary looks like a reasonable market to get into with the slow turn around in oil and gas. Well done Milo saving up for down payment. What area of Cowtown are you looking at?


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## sags (May 15, 2010)

One of the reasons the CMHC introduced this program is because they calculate that if a person earning the average wage saved 10% of their income it would take 43 years to save the DP on an average home. The housing market has reached maximum affordability and is heading for big troubles.


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## milo (May 31, 2016)

Gruff403 said:


> Told my kids don't go anywhere near this program. Don't let the gov't own part of your home. Buy what you can afford and work your way up like the rest of us did. Calgary looks like a reasonable market to get into with the slow turn around in oil and gas. Well done Milo saving up for down payment. What area of Cowtown are you looking at?


Thanks - I'm looking at as central and close to my work as I can afford to buy a house or duplex, and I don't mind waiting and saving money renting than settling for something that isn't worth it.


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## OnlyMyOpinion (Sep 1, 2013)

sags said:


> One of the reasons the CMHC introduced this program is because they calculate that if *a person earning the average wage saved 10% of their income it would take 43 years to save the DP on an average home*. The housing market has reached maximum affordability and is heading for big troubles.


Can you please link your source and the assumptions behind these numbers.


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## tavogl (Oct 1, 2014)

OnlyMyOpinion said:


> Can you please link your source and the assumptions behind these numbers.


crazy numbers.


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## sags (May 15, 2010)

There are some statistics here......bear in mind they are using "family income" and saving 20% of their gross income to provide a 20% down payment.

Saving 10% of an average single income to save a 20% down payment would be near impossible.

They are also calculating how long it would take to save the down payment based on today's home prices, but which would actually be bought years into the future.

Presumably homes prices would be higher in the future, so the financial goal posts keep moving.

Young adults are priced out of the market today because of a lack of down payment. Not everyone has parents who can gift them hundreds of thousands of dollars.

This is the problem the CMHC changes are meant to address.

https://www.inbrampton.com/heres-how-much-a-down-payment-costs-in-brampton-right-now

A more in-depth study here.....

_Many Millennials would like to one day own a home in the city they love. But if that city happens to be Vancouver, they probably already know their homeownership dream is more like a fairy tale: enjoyable to think and talk about but ultimately unrealistic. Vancouver, however, is not the only urban hub that is totally out of reach for people in their mid-twenties to mid-thirties: *according to our analysis, there are seven markets where it is virtually impossible for a Millennial couple to save for a down payment.
*
Taking into consideration the average home prices and the average household income of Millennials living and working in Canada’s most expensive urban centres, it would take young people in these places a depressingly long time to save for a down payment. And even this would only be possible if Millennials religiously set aside 20% of their income each month.
_
https://www.point2homes.com/news/ca...wn-payments-delay-homeownership-35-years.html


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## nobleea (Oct 11, 2013)

^ That's a wild generalization and cherry picking the numbers.

From the same article:

"In Canada’s 10 most populous cities, the time needed to save for a down payment varies significantly: from 20 years in Vancouver, to *5 in Toronto, and as little as 1 year in Edmonton*.
In the nation’s seven most expensive markets, Millennials will need between 14 and 35 years to save for a down payment, making these urban centres the most unattainable for the young demographic: West Vancouver, BC; Vancouver, BC; North Vancouver, BC; Burnaby, BC; Oakville, ON; Richmond Hill, ON; and Richmond, BC.
In *40 Canadian cities, Millennials could save for a down payment in 12 months or less*, which makes these markets the most attainable for Gen Y-ers."

You can't have it all. To expect for a millenial, right out of school to be able to buy a place with a reasonable downpayment in Van or London or NYC is ridiculous.


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## sags (May 15, 2010)

The years are calculated as a couple earning the average income for the city where the property is located and saving 20% a year for a down payment.

For a single person or a couple who could only save 10% a year, it would extend the time line much further out.

By the time they saved the down payment the home may have increased in value and they still come up short.


