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Discussion Starter #1
So some more details came out on the latest pointless scheme to help first time buyers, but I'm wondering if it ever makes sense for anyone, and specifically myself, to use it.

I'm 32, live in Calgary, have an income of about 100,000 and may buy a home in the next year or so, for about 350,000 - 400,000. I've got total savings of about 180,000 and about 110,000 of that available for a downpayment, although I probably would only put 20% down.

Instinctively, I don't see any reason for myself (or anyone) to use this new CHMC incentive, but I would be eligible to use it so it's worth investigating. I'd have to put down less than 20% and pay the CMHC insurance (but get a better interest rate), but I'd get an 'interest free' loan of about 17-20K. But also lose a portion of the potential upside (or downside).

Thoughts? Now that I've written that I'm pretty convinced it's not a good idea for me, but is there any situation it is a good idea?
 

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If people have the 20% down payment there would be no benefit.

For people who don't have the 20% down payment, the CMHC loan may help them qualify and save money on their monthly payments.

If home prices go up, the people gain on a house they may not have otherwise been able to purchase. If home prices go down, the CMHC shares in the loss.

I think this is also an important factor the government has considered

Many parents are borrowing to provide the 20% down payment for their kids, putting their own retirements at risk.

If the kids can buy with this type of assistance from the CMHC, it is better for the parents to not be involved with their kid's home purchase.

The CMHC is introducing this to keep homes selling and perhaps stop the decline in home prices that is already underway.
 

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I already commented about this incentive in another post.......ultimately, this incentive is useless and to be avoided.

Its not an "interest free" loan as you mention - you can be sure of that. What will most likely happen is the government will take a percentage of your gain once you sell. Most likely the same percentage that was 'loaned'.

The best "incentive" you should consider is putting 20% down to avoid mortgage insurance premium. Yes, the interest rate is slightly higher than an insured rate - no more than 15bps. But given our historic low rates which are here to stay for several more years, the rate difference is negligible.
 

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Thoughts? Now that I've written that I'm pretty convinced it's not a good idea for me, but is there any situation it is a good idea?
Here is some history on government-sponsored investment:
While the two types of tax avoidance are quite different, they both involve risk. Consider, for instance, the sad history of MURBs — a bureaucratic designation for Multiple Unit Residential Buildings, or what most of us would call apartment buildings. Back in the 1970s, Ottawa decided to encourage investment in this sector by allowing investors in new apartment buildings to claim their annual depreciation against other income for tax purposes. Promoters quickly took advantage of that offer and constructed leveraged deals that allowed MURB investors to put down as little as 10% of their total investment while giving them an immediate tax break almost as big as their initial cash outlay.

All of which was fine until the real estate market crashed in the late 1980s, vacancy rates soared and a lot of clever taxpayers found they couldn’t sell those lovely tax-assisted MURBs for love or money. The lesson? “The prospects of immediate tax savings blinded people to the economic reality of the underlying investment,” says Robert Brown, former CEO of PriceWaterhouse Canada, former head of the Canadian Tax Foundation and a long-time observer of the tax planning industry. “Investors weren’t thinking about the long-term implications.”

That lesson went unheeded in the 1990s when investors flocked to Labour-Sponsored Investment Funds (LSIFs). These are essentially mutual funds that invest in small start-up firms. Investing in such businesses has always been notoriously risky, so federal and provincial governments decided to offer tax credits worth 30% or more of your initial investment to encourage as many investors as possible to take the plunge.

Unfortunately, most labour funds have turned out to be dogs. Even the 10 best funds with a minimum five-year track record have lost an average of 1.2% a year, according to the fund tracker Morningstar. Many LSIFs have done far worse. Adding misery to discontent, those who invest in labour funds have to hold these poorly performing investments for a minimum of eight years or pay back all the tax credits they have already claimed.

The dismal track records of MURBs and LSIFs demonstrate that no tax advantage can compensate for a fundamentally lousy investment. “Any investment you make should stand up on its own investment merits,” says Adrian Mastracci, portfolio manager of KCM Wealth Management in Vancouver, a fee-only advisory service. “You should ask yourself: ‘Would I want to own this without the tax goodies?’ If not, you should move on.”
I lived through both of these. In fact, I partnered with a builder to construct a 3-story apartment building (MURB) and made a quick $150k profit in 2 years. The incentive helped developers and not buyers.

Since then, I have considered all government incentives as interference in the free market that will not help the individual tax-payer in the long run. YMMV!

Source

PS Ask anyone who recommends them how they have made out investing their own money in the program.
 

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Told my kids don't go anywhere near this program. Don't let the gov't own part of your home. Buy what you can afford and work your way up like the rest of us did. Calgary looks like a reasonable market to get into with the slow turn around in oil and gas. Well done Milo saving up for down payment. What area of Cowtown are you looking at?
 

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One of the reasons the CMHC introduced this program is because they calculate that if a person earning the average wage saved 10% of their income it would take 43 years to save the DP on an average home. The housing market has reached maximum affordability and is heading for big troubles.
 

