The federal government's plan to help first-time homebuyers through increasing retirement fund borrowing and covering a portion of their mortgage is "quite puzzling," says one expert.
The Liberal's 2019 federal budget, the last one before the election, introduces incentives meant to help first-time buyers, particularly those in their 20s and 30s, have access to more funds for a down payment. Now, they'll be allowed to withdraw $35,000 from their RRSP, up from $25,000.
First-time homebuyers whose household income is less than $120,000 will also be eligible to finance a portion of their home purchase through what the government is calling a "shared equity mortgage" — essentially a zero-interest loan — with Canada Mortgage and Housing Corporation.
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The new measures come as homes in Canada's largest cities become increasingly unaffordable. The average price of a condo in Toronto and Vancouver, for example, is more than $600,000, according to their real estate boards.
But whether they'll actually help this demographic of Canadians is up for debate, said principal broker Vince Gaetano at MonsterMortgage.ca.
"The changes are quite puzzling," said Gaetano. "I think this budget is designed to make more friends than enemies. It's a little bit disappointing."
In terms of the shared equity mortgage, Gaetano described what's been released about the process so far as "sketchy."
The federal government said in its budget that homebuyers will be offered a 10 per cent shared equity mortgage for a newly constructed home, and five per cent for an existing home. This means the government has a 10 or 5 percent stake in the home, which will be paid back when the home is sold. The specific details of the program still need to be ironed and will be revealed later in the year.
"These are complex-type programs that will require a lot of work to implement from lenders to the people processing the mortgage payments," Gaetano said, questioning if insurance rates will be higher for these types of mortgages, whether the owners will be allowed to rent out their home, and how the government will earn back the money if the home is sold at a loss.
"We may see a spike in real estate values as people try to take advantage of the incentives," he said.
The mortgage and incentive amount cannot be more than four times the home buyers' annual household incomes. The largest mortgage that a home buyer could have using the program is $480,000 — disqualifying the vast majority of prospective home buyers in Toronto and Vancouver.
In terms of the increased RRSP borrowing cap, Gaetano said, "I think it's a nice flowery tool that isn't going to get much traction at all."
Most first-time homebuyers won't have anything close to $35,000 in their RRSP to take advantage of the change, he said. In his experience as a mortgage broker, very rarely are these clients taking out the current $25,000 cap. And they have to pay it all back in 15 years.
Parvathi Subramanyam is the demographic the Liberal's housing changes are targeting — a 29-year-old professional in downtown Toronto. In 2017, with an annual salary of about $80,000, she was on the hunt to buy her first home, but wouldn't have qualified for either of the incentives.
After a half dozen bidding wars, she secured a one-bedroom-plus-den condo for $490,000 in 2017, too much for the shared mortgage equity program. When she drew some savings from her RRSP, they fell considerably short of the $25,000 cap, nevermind $35,000.
"Honestly, because I'm so young and only recently started contributing to my RRSP, it really wouldn't have made much of a difference," she said of the rule change.
The greatest impact she said the government could have on the housing market isn't changing borrowing rules, but addressing a more systemic problem.
"Building more affordable housing is part of it, we don't have enough supply," Subramanyam said.
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The Liberals are promising to build 42,500 affordable units across Canada by allocating $10 billion over nine years to a rental construction financing initiative.
Overall the changes are unlikely to help urban dwellers, but will help those in smaller cities and rural areas, said Gaetano.
"This definitely provides a tremendous boost outside of big cities, the rest of Canada will do extremely well with this plan," he said.
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The budget does not address the controversial mortgage stress test, introduced a year ago. The test requires homebuyers to prove they can handle a mortgage at a rate two percentage points higher than the current rate. It also does not give first-time homebuyers the option of taking out 30-year mortgages, instead of 25, which groups like the Toronto Real Estate Board have been pushing for.
"Current market realities indicate the stress test and federal limitations on 30-year mortgage amortizations are not warranted," said John DiMichele, the board's executive director in a statement.
"This is especially true at a time when first-time buyers are facing serious challenges in achieving the dream of home ownership. We applaud the federal government for acknowledging that housing issues are a top priority for Canadians, but current mortgage restrictions still need to be addressed."