When the Federal government released its budget in mid-March, those in the housing sector were eager to see what might be in store to help address the pressing need of making housing more affordable. Indeed, there was a response to housing affordability; it just wasn’t quite what people were expecting.
In the lead up to the budget, suggestions from analysts and industry organizations on how to ease the strain of the housing market ranged from lengthening the amortization of mortgages from 25 to 30 years, changing the stress test, or extending the First-Time Home Buyer’s Plan from $25,000 to $35,000 - the last of which did happen. The stress test in particular attracted a lot of attention, especially since it resulted in a 33% drop in first-time home purchases according to the Canadian Home Builders’ Association, which estimates 147,000 first-time home buyers couldn’t access the market as a result of this necessary measure.
Instead, the world was introduced to shared equity mortgages with the First-Time Home Buyer Incentive, a tool that will allow CMHC to lend a homeowner money for a shared stake in the equity of a home. While many may have responded to the approach with some skepticism, I know that the technique works.
How do I know? Options for Homes has been offering shared equity mortgages for 25 years and we’ve helped over 3,000 families become homeowners in the process. The government also borrowed from our model in the formulation of theirs, shining a light on a previously little-known model. It’s a validation of what we’ve been doing and kind of makes us feel like a start-up that’s been acquired by Google!
I also know that talking about shared equity tends to elicit furrowed brows. People don’t immediately get it and are naturally nervous about something that isn’t familiar. While I can’t speak to the details of how CMHC will roll out the program, I can certainly share how it works at Options.
A shared equity mortgage, also often referred to as a shared appreciation mortgage, is a loan that helps deepen the affordability of a home and bridges the gap for those who are able to afford the costs of carrying a mortgage but might not have enough down payment saved.
In the case of Options, we offer anywhere from 10% to 15% of the value of a condo as a down payment loan, in addition to a 5% down payment required from the purchaser’s own money. This is available to anyone, not just first-time buyers, regardless of income or the price of the suite they’re interested in. The effect of this is that a purchaser has a larger down payment, which results in a lower mortgage requirement and lower monthly costs. This shared equity loan comes with no scheduled payments.
The loan is repayable at the time of sale (or any time a homeowner wishes) and 10% or 15% (depending on the size of our investment) of the sale price is due back to Options. That’s the shared equity part: we help people become homeowners; we share the benefit from the equity gain in the home. As a non-profit, our gains are put towards new projects that help others achieve financial security through home ownership.
Details about the First-Time Home Buyer Incentive are still being hammered out and are expected by September when the program takes effect. But to me, it seems like a surgical counter strike to the stress test, which was a bit of global tool to cool the runaway housing market. While some may have wanted or expected changes to the test, my sense is that it worked. It brought prices down, things stabilized, and they landed the plane of the economy on a narrow landing strip. Removing the stress test would destabilize things, but there was room for refinement.
That’s where this incentive comes in. Since it’s only available to first-time home buyers with a max household income of $120,000, and the maximum value of a home to be purchased is 4x their income, it is quite targeted. The focus is on millennials, who are credit worthy, will likely have rising incomes and are stepping into the market. It will have limited impact in the downtown core of expensive markets like Toronto and Vancouver and it won’t be available to current homeowners looking to move up in the market.
That’s also why criticisms that the $1.25 billion price tag of the incentive will increase demand are unfounded. Yes, the rollout of this program will allow those who had been squeezed out of the market the chance to get in. But that $1.25B is spread out over three years across the whole country. That’s $400 million a year, nationally.
To put that into perspective, Options alone is putting over $20 million in second mortgages into the GTA market this year, with an additional $15 million coming soon for The Humber. We’re immensely proud of our impact, but we’re certainly not tipping the supply-demand scales in any dramatic fashion.
By offering more shared equity mortgages to those on the cusp of home ownership, the Federal government is strategically addressing some of the downsides of its earlier policy without disturbing the fine balance it achieved with the stress test.
Of course, when it comes to success the devil’s always in the details, but it’s hard to feel anything but optimism about the large-scale implementation of a financial model that we know has the potential to help so many Canadians.