Finance Committee on May 6th, 2019

[Cynthia Leach]

It's a function of the borrower's down payment on the insured mortgage as well as of his or her income. Because there's a $120,000 income limit as part of the incentive, for a borrower at that income limit, the maximum house price range would be from about $505,000 to about $565,000, approximately. It increases, then, with the higher borrower down payment.

Of course, the first mortgage has to be insured, and insured borrowers occupy a different market segment from others in the overall market. Insured buyers tend to be first-time homebuyers who purchase lower-priced properties as they get into the housing market.

[Pierre Poilievre, Conservative, Carleton, ON]

You said the first mortgage. You imply that there would be two mortgages on the house.

[Cynthia Leach]

The exact structure is not determined, but the idea is that the borrower has to qualify initially for an insured mortgage in order to be eligible for the incentive.

[Pierre Poilievre, Conservative, Carleton, ON]

Is that before even taking into consideration the effect of the incentive on the buyer's ability to support the borrowing for the house?

[Cynthia Leach]

Yes. The prospective borrower would have to qualify for an insured mortgage under the existing mortgage rules.

[Pierre Poilievre, Conservative, Carleton, ON]

That wasn't my question. The question is, would they have to qualify without the incentive first and then receive the incentive, or would the incentive itself be taken into consideration when determining whether or not the buyer qualifies?

[Cynthia Leach]

I guess you could say the incentive would be taken into consideration to the extent that the incentive reduces the size of the initial insured mortgage. The idea is that the borrower would qualify on the now reduced size of the insured mortgage.

[Pierre Poilievre, Conservative, Carleton, ON]

Okay.

[Michel Tremblay]

To be clear, the borrower also has to qualify for an insured mortgage in the first place, so they need to meet the parameters under mortgage loan insurance.

Also as a point of clarification, it's not just CMHC and the government; they could be going through a private insurer also on the first mortgage. It could be insured by Genworth, or by Canada Guaranty as well.

[Pierre Poilievre, Conservative, Carleton, ON]

But they would have to qualify for insurance based on the assumption that they are getting the first-time homebuyer incentive. That's what I understand from Madam Leach. Do I have that correctly?

[Cynthia Leach]

I think so, yes.

[Pierre Poilievre, Conservative, Carleton, ON]

Okay.

I just want to make sure I understand this, though. Would they first go and qualify for insurance and, having qualified, then go and apply for the first-time homebuyer incentive? Or, when they're applying for insurance in the first place, would they be able to consider the homebuyer incentive as part of the down payment required to be insured in the first place?

[Michel Tremblay]

Go ahead.

[Cynthia Leach]

I think it's more the latter. The application process hasn't been outlined; it will follow. The idea is that applying for the insured mortgage should take into account that the availability of the incentive, if the borrower qualifies for it, would be able to reduce the size of the insured mortgage. That insured mortgage size would be the basis on which they would qualify.

One other point of clarification of the incentive is that because the borrower has to qualify under existing mortgage insurance rules, the incentive would not decrease the down payment required for an insured mortgage. There are minimum down payment requirements, and the incentive would not change that.

[Pierre Poilievre, Conservative, Carleton, ON]

For example, to be insured you need 5% or 10% down. You can't use the first-time homebuyer incentive to cover that down payment?

[Cynthia Leach]

The down payment varies from a minimum of 5% up to about 7.5% at the $1 million price limit. As you said, the incentive cannot be used to reduce that. Rather, the incentive, similar to a down payment, reduces the size of the insured mortgage, so it allows you to reduce the size of your insured mortgage without increasing your down payment, therefore lowering your borrowing costs.

[Pierre Poilievre, Conservative, Carleton, ON]

Okay.

Did you say you expect 100,000 people to use this per year for three years, or 100,000 over three years?

[Cynthia Leach]

I would estimate 100,000 over the three-year program.

[Pierre Poilievre, Conservative, Carleton, ON]

If that is fully subscribed, does the budget provide for any additional funds, or is it capped at this level for now?

[Cynthia Leach]

The budget announced program funding up to $1.25 billion.

[Pierre Poilievre, Conservative, Carleton, ON]

Is that enough to give 100,000 people this incentive?

[Cynthia Leach]

That is to be determined. There are many unknowns with respect to the program, including borrower take-up, and—

[Pierre Poilievre, Conservative, Carleton, ON]

I'm talking about the maximum, though. Assuming that there is borrower take-up and all of that, are we more or less capped at about 100,000 buyers who will benefit from the first-time homebuyer incentive?

[Robert Sample]

The size of the first-time homebuyer incentive that each borrower takes on is a variable that needs to be worked through as there is borrower pickup. The program parameter that we could speak to is the $1.25-billion envelope.

[Pierre Poilievre, Conservative, Carleton, ON]

Okay.

Let's say that CMHC, through this program, takes a 10% share in a first-time homebuyer's house, that the house is purchased for $400,000, and that the market takes off and over the course of a few years the house doubles in value and is now an $800,000 house. Will the amount that the homebuyer has to pay back to the government now have risen to $80,000?