For first-time homebuyers, getting into the housing market can be challenging - especially if you’re getting your downpayment together. But did you know, there are ways to help first-time homebuyers build up their downpayment?
Today we’re going to talk about Downpayment Assistance Programs: what they are, who offers them, what they cover, how they’re paid off, and if you can avoid repaying them at all. Related: Investing in fractional ownership
What are downpayment assistance programs?
A downpayment assistance program is structured as a shared equity mortgage between the buyer and the lender. In exchange for offering more cash up front, the lender typically owns a portion of the equity in your home - which can either be repaid as a loan or upon the sale of the property. In Canada, these programs are offered by the government or by private lenders.
Do you qualify for downpayment assistance?
The Canadian government has outlined that downpayment assistance programs are geared towards helping low to middle-income families become homeowners. Meaning, that there are relatively strict requirements you’ll need to meet (which will change by municipality):
- You will need to be a first-time homebuyer
- You will need to make this property your primary residence
- You will need to pre-qualify for a mortgage
- You will need to be considered low to middle income (usually less than $100,000)
- You will need to purchase property below a maximum threshold (each program will outline what the maximum value for a property can be, usually deemed as affordable housing)
- You will need to be a Canadian resident
It’s important to note that each program offered in Canada is different and will have changing requirements - so keep up to date with the program you’re looking into to ensure it’s right for you. (more on this below).
Who offers downpayment assistance programs?
Within Canada; downpayment assistance programs are offered by the government and by private lenders.
Here are a few examples:
First-Time Homebuyer’s Incentive (FTHBI)
The First-Time Homebuyer’s Incentive (FTHBI) is a federally shared equity mortgage plan. The intent of the plan is to minimize your monthly payments by helping you reach the 20% down threshold. With the FTHBI you can borrow up to 10% of the house’s price for your downpayment. That borrowed 10% can be repaid upon the sale of your house. In the short-term, the cash up front will decrease your monthly expenses, however, in the long-term that 10% sales price will likely be higher if your property increases in value.
Provincial and municipal plans
Each province and municipality will have varying requirements for downpayment assistance - here are a few notable examples:
Provincial/Municipal variance with examples:
Each province will structure its loan types differently; meaning some have a fixed payment structure while others will be upon the sale of the home. It’s also common that to qualify for the provincial and regional requirements, you will need to have been a resident for a set amount of time. Provincial evaluations for low-income are assessed differently - for example, in Saskatchewan to be considered low-income for downpayment assistance, you need to have a net worth of less than $25,000. Other provinces and regions may base this on just income.
In Calgary, as another example, part of the qualification is based upon properties that the municipality has pre-selected as ‘affordable’. This means you won’t be able to buy any property you want, only the designated ones (This is also the case for Montreal’s program).For Barrie, if the property becomes your primary residence for more than 20 years, the loan is forgiven. Having a clause like this is great if you plan to stay in the residence for the long term. Other provinces, like British Colombia and Newfoundland & Labrador, have discontinued their assistance programs in Vancouver and St.John’s respectively. This is to say that these programs could be continued, changed, or discontinued so it’s best to look into local programs near you!
In the Canadian market, private lenders can also offset the cost of home ownership. A good example of this is Ourboro, who co-invests up to $250,000 for a downpayment. The upside of using a private lender like Ourboro is that there are fewer restrictions on who can qualify. Instead of basing the investment on income range, it’s based upon meeting a minimum threshold of 5% down and buying within the GTA (Greater Toronto Area). They structure their investments as mortgage equity, so the lender will only be paid out once the home sells.
Similar to government-backed programs, there are requirements for being pre-qualified, making the property your primary residence, and living in the residence for more than 10 years. This might make sense as an alternative if you don’t qualify for federal or provincially backed downpayment assistance.
Related: Most common first-time closing mistake
Using a government program or using a private lender - what makes sense?
While there is no perfect solution, there are options that will make more sense based on your geography and income. Depending on the government downpayment assistance program, there could be an option for the loan to be forgiven.
Typically, this would be the case if you live in the property for a set amount of time and make the property your primary residence. If the loan is forgiven, this will offset some of the cost for your mortgage. However, that assumes you qualify within the government-mandated income bracket. Using a private lender for down payment assistance makes more sense if you’re above the threshold for qualification and looking to buy within the area they serve.
Our Bottom Line:
Assess where you are financially and within Canada. Federal, provincial, municipal, and private downpayment assistance programs can be excellent financial tools if you meet the qualifications and the program matches your goals for homeownership. With a little research into the right plan, you’ll realize you are a step closer to homeownership!