Looking to purchase your first property, but the market & payments are getting away from you? Consider a new build!
Buying your first home can be an overwhelming experience, especially in the wild Alberta market. Clients that didn't get in last year, but are still in the market for a new home, are looking at higher required down payments and higher monthly payments after closing. New builds are becoming a more viable option for young Canadians looking to purchase their first home. Purchasing a new build may allow clients to avoid competing offer situations, and it allows them to take advantage of the maximum shared equity loan available via the Government of Canada's First Time Home Buyer Program.
The First-Time Home Buyers Incentive program allows eligible buyers to increase their down payment from 5% to 15%, resulting in significant savings. In this blog post, we'll explain how the incentive works and why purchasing a new construction property can help you take full advantage of the 10% incentive.
Use our quick navigation guide below to jump to any point of our blog on Maximizing the First-Time Home Buyers Incentive with New Builds:
- Understanding the First-Time Home Buyers Incentive
- How Does the Incentive Work?
- Financial Difference:
- Why Consider Purchasing a New Construction Property?
- In Conclusion
The Canadian government introduced the First-Time Home Buyers Incentive program in 2019 to assist first-time buyers in affording their dream homes. This program enables eligible buyers to borrow a portion of their down payment from the government, thereby reducing their mortgage amount and future monthly payments.
Under the program, the incentive amount differs based on the type of property:
- For existing homes, the incentive is 5% of the purchase price.
- For new construction properties, the incentive increases to 10% of the purchase price.
The government provides this amount as an interest-free loan, which must be repaid within 25 years or upon the sale of the property, whichever comes first. Homeowners must pay back up to a maximum gain of 8% per annum (not compounded) on the incentive amount from the date of advance to the time of repayment, in addition to the original borrowed amount.
To illustrate the potential savings, let's consider a scenario where you're a first-time homebuyer looking to purchase a $500,000 home. With a 5% down payment, you would need to provide $25,000, leaving you with a mortgage of $475,000. However, if you qualify for the First-Time Home Buyers Incentive and decide to purchase a new construction property, you may be eligible to increase your down payment to 15% by borrowing an additional 10% from the government.
In this example, your down payment would be $75,000 ($50,000 from the government and $25,000 from your savings), and your mortgage amount would decrease to $425,000. By increasing your down payment, you would have a smaller mortgage, resulting in lower monthly payments and reduced interest payments over time. This means you could potentially save thousands of dollars throughout the life of your mortgage.
To better understand the financial impact, let's compare the costs of a 5% down payment versus a 15% down payment with the First-Time Home Buyers Incentive, assuming a fixed interest rate of 4.54% over a 25-year mortgage term:
- 5%: $25,000
- 15%: $75,000
As you can see from the comparison, utilizing the First-Time Home Buyers Incentive to increase your down payment by 10% can make a significant difference in your monthly payments over the long term. With a 15% down payment, you'll have lower default insurance costs, a smaller mortgage balance, reduced monthly payments, and substantial interest savings over the first five years. In this example, you could potentially save over $60,000 in interest over the life of your mortgage.
If you're a first-time homebuyer aiming to take advantage of the 10% incentive offered by the First-Time Home Buyers Incentive, purchasing a new construction property could be smart. Here are some reasons why:
Energy Efficiency: New construction properties often have energy-efficient features and technologies, such as insulation, windows, and appliances. These features can help reduce your utility bills over time, providing long-term savings.
Warranty Coverage: New homes typically come with warranties, giving you peace of mind and protecting you from unexpected repair costs. This can save you money in the early years of homeownership.
Modern Features: New construction properties often incorporate the latest design trends and amenities. This means you're less likely to face immediate renovation or upgrade expenses, further contributing to your long-term savings.
Stress-Free Maintenance: By purchasing a new home, you can avoid the immediate need for extensive repairs or renovations. This saves you money and reduces the stress associated with taking on major home improvement projects right after purchasing the property.
The First-Time Home Buyers Incentive can be a game-changer for those entering the housing market. By utilizing the incentive and increasing your down payment, you can enjoy lower mortgage payments, reduced interest costs, and significant savings over the life of your mortgage. If you're considering purchasing a new construction property, now is could be an ideal time to take advantage of this opportunity.
Posted by Cody Tritter on