- Dave The Mortgage Broker - https://www.integratedmortgageplanners.com/blog -

The New Bank of Justin and Bill

Toronto mortgage ratesToday I’ll interrupt my usual Monday Morning Interest Rate Update to cover another mortgage-related topic that garnered most of the headlines last week.

Last Thursday, our federal government released its 2019 budget, and it included several initiatives that were designed to improve housing affordability.

While on first pass this will be welcome news for home buyers and for many of our now somewhat beleaguered regional housing markets, the federal government has thus far left out many key details that are needed to assess the full impact of its main new initiative, the First Time Home Buyers Incentive (FTHBI) program.

Bluntly put, the announcement reminded me of a term paper that was written during an all-nighter the day before it was due (and my university roommates will confirm that I am somewhat of an expert on that topic).

In today’s post, I’ll outline what we know about the two most prominent initiatives that were announced last week, I’ll offer my take on how these changes are likely to impact our regional housing markets, and I’ll explain why these changes should concern existing home owners across the country.

Initiative #1 – Changes to the Home Buyers Plan (HBP)

The HBP allows first-time home buyers and repeat buyers who have not owned a home during the past five years to withdraw funds from their Registered Retirement Savings Plan (RRSP) tax free to buy or build a home. (The funds must be repaid in equal instalments over a fifteen-year period.)

The federal government announced the following changes to the HBP in its 2019 budget:

These tweaks to the HBP should be of help to some home buyers, but fellow mortgage broker Rob McLister noted in a recent article that there are about 300,000 new first-time buyers each year, and in 2017, only 20,250 (8.4%) of them maxed out their full HBP $25,000 allowance.

Adding home buyers who have experienced a marital breakdown and would not otherwise be eligible is a helpful tweak, but here too the impact is likely to be minimal. While this cohort is likely to have accumulated larger balances in their RRSPs, it is not a large enough portion of the home-buying population to create much of a tailwind for our housing markets overall.

Expected impact of Initiative #1: Low

Initiative #2 – The introduction of the First Time Home Buyer Incentive (FTHBI) program

The new FTHBI program will provide an interest-free shared-equity loan to eligible first-time buyers. In short, some first-time buyers who aren’t lucky enough to have access to a Bank of Mom and Dad will soon be able to access the Bank of Justin and Bill instead.

Here is how the new FTHBI program, which will start this September, will work:

Here are some of the details that have yet to be clarified:

I could go on, but I think I have made my point.

While the FTHBI program has dominated the attention of the media since the 2019 budget was announced, I don’t actually think it will end up appealing to very many first-time home buyers for the following reasons:

Expected impact of Initiative #2: Low

In summary, I think the changes to the HBP are mildly positive.

House prices have increased substantially in the decade since the HBP limit was last raised, and the decision to allow people undergoing a marital separation access to their RRSPs will help them get re-established more quickly.

Conversely, I think the new FTHBI program will become a bureaucratic nightmare to administer, and it comes with much more risk.

For starters, while the federal government has assured us that the FTHBI program was designed to benefit less expensive housing markets, if the maximum purchase price is in the $500k to $600k range, it will concentrate its impact on the bottom end of the condo markets in Toronto and Vancouver, which “are already the most competitive” according to real-estate broker and data guru John Pasalis.

Also, the Bank of Canada still believes that household debt levels are “the single biggest risk to our economy”, so if the FTHBI program is successful, isn’t the federal government worried that it will be offering lower-income first-time buyers another rope with which to hang themselves?

Most concerningly, could the FTHBI be just a sign that our federal government has lost its nerve in an election year and is therefore bowing to political pressure, after a decade of prudent policy making appears to have successfully engineered soft(ish) landings in our hottest regional housing markets?

Time will tell.The Bottom Line: Last week the federal government announced that it will increase the HBP limit from $25,000 to $35,000 and that buyers who are undergoing a marital separation will now be eligible to access the program. The government also introduced a new FTHBI program, but I think it will prove to be a complicated dud.

David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.