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## sags (May 15, 2010)

A couple earning $100,000 a year and saving 20% for 12 months would have $20,000 for the down payment.

A $20,000 down payment would buy a $100,000 property. In our city that would buy an older mobile home or a run down 1 bedroom apartment..........but it is possible.


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## nobleea (Oct 11, 2013)

Where does it say anything about 20% down? The numbers appear to be based on 5% down.
A 20K downpayment is 5% of a 400K home. Which is average house price in Edmonton (which was highlighted as 1yr savings time frame in the article).


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## Mortgage u/w (Feb 6, 2014)

Y'all can twist and disect all the stats you want.......bottom line, this incentive program is not very beneficial to help with the housing market. This incentive was a last minute thought and thrown in at a time when no one was asking for it. I can confirm that all lenders and insures are meeting and laughing at this proposal because 1) implementing it at the lender level will be very difficult and 2) no many consumers are expected to be using it.

A similar program exists in my province but is managed at the municipal level and only applicable to qualified condo builds. It 'kinda' works because the loan amounts are relatively low (purchase price avg $250k). Condo values have not grown in the past 5-10 years so the cost of reimbursement is relatively low. Still, it only attracts people who should not have been homeowners.


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## sags (May 15, 2010)

For those who qualify, the program looks like an interest free loan that could save a significant amount of money.

The CMCH would own a % of the home equal to the % they invested, which is a fair deal since it is their money.

It could be useful for some people.

https://www.cbc.ca/news/business/cmhc-first-time-buyer-program-1.5178055


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## milo (May 31, 2016)

You would almost certainly be better off saving up 20% and leaving out CMHC entirely though. This is another example of governments rewarding the wrong behaviour, I was hoping at least this time I could game the system to my benefit, but that does not appear to be the case.

It goes against previous government policy also. On the one hand, they correctly have been trying to limit people buying mortgages larger than they can afford and thus tempering house price growth. But this policy (if anyone takes it up, which few likely will, because it's such a poor giveaway) is designed to goose house price growth.


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## sags (May 15, 2010)

Buyers are already borrowing the down payments from parents, lines of credit or expensive second mortgages, so the only difference is how or if the money is paid back.


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## Mortgage u/w (Feb 6, 2014)

sags said:


> For those who qualify, the program looks like an interest free loan that could save a significant amount of money.
> 
> The CMCH would own a % of the home equal to the % they invested, which is a fair deal since it is their money.
> 
> ...


What you may have omited to notice is when you sell, you will owe back the 5% borrowed PLUS 5% of your equity gain.


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## sags (May 15, 2010)

An example:

_On a home costing $500,000, if the borrower puts up $25,000 and the CMHC puts up the same amount, the CMHC would then own five per cent of that home. So if, down the line, the house appreciates to $600,000 and the borrower wants to sell, they would have to give the CMHC five per cent of the sale price — $30,000 in this example — not the $25,000 the CMHC put down in the first place.
_
The $25,000 the CMHC put down lowered the mortgage by $25,000 so when the home is sold the mortgage payout would be $25,000 less. It is simply a return of capital.

There is no loss on that portion for the buyer. In fact there would be a small gain from lower monthly payments over the life of the mortgage.

There is no guarantee there will be any equity from a future sale. If the home loses value the CMHC shares in the loss.

If people don't have a down payment, they wouldn't have a house to earn any equity on.

I think the CMHC wants to eliminate much of the second tier lending at high interest for down payments, but they don't want to completely eliminate down payments.

Buyers need to have some skin in the game, either with their own down payments or future equity in the home.


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## twowheeled (Jan 15, 2011)

milo said:


> So some more details came out on the latest pointless scheme to help first time buyers, but I'm wondering if it ever makes sense for anyone, and specifically myself, to use it.
> 
> I'm 32, live in Calgary, have an income of about 100,000 and may buy a home in the next year or so, for about 350,000 - 400,000. I've got total savings of about 180,000 and about 110,000 of that available for a downpayment, although I probably would only put 20% down.
> 
> ...


