BC Government Home Buyer Loan plan: The pros and cons

“Applicants must be first-time homebuyers and have a total household income of less than $150,000. Homebuyers must also have been Canadian citizens for the past five years and lived in the province for two years. Applicants will have to demonstrate that they’ve paid taxes in Canada for at least one year. The 25-year loan will be interest-free with no payments required for five years, after which interest will be applied at current market rates. The new loan depending on its size could be a significant help to families who have to choose agonizingly between a condo, townhouse, and a single family dwelling and allow buyers options for properties that suit their need in the present or future. This loan money is not “yours,” and it is not equity in your home – it is very clearly the second mortgage.  As always a suitably qualified trained professions mortgage or financial advisor should be able to guide and offer advice on what decision suits you.”

On December 14, 2016,  British Columbia Premier Christy Clark announced that the BC government will be offering a new loan program, matching first-timer buyers’ down payments up to $37,500 or five percent of the home’s value (with conditions), from January 16, 2017.  The new program mainly offers loans (That’s must be paid back eventually) interest-free over a five year period and are registered as a second mortgage on your home.  The B.C. HOME Partnership program loan only applies to homes with a total purchase price of $750,000 and under, and only for qualified “stress-tested” buyers with insured high-ratio mortgages, (with a down payment of less than 20 percent). Applicants must be first-time homebuyers and have a total household income of less than $150,000. Homebuyers must also have been Canadian citizens for the past five years and lived in the province for two years. Applicants will have to demonstrate that they’ve paid taxes in Canada for at least one year. The 25-year loan will be interest-free with no payments required for five years, after which interest will be applied at current market rates

Real estate experts and financial analysts are in disagreement over what the program will do for the housing market, its buyers and seller in the short and long term. Some Financial experts say the new program is a contradictory policy. A government that’s trying to reduce home prices (through the foreign buyer tax), as the new loans could conversely increase prices and end up only benefiting home sellers—buyers will just bid more for homes with their extra cash. Real Estate experts argue that the BC loan program seems to be an attempt to redress that balance and give those same buyers back some purchasing power to help them get a foot on the property ladder.   The fact is, it’s complicated and multi-faceted issue. Here are some pros and cons:

PROS

The real estate and development industry are widely in support of the new Homebuyers program.  Much criticism has been made of the recent federal policy to change mortgage qualification rules and “stress-test” the buyers who have less than 20 percent down payment. Considerably putting the buying power of home buyers and pricing many out of the market altogether, the Real Estate market’s five-year grace period before the loan has to be paid back could allow stretched first-time buyers enough time to attack the interest on their mortgage. They could either save, budget, or if house prices rise even modestly to accrue some equity, that will allow them to save some amount of money in interest payments on mortgages.

Housing finance experts believe that with good sense and proper financial planning, it may be possible for buyers to use this initial “cheap” interest-free money from the loan program. They could either fund a bigger down payment or put it towards accelerated mortgage payments or a lower interest payment rate on the mortgage and other options that could work in their favor. The very complicated math would have to be worked out with a mortgage expert or financial adviser who can accurately calculate the long-term financial scenarios, and how best to make use of the loan program.

With new stricter stress testing rules for mortgages, the loan program could be used to meet somehow conditions, criteria, and obligations that may arise.

The new loan depending on its size could be a significant help to families who have to choose agonizingly between a condo, townhouse, and a single family dwelling and allow buyers options for properties that suit their need in the present or future.

CONS

Critics of the plan are many and include economists, opposition politicians and finance experts who say that the new loan program is an unaffordable burden to already stretched home buyers to encourage them to take on yet further debt and could have unforeseen consequences in the future as market interest rates rise.

There is also criticism over why the government is even spending money on the program and that the loan program is yet another burden on the overstretched taxpayer. Other points are that the program can only increase housing prices in the short and long term as it stimulates housing demand without improving supply.

Politicians argue that the money in this loan program could be better put to funding and providing a low- cost housing rental amount that does help those impacted by the unaffordable housing crisis. Others say there is a moral issue at stake as it would be present homeowners and building developers who will gain in the long and short term home as prices increase due to demand.

Most tellingly of all, financial experts point to the possible scenario of an inevitable rise in interest rates that could mean a widespread repayment crisis in five years’ time. That would be when the loan repayments kick in, and participant in the loan program could find themselves in a situation where they cannot afford to make repayments on both their mortgage repayment and the “second mortgage” of the homebuyer loan program they have taken on.

Critics say the era of historically low-interest rates will come to an end and with mortgage interest rates typically negotiated for five-year terms, a buyer who takes the loan now – will face a shock in five years’ time, once the grace period is up- and also at the new higher interest rate.  It could be indeed a double whammy for homebuyer on this program.

Also note that personal circumstances may change within five years in life career, relationship and family decisions and there may have new financial responsibilities by then, especially for those starting families.

DO OR DON’T

The most important question, though, is whether you, as a first-time buyer, should take out one of these loans. That’s tough to answer, because here is where the math gets tricky, and it depends greatly on your financial situation.  This loan money is not “yours,” and it is not equity in your home – it is very clearly the second mortgage.  As always a suitably qualified trained professions mortgage or financial advisor should be able to guide and offer advice on what decision suits you.

One thing that is clear is that, whether this is a good or a bad policy (or both), it is also no coincidence that this is coming directly before B.C. provincial election – an election that could be fought and won over the issue of housing affordability. Nobody is disputing that whatever else this policy is, it is also a vote grab.

The program will last three years, and at present, the B.C government says there’s no cap on the amount of money available or the number of applications they can approve. Online applications open January 16, 2017.