Three major changes to housing rules any first-time homebuyer should know

If you have purchased your first home recently (or are planning to), you've likely seen a lot of news over the past year affecting first-time homebuyers. The TD Newsroom sat down with Marc Kulak, Vice President, Real Estate Secured Lending at TD, to break down how changes to incentive programs and the qualifying interest rate will affect Canadians thinking about buying a home.

There's been a lot of news lately about the housing market and changes to rules affecting potential homebuyers. What are some of the changes that potential homebuyers should know about?

MK: From a regulatory perspective, there have been a few notable changes. For example, the federal government has tightened the criteria for mortgage qualification over the past two years, with the intention of helping Canadians feel more confident with their mortgage borrowing. They've also introduced several new housing measures in the 2019 Federal Budget designed to help first-time homebuyers, including an increase to the Home Buyers' Plan and a new First-Time Home Buyer Incentive scheduled to launch in September 2019.

Tell us more about these two first-time homebuyers' incentives.

MK: The existing Home Buyers’ Plan program allows first-time homebuyers to withdraw funds from their Retirement Savings Plan (RSP) to use toward their first home. The 2019 federal budget increased this withdrawal limit from $25,000 to $35,000 (up from $50,000 to $70,000 for a couple). The increased limit is meant to give first-time homebuyers greater access to their RSPs to purchase or build a home.

Borrowers who meet the criteria have up to 15 years to repay the amount withdrawn and can repay the full amount at any time without penalty. If it's not repaid, the annual amount becomes taxable income in that year.

The second is related to the First-Time Home Buyer Incentive. The federal government introduced the First-Time Home Buyer Incentive to enable first-time homebuyers to reduce their monthly mortgage payment without increasing their down payment.

READ: Millennials seek suburban living to climb the property ladder

To qualify, you must be a first-time homebuyer and have a down payment of at least 5% of the total purchase price (up to 20%). The household income must be under $120,000, and the mortgage and incentive amount combined cannot exceed more than four times the household income.

Borrowers who meet the criteria can apply for a 5% or 10% shared equity mortgage with the Government of Canada. A shared equity mortgage is where the government shares in the upside and downside of the property value—for example, if you receive $25,000 from the government and the value goes up 20%, you then owe the government $30,000 when it comes time to repay. This incentive is repayable in full at any time throughout the term of the mortgage or upon the sale of the property.

We would say that it is still very important to speak to a financial advisor or mortgage specialist to make sure you qualify for the first-time homebuyers' incentives, and to confirm the best option, depending on your needs. It might help to also consult with a lawyer to obtain independent legal advice about the shared equity mortgage.

The Bank of Canada recently lowered its qualifying rate. How does this change impact someone looking to buy a home?

MK: The qualifying rate is the interest rate used in the mortgage stress test to qualify a borrower when they apply for a mortgage or a TD Home Equity FlexLine. Qualifying rates are in place to verify that borrowers can continue to make their payments if mortgage rates increase over the course of their term.

READ: TD Explains - What's a mortgage stress test?

In July 2019, the Bank of Canada lowered its qualifying rate from 5.34% to 5.19%, marking the first time the rate has dropped since September 2016. This decrease takes some of the pressure off first-time homebuyers and potentially makes it slightly easier for those with uninsured mortgages to qualify for a mortgage.