OP did you go through with the incentive? I think the advice you are getting is coming at this from the wrong way. This is not an interest free loan of any sort. It is an equity share. Similar to how any business can raise capital by taking on debt or issuing equity. The mortgage is a loan from the bank, the federal incentive is selling 5-10% share of your house to the government. 

The other point I don't see being discussed with the whole "keep the govt out of my house" perspective. if the government does accumulate a lot of residential RE on their balance sheet, are they not incentivized to prop up housing prices to avoid losses to the program? Maybe by letting the value of the loonie fall?


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## peterk (May 16, 2010)

twowheeled said:


> OP did you go through with the incentive? I think the advice you are getting is coming at this from the wrong way. This is not an interest free loan of any sort. It is an equity share. Similar to how any business can raise capital by taking on debt or issuing equity. The mortgage is a loan from the bank, the federal incentive is selling 5-10% share of your house to the government.
> 
> The other point I don't see being discussed with the whole "keep the govt out of my house" perspective. if the government does accumulate a lot of residential RE on their balance sheet, are they not incentivized to prop up housing prices to avoid losses to the program? Maybe by letting the value of the loonie fall?


I think you've seen all the arguments now, but seem unswayed from pursuing the equity loan because you are stuck on the thought that the government is reducing your risk exposure in some meaningful way. Regardless, worse case scenario is that you lose money, and are burdened with excess paperwork from the government. Not an insurmountable problem, most likely. Best of luck.


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## twowheeled (Jan 15, 2011)

I would really like to hear some additional arguments for the against. The main point that seems to get repeated is people are paranoid about the government having a piece of your pie. Ok, so let's explore where that leads. Is there any scenario you can think of that the government can use a 5-10% equity in the property to force you to sell or evict you or otherwise force some unfavourable action at odds with the homeowner?


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## like_to_retire (Oct 9, 2016)

twowheeled said:


> The main point that seems to get repeated is people are paranoid about the government having a piece of your pie.


People don't seemed to be too paranoid about the government owning a portion of their RRSP. I don't see this plan as being much different.

ltr


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## Mortgage u/w (Feb 6, 2014)

twowheeled said:


> I would really like to hear some additional arguments for the against. The main point that seems to get repeated is people are paranoid about the government having a piece of your pie. Ok, so let's explore where that leads. Is there any scenario you can think of that the government can use a 5-10% equity in the property to force you to sell or evict you or otherwise force some unfavourable action at odds with the homeowner?


The first thing I can think of is fees. 
Aside from repaying the government 5% (or 10% for new builds) of your gained equity, the solicitor fees are higher - you pay 2 title registrations when you buy and 2 discharges when you sell.

Other negative is you will be limited when refinancing. Although it is possible to pull out equity at a future date, you will be restricted by the incentive amount + the portion owed. Example, purchase is 100k ($90k mortgage + $5k incentive). In 5 years, Value jumps to $125k. Essentially, you should be allowed 80% of market value so $100k in this example. However, you need to deduct the incentive + 5% of market value so $7500 less. Rather than getting $10k equity ($100 minus $90k), you can only get $2500.

As for pros, well it all depends on each situation. Yes, there will be a monthly savings on your mortgage payment and you will pay 0.90% less on CMHC fees. However, the sooner you sell and the greater the property appreciation, the more you end up owing which will most likely be more than what you saved.


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## milo (May 31, 2016)

twowheeled said:


> OP did you go through with the incentive? I think the advice you are getting is coming at this from the wrong way. This is not an interest free loan of any sort. It is an equity share. Similar to how any business can raise capital by taking on debt or issuing equity. The mortgage is a loan from the bank, the federal incentive is selling 5-10% share of your house to the government.
> 
> The other point I don't see being discussed with the whole "keep the govt out of my house" perspective. if the government does accumulate a lot of residential RE on their balance sheet, are they not incentivized to prop up housing prices to avoid losses to the program? Maybe by letting the value of the loonie fall?


