Government buyer incentives: Are they really worth it?

Canadian homebuyers can take advantage of federal government programs to help in the purchase. The trick is knowing whether the programs will really be of benefit to you.

Among the most popular programs is the Mortgage Loan Insurance Program, introduced in 1994 by Canada Mortgage and Housing Corporation, the housing arm of the federal government.

Under this program, buyers can purchase a home valued at up to $250,000 (in most urban markets) with as little as 5 per cent of the purchase price as a down payment. The mortgage is insured by Canada Mortgage and Housing Corporation, which protects the mortgage lender in case of default.

For example, if you bought a $225,000 house in Toronto, you could purchase with a down payment as low as $11,250. A $100,000 condominium would require only $5,000 down.

The ‘5 per cent’ down program is also available from a single private-sector insurer, GE Capital, a subsidiary of U.S.-based GE Corporation.

All types of homes are eligible under the program. Buyers may qualify if they can meet payments for principal, interest, property taxes, heating and 50 per cent of condominium fees without consuming 35 per cent of their gross family income. The mortgage insurance can be obtained from a wide variety of lenders.

While the leverage opportunity with such ultra high-ratio financing is tempting, there are a couple of potential pitfalls.

First of all, the insurance premium for 95 per cent of value financing is 3.75 per cent of the mortgage amount at both CMHC and GE Capital. Normally, the mortgage lender adds this fee to the mortgage amount that you pay each month.

This means that, in reality, you would only have a 1.25 per cent equity stake in the property. On a $225,000 house, for instance, your actually equity stake would be less than $3,000. If house prices should fall you could be quickly left with negative equity and find yourself making payments on a mortgage that is worth more than your home.

Also, with such a high ratio mortgage your monthly payments and the income needed to cover it would be much greater than if you had put down a larger down payment.

A second popular program is the Registered Retirement Savings Plan (RRSP) Home Buyer Plan. This program allows people to tap into their RRSP funds up to a $20,000 maximum, or $40,000 for a couple, towards the purchase of a home. The withdrawals are not deemed to be taxable income in the taxation year they are withdrawn.

There is a no-penalty payback period for the RRSP money of a maximum of 15 years.

Again, buyers should be cautious when looking at funneling RRSPs into a home purchase. You must balance the lost revenue that the money could potentially generate within the RRSP against any savings in not including the $20,000 as part of the mortgage.

Finally, new homes are the only taxable purchase in Canada that is allowed a partial rebate under the federal goods and services tax.

The GST is applied to the purchase of new homes only, not resale homes. If the property is priced at $350,000 or less, the buyer is entitled to a rebate of 36 per cent of the total GST paid. The net effect is you pay 4.5 per cent, rather than 7 per cent. For new homes priced above $350,000, the full 7 per cent applies.

Buyers can save a bit by completing a ‘GST new housing rebate form’ before the sale of the property is complete. The form allows you to pay only the net amount of the GST payable on closing and you won’t have to wait for Ottawa to mail back the rebate cheque.

By: Frank O'Brien
June 03, 2001

Copyright 2001 Inman News Features
Distributed by Inman News Features