On March 19th, the Canadian federal government unveiled their 2019 budget which included the introduction of what they call “shared equity mortgages” provided by the Canadian Housing and Mortgage Corporation (CMHC). I’m going to break down what that means, why it matters, and why this lays the groundwork for big changes in the real-estate market.
The concept of shared equity mortgages isn’t new. In fact, the BC government offered a similar program a number of years ago called the BC Home Owner and Equity Partnership. It is now defunct due to lack of government funding, but they have replaced it with a similar program. There are also a few different non-profits offering similar mortgages, mostly based in Toronto.
Shared equity mortgages have been around at least since the 1980s, when interest rates were around 19%. They were used as a way of helping borrowers afford to take on financing. They were originally called “shared appreciation mortgages” — shared equity mortgage is just a rebrand. They were primarily used for commercial properties, but they have seen use in residential as well.
How Do Shared Equity Mortgages Work?
The government has been pretty lean on the details of how they will be implementing their shared equity mortgage, but there’s lots of precedent to have a pretty good understanding of how it will work.
Essentially, the government will buy up some of the equity in new homes. Home buyers therefore will require less money for a mortgage, decreasing their payments. From an example in their budget document:
Anita is seeking to buy a new condo in Ajax, Ontario for $400,000. Under the First-Time Home Buyer Incentive, Anita can apply to receive $40,000 in a shared equity mortgage (10 per cent of the cost of a new home) from CMHC, lowering the total amount she needs to borrow.
The CMHC First-Time Home Buyer Incentive would enable Anita to pay $228 less in mortgage payments every month.
When Anita sells her condo in the future, CMHC is repaid.
So — no details on how CMHC is repaid. How it normally works (and what I expect the government’s model to use) is that the government will be paid back 10% of the sale price — as if they owned 10% of the equity in the home.
Let’s say Anita holds on to the property for 6 years, and then sells it. If the property sells for $550,000, then the CMHC is repaid 10% of that — or $55,000.
In this example, the CMHC has made around 5.5% a year on their investment, and Anita got to save on monthly payments. Anita ends up paying more than if she just paid 3.5% on the entire amount, but without those monthly savings she may not have been able to get into the market at all. In this case, both sides are happy.
There are other models of shared appreciation mortgages out there, such as the one introduced by the Bank of Scotland where they receive a greater share of the appreciation than the homeowner. But it is unlikely that they will use that model — there’s ongoing class-action lawsuits against the bank because of how bad that deal was from home owners. I could go into a whole other post about that, but that’s for another time.
Why This Matters
$228 a month isn’t a huge amount of savings, but it does illustrate the real power of shared appreciation mortgages. By buying equity, monthly payments can be reduced, and that the amount of equity bought will dictate the amount of monthly savings. In the example given in government’s booklet, monthly payments are reduced by about 11.5%.
Hypothetically, if the government program put in 40% instead of 10%, then the monthly savings would far more significant. Using the example from the booklet, that would mean Anita would have payments at $1098 a month— savings of $875 a month, or about 44% less.
For more expensive homes, these savings become even more meaningful. The example provided by the government is a home being bought for $400,000. While that is around the average price of a house in Canada, the average price of a dwelling in British Columbia is $720,000. Once you get into cities like Vancouver or Toronto the story is even more bleak — but we have all read those news articles already so I’ll skip ahead.
Let’s do an example for the average dwelling in B.C. For a $720,000 condo, without the government’s shared equity mortgage, monthly payments would be $3551. With the 10% from the CMHC program, they would be $3141. And with our hypothetical 40% — payments would be $1977 a month.
Now that is a meaningful difference. Saving $1574 a month and (only paying $1977 for a mortgage) would be huge for people — particularly the people whose rent is more than that mortgage would cost.
Unfortunately, not only is the government limiting their contribution to 10%, they are only financing homes up to about $475,000. They are also restricting it to new builds (they will give only 5% to existing homes). This means that the regions where the relief would be most felt are completely ignored.
So Why Isn’t The Government Doing More?
For the same reason that shared appreciation mortgages fell out of favour and are only starting to resurface now — they are risky.
Many lenders who offered shared appreciation mortgages back in the 1980s ended up taking a hit when housing prices dropped. Not only did they not make money, but they lost money. Compared to traditional mortgages which are typically quite predictable, it was just not a good value proposition.
It’s not very controversial to suggest we are in a property bubble. A bubble at some point pops, and the government doesn’t want to be left holding the bag after spending $1.25 billion of taxpayer money.
By limiting their exposure to the upper end of the market (which is hit first in a downturn) and by only putting in 10%, the CMHC is wisely limiting their exposure to future market corrections.
Can we fault them for this? I don’t this so — as a taxpayer I’m glad they are being conservative with this money.
For some, the government’s plan may be enough to push them over the edge into being able to get in to the property market.
The government’s plan lays out the groundwork — but I think in order to make a fundamental difference to the larger Canadian housing market, we need a program that buys in more than 10% and it needs to be viable in the regions that most need it.
Josh Baker is a founder of Fraction, a company working on making home ownership more flexible and more affordable.