Sorry, only just saw this.

No I haven't bought a house, and won't be using the incentive regardless. This isn't because I am afraid of the government owning part of my house, but because the deal is terrible and only makes sense in situations where one shouldn't be buying a house anyway. The posters on this thread helpfully confirmed what my intuition was, and I am grateful for that.

I am, however, glad the deal is terrible and hope that it is so terrible that virtually no one takes it up. Demand side policies such as this one are an awful idea, and create the exact opposite effect on the market that the government states it wants and should be encouraging (less demand for housing debt and more housing supply).


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## [email protected] (Jan 30, 2020)

*Reduced Purchasing Power*



twowheeled said:


> I would really like to hear some additional arguments for the against. The main point that seems to get repeated is people are paranoid about the government having a piece of your pie. Ok, so let's explore where that leads. Is there any scenario you can think of that the government can use a 5-10% equity in the property to force you to sell or evict you or otherwise force some unfavourable action at odds with the homeowner?


Hello all, I am a first time poster with some insight from the within the mortgage industry (licensed mortgage agent in Ontario). The main negative for this incentive is that it reduces your buying power to 4 x income to a max of $120K income / $480k mortgage / $505K Purchase Price / $25.5K Downpayment. If you had an income of 120K and put the minimum downpayment (5% South of $500K + 10% North of $500K) with no outside debts at the qualifying rate of 5.19% that $120K would qualify for closer to $615K mortgage / $630K Purchase Price / $38K Downpayment. Granted these are not exactly equal($13K diferrence in downpayment) but no two mortgages ever are. We are a decently sized office within the GTHA and we have yet to write one of these deals. We've been close on a couple, but income became the exclusion. While this program is being adopted at greater rates in other regions of Canada, Toronto/Vancouver/Montreal are not great uptakers.


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## milo (May 31, 2016)

[email protected] said:


> Hello all, I am a first time poster with some insight from the within the mortgage industry (licensed mortgage agent in Ontario). The main negative for this incentive is that it reduces your buying power to 4 x income to a max of $120K income / $480k mortgage / $505K Purchase Price / $25.5K Downpayment. If you had an income of 120K and put the minimum downpayment (5% South of $500K + 10% North of $500K) with no outside debts at the qualifying rate of 5.19% that $120K would qualify for closer to $615K mortgage / $630K Purchase Price / $38K Downpayment. Granted these are not exactly equal($13K diferrence in downpayment) but no two mortgages ever are. We are a decently sized office within the GTHA and we have yet to write one of these deals. We've been close on a couple, but income became the exclusion. While this program is being adopted at greater rates in other regions of Canada, Toronto/Vancouver/Montreal are not great uptakers.


The fact that it is seen as normal to have such high mortgage:income ratios with such a low down payment is how we got into this mess in the first place. The government needs to be discouraging this, not throwing fuel on the fire.


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## Mortgage u/w (Feb 6, 2014)

milo said:


> The fact that it is seen as normal to have such high mortgage:income ratios with such a low down payment is how we got into this mess in the first place. The government needs to be discouraging this, not throwing fuel on the fire.


I wouldn't say its seen as normal but the reality is that its indeed the norm. Its easy to say that the government should discourage it but if no one is borrowing, economy will take a hit. Its a double-edged sword. I think the government has a responsibility to keep the economy afloat - whether we agree with the incentive or not. We can't be relying on the government to bring consumer debt down, encourage living debt free or leading a frugal lifestyle. Its up to each individual to make that assessment. That's like asking the government to ban fast food cause it causes obesity. It will never happen.

It is what it is - some people sleep well with large debt, others don't. Just like you can walk just fine with a $30 pair of shoes, some people feel the need to spend $300, even if they can't afford it. All I can say is, be smart with your finances and not be influenced by others.


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