Real estate professionals at Merovitz Potechin LLP are considering the impact of possible incentives for first time homebuyers recently announced by Federal Finance Minister, Bill Morneau, in Federal Budget 2019. The marquee announcement is the creation of a shared equity mortgage incentive program partnering up first time homebuyers with Canada Mortgage Housing Corporation (“CMHC”).
Shared equity mortgages (sometimes referred to as shared appreciation mortgages or “SAMs”) are well known in the United States and the United Kingdom. SAMs have been used in both countries by private lending businesses and government housing corporations to help facilitate home ownership for low-income individuals and first time home buyers.
Briefly, Minister Morneau’s proposal is an arrangement whereby CMHC may partner with qualifying first-time homebuyers to both participate in and insure the financing of a home purchase. A first-time homebuyer would still have to save up for the minimum down payment for a CMHC insured mortgage from a lender. However, CMHC could then also provide the equivalent of a 5% or 10% stake in the purchase price (depending on the type of home),which stake would be secured by a shared equity mortgage.
The key feature of a SAM is that no payments are made during the term of the loan. This enables the homebuyer to obtain a smaller conventional mortgage loan up front, thereby reducing monthly principal and interest payments. By extension, when the property is eventually sold, CMHC would be entitled to be repaid its initial stake plus a 5% or 10% share of the increase in the property’s value. In other words, by working with CMHC, the homeowner will agree to share a portion of the profit realized at the time of the sale.
This incentive could be very attractive to first time homebuyers and low income individuals, as it could grant people access to a property that might otherwise be just out of reach.
Minister Morneau’s proposal is quite intriguing in theory, but questions remain. For instance, what happens if the home is sold and there is no profit? What if there is, in fact, a loss? Will CMHC be prepared to write-off such a debt? If the property becomes a rental unit, will CMHC be entitled to a portion of tenancy income?
These details matter very much and Minister Morneau advises that the exact terms of this incentive program will not be announced until later this year.
Should you have initial questions about this proposal and its practical impact, please feel free to contact real estate lawyer Michael Brown at 613-563-6676.