If Scott Money had been allowed to borrow more from his RRSP for a down payment, the first-time Toronto homebuyer says he and his wife would have stashed a greater share of their savings in their registered retirement savings plans instead of tax-free savings accounts.
Now first-time buyers will be permitted to borrow up to $35,000 from their RRSPs, up from $25,000, the limit set 10 years ago, Finance Minister Bill Morneau announced in Tuesday’s federal budget.
As the centrepiece of its budget plan to boost home ownership, the Liberal government also launched a new shared equity mortgage plan to benefit first-time buyers with incomes of $120,000 or less, to be administered by Canada Mortgage and Housing Corp. (CMHC).
The measures are aimed at helping millennials and new Canadians break into a housing market that is seen as increasingly unaffordable, especially in big cities like Toronto and Vancouver.
It took Money and his wife eight years to save for the townhome they recently purchased in Mississauga for about $700,000.
“We always kept our eye on the $25,000 each (RRSP limit). That will be the new benchmark for people saving for a place,” said the 31-year-old communications professional.
Absent from Tuesday’s budget, however, was any mention of relaxing or eliminating the mortgage stress test that forces buyers to qualify for loans at a rate 2 per cent higher than their banks offer. Nor did the government raise amortization periods from 25 to 30 years on insured mortgages — a move Money says they would have considered to reduce their monthly payments, even though it would cost them more in interest over the long term.
When the couple take possession of their home in May, he figures their monthly mortgage will be just shy of $3,000, plus condo fees — about twice what they currently pay for an apartment in south Etobicoke.
“We’re lucky enough to have good jobs. I have a lot of friends who say buying a house is a dream,” he said.
Buyers have up to 15 years to repay the funds they borrow from their RRSPs.
The new First-Time Home Buyer Incentive, for those with an annual income of $120,000 or less, would provide an interest-free CMHC loan worth up to 5 per cent of the value of an existing property or 10 per cent of a new-construction home. The government says the $1.25 billion in financing would benefit about 100,000 Canadians over three years. Another $100 million in financing would be administered through third-party groups, including non-governmental organizations.
“That’s real help for people who want to own their own home. For young people. For families. For Canadians who need just that little extra help to make their dream of owning a home a reality,” Finance Minister Bill Morneau said in an advance copy of his budget speech.
While the deadline to repay the loan wasn’t specified in the 2019 budget, it is designed to be a long-term measure.
The incentive would be in addition to the buyer’s own down payment — a minimum of 5 per cent of the home’s value. The overall value of a mortgage and CMHC loan won’t be allowed to exceed four times a recipient’s household income. With that cap of $480,000, it means the highest-value home that could be purchased under the plan would be around $500,000.
It means a borrower purchasing a $400,000 home with a 5 per cent down payment and a 10 per cent CMHC shared equity mortgage worth $40,000 would have their total mortgage reduced from $380,000 to $340,000 — about $228 less on the monthly payment.
But Robert McLister, a mortgage broker who runs rate-watching website Ratespy.com, questioned the program’s impact in pricy cities like Toronto or Vancouver — places where “in the downtown core, you might be able to get a studio apartment” for that price.
“But if you wanted to start a family and put the crib in another room, good luck,” he said.
The idea is similar to a Toronto program called Options for Homes that has been studied by the government, according to Options CEO Heather Tremain.
“It’s trying to help those people who have been squeezed out by the stress test, people who are credit-worthy but they just need a bit more help to get into the market,” she said.
“It’s a way of helping people stay in the middle class or become middle class through home ownership, but it’s not the wild west,” said Tremain.
It avoids creating a lot of demand at a time when housing is in relatively short supply — a scenario that has been blamed for driving up home prices, she said.
Under the Options program, the loans are repaid when the home is sold. In addition to repaying the principal, the seller pays a share of the property’s appreciation, so if the market has gone up 10 per cent, they pay an additional 10 per cent.
It also resembles Trillium Housing’s more flexible mortgage program that offers needs-based mortgage loans, so a sole-support parent with more mouths to feed might get a bigger loan than a single person, said founder Joe Deschênes Smith. The average income level of Trillium recipients is $64,000, he said.
Michael Bourque, CEO of the Canadian Real Estate Association, called the incentive a positive development that “will have a significant impact on the market,” although he agreed it is capped at prices below those of the country’s two least affordable housing markets.
Bourque also praised a new $10-billion Rental Construction Financing Initiative spread over nine years, meant to offer below-market rates to developers of purpose-built rentals. The government says it will create 42,500 new units.
That’s 10 times the amount the government is devoting to affordable ownership, said Deschênes Smith.
“They’re putting a lot of money into affordable rental. I’m never going to criticize that. But I am going to say if you’re just looking at the housing piece, modest-income families — the bank teller, the teacher or nurse who are earning $60,000, $70,000 a year — they’re never going to get into the affordable (housing) eligibility. You can help a lot more families doing this,” he said of his Trillium program.