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Discussion Starter #8
Told my kids don't go anywhere near this program. Don't let the gov't own part of your home. Buy what you can afford and work your way up like the rest of us did. Calgary looks like a reasonable market to get into with the slow turn around in oil and gas. Well done Milo saving up for down payment. What area of Cowtown are you looking at?
Thanks - I'm looking at as central and close to my work as I can afford to buy a house or duplex, and I don't mind waiting and saving money renting than settling for something that isn't worth it.
 

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One of the reasons the CMHC introduced this program is because they calculate that if a person earning the average wage saved 10% of their income it would take 43 years to save the DP on an average home. The housing market has reached maximum affordability and is heading for big troubles.
Can you please link your source and the assumptions behind these numbers.
 

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There are some statistics here......bear in mind they are using "family income" and saving 20% of their gross income to provide a 20% down payment.

Saving 10% of an average single income to save a 20% down payment would be near impossible.

They are also calculating how long it would take to save the down payment based on today's home prices, but which would actually be bought years into the future.

Presumably homes prices would be higher in the future, so the financial goal posts keep moving.

Young adults are priced out of the market today because of a lack of down payment. Not everyone has parents who can gift them hundreds of thousands of dollars.

This is the problem the CMHC changes are meant to address.

https://www.inbrampton.com/heres-how-much-a-down-payment-costs-in-brampton-right-now

A more in-depth study here.....

Many Millennials would like to one day own a home in the city they love. But if that city happens to be Vancouver, they probably already know their homeownership dream is more like a fairy tale: enjoyable to think and talk about but ultimately unrealistic. Vancouver, however, is not the only urban hub that is totally out of reach for people in their mid-twenties to mid-thirties: according to our analysis, there are seven markets where it is virtually impossible for a Millennial couple to save for a down payment.

Taking into consideration the average home prices and the average household income of Millennials living and working in Canada’s most expensive urban centres, it would take young people in these places a depressingly long time to save for a down payment. And even this would only be possible if Millennials religiously set aside 20% of their income each month.

https://www.point2homes.com/news/canada-real-estate/millennials-down-payments-delay-homeownership-35-years.html
 

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^ That's a wild generalization and cherry picking the numbers.

From the same article:

"In Canada’s 10 most populous cities, the time needed to save for a down payment varies significantly: from 20 years in Vancouver, to 5 in Toronto, and as little as 1 year in Edmonton.
In the nation’s seven most expensive markets, Millennials will need between 14 and 35 years to save for a down payment, making these urban centres the most unattainable for the young demographic: West Vancouver, BC; Vancouver, BC; North Vancouver, BC; Burnaby, BC; Oakville, ON; Richmond Hill, ON; and Richmond, BC.
In 40 Canadian cities, Millennials could save for a down payment in 12 months or less, which makes these markets the most attainable for Gen Y-ers."

You can't have it all. To expect for a millenial, right out of school to be able to buy a place with a reasonable downpayment in Van or London or NYC is ridiculous.
 

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The years are calculated as a couple earning the average income for the city where the property is located and saving 20% a year for a down payment.

For a single person or a couple who could only save 10% a year, it would extend the time line much further out.

By the time they saved the down payment the home may have increased in value and they still come up short.
 

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A couple earning $100,000 a year and saving 20% for 12 months would have $20,000 for the down payment.

A $20,000 down payment would buy a $100,000 property. In our city that would buy an older mobile home or a run down 1 bedroom apartment..........but it is possible.
 

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Where does it say anything about 20% down? The numbers appear to be based on 5% down.
A 20K downpayment is 5% of a 400K home. Which is average house price in Edmonton (which was highlighted as 1yr savings time frame in the article).
 

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Y'all can twist and disect all the stats you want.......bottom line, this incentive program is not very beneficial to help with the housing market. This incentive was a last minute thought and thrown in at a time when no one was asking for it. I can confirm that all lenders and insures are meeting and laughing at this proposal because 1) implementing it at the lender level will be very difficult and 2) no many consumers are expected to be using it.

A similar program exists in my province but is managed at the municipal level and only applicable to qualified condo builds. It 'kinda' works because the loan amounts are relatively low (purchase price avg $250k). Condo values have not grown in the past 5-10 years so the cost of reimbursement is relatively low. Still, it only attracts people who should not have been homeowners.
 

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Discussion Starter #18 (Edited)
You would almost certainly be better off saving up 20% and leaving out CMHC entirely though. This is another example of governments rewarding the wrong behaviour, I was hoping at least this time I could game the system to my benefit, but that does not appear to be the case.

It goes against previous government policy also. On the one hand, they correctly have been trying to limit people buying mortgages larger than they can afford and thus tempering house price growth. But this policy (if anyone takes it up, which few likely will, because it's such a poor giveaway) is designed to goose house price growth.
 

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Buyers are already borrowing the down payments from parents, lines of credit or expensive second mortgages, so the only difference is how or if the money is paid back.
 

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