Living in Vancouver, we reside in one of the toughest global real estate markets for millennials to get their foot in the door(literally). With some of the highest housing prices in relation to income in the world, crippling levels of household debt, and a scarcity of supply, it is not getting easier either. Due to pent up discouragement and frustration from the millennial generation, the BC government has decided to put forth a new program to help. Unfortunately, government programs are not a one size fits all solution for everyone, and often consumers unintentionally run into issues with the fine print after the fact. Because of this, I would like to give an objective and detailed analysis of this program. After reading this, one should come away with a better understanding of how this initiative works, and how it could be efficiently applied to their situation. I will tackle this analysis by splitting it up into 4 key sections:
- How does this program work, and how does one qualify to use it?
- What should consumers be looking for in the fine print when deciding to use this program? Are there any other things to consider?
- How is this program intended to be used?
- How can one use this program to their benefit, as opposed to their detriment?
If there are further questions beyond what I have covered here, please get in touch!
How does this program work, and how does one qualify to use it?
One of the biggest challenges millennials face is saving up the necessary down payment to get a mortgage. Aiming to target this issue, this new initiative will match one’s down payment for up to 5%(capping out at $37,500) of the purchase price of a home. This would be in the form of a second mortgage loan registered on the property purchased. The loan begins as interest and payment free for the first 5 years. After that, interest will begin to accrue and monthly payments will be due. These payments will be due based on an interest rate of the prime rate + 0.5%(currently 3.2%), and amortized over the remaining 20 years of the mortgage. This loan can be repaid partially or in full at any time. BC Housing outlines the following criteria to qualify for this program as below.
To qualify for the BC HOME Partnership loan, anyone who appears on the title of the home must meet the following criteria:
- Be a Canadian citizen or permanent resident that has resided in Canada for at least five years.
- Have lived in British Columbia for at least the full 12 months preceding your application.
- Be a first-time home buyer who has not owned an interest in a principal residence anywhere in the world at any time and has never received a first-time home buyers’ exemption or refund.
- The combined, annual gross household income of all individuals on title must not exceed $150,000.
- The home being purchased must be used as the principal residence of all individuals on title for the five years after purchasing.
- Purchase a home valued at $750,000 or less.
- Be eligible for a high-ratio insured first mortgage for the home
The BC Home Partnership loan is due and payable in full if any of the following occur:
- Default under the first mortgage or the BC HOME Partnership loan
- Change of ownership (including addition of a person to title)
- The home is no longer the home buyer’s principal residence
What should consumers be looking for in the fine print, and other things to consider.
- This program is only applicable to consumers acquiring an insured mortgages(less than 20% down). For example, if one has a 15% down payment saved up, they cannot use this program to get to a 20% down payment, as that mortgage will no longer be considered an insured mortgage. The consumer must put less than 20% down for this program to work. If one could put 20% down, but wants to take advantage of this program to create liquidity, they should also keep in mind the mortgage insurance premium would be avoided when putting 20% down. At 15% down, this premium would be 1.8% on the entire mortgage amount, or $1,800 on every $100,000 of mortgage acquired.
- The down payment assistance will be legally registered as a 2nd mortgage on a home, giving an interest in the home to BC Housing. As with any mortgage, this mortgage charge cannot be removed until the loan is paid off.
- There are legal costs involved with both registering a mortgage charge on the title of a property, and eventually removing the mortgage charge when the loan is paid off. The cost for both of these has yet to be revealed in detail by BC Housing, but it will be at the consumer’s expense. Typically, legal costs to register an additional mortgage is approximately an extra $300-$500 when purchasing a home. An additional cost of approximately $200-$300 would be applicable to remove the mortgage off title once the loan has been paid off. ***Update Jan 27th: BC Housing has stated there will be a $560 fee for “registration cost”. This is not including the $300-$500 your solicitor may charge as well.***
- The down payment is considered a “non-traditional down payment” as defined by CMHC. This means if one puts less than 10% as a down payment, they would be paying an additional 0.25% on a CMHC mortgage insurance premium. An easy way to think of this is an extra $250 per every $100,000 of mortgage acquired. This cost will not be paid upfront, but added to the total mortgage amount, and amortized over the life of the mortgage. For example, when insuring a $400,000 loan amount, the insurance premium would be $15,400 for using a non-traditional source of down payment, as opposed to a $14,400 if the entire down payment came from your own funds, a difference of $1000.
- Further to the previous point, only a minority of lenders currently have programs where they accept “non-traditional down payment” sources. Fewer options, means less competition for the business. This could potentially lead to acquiring a mortgage with a marginally higher interest rate, or mortgage terms which are less flexible.
- If there are any changes to the properties title, the loan will become immediately due. This means even if one wanted to add a family member on title, or a spouse down the line, they would be responsible for immediately paying off the loan in full. This could also apply if someone was to be removed off title. The most common example of this is in the case of a divorce. ***Update Jan 27th: BC Housing has since adjusted their policy. In the case of divorce, as long as the party remaining on title can still qualify for the mortgage and the mortgage insurance policy on their own, the loan can continue and not be immediately due. Moreover, in the case of marriage, an additional owner may be added on title as long as both parties can re-qualify for the mortgage and insurance policy, and the new party also meets the BC Home Partnership Loan guidelines.***
- If one changes the purpose of their home in the first 5 years of the loan, they would be responsible for immediately paying off the loan in full. The most common example of this is switching the properties purpose to an investment property.
- We still need to see how mortgage lenders respond to this new initiative. It is very common for lenders to have a mortgage term on their contracts where they prohibit any form of secondary financing. Due to this, there is a possibility some lenders will not participate in the program. If that occurs, that means there will be fewer options for financing for consumers interested in using this initiative. ***Update Jan 15th: So far, it seems sort of a mixed bag in terms of which lenders are on board with this program. I have reached out to 16 lenders I work with. 4 of them have committed to participating. 4 of them have stated they will not participate.. 8 are still deciding***
- Even though there is to be no interest or payments over the first 5 years, lenders will still want to qualify the liability of having a loan to pay back. Thus, just because one would qualify at 5% down with the down payment coming from their own means, it does not mean they would also qualify for the same mortgage using this program.
How is this program intended to be used?
As of right now, subject to a consumer’s income and credit, one is able to purchase a home with as low as 5% down. Since qualified consumers who have saved up 5% can technically enter the market already, it is clear this program is targeted towards consumers who have saved less than 5% of a down payment to purchase a home. This definitely creates a home ownership opportunity for a market that was not able to attain it before, but it also encourages larger household debt, and puts consumers in a situation where realistically, they begin with negative equity in their home.
Take the example of buying a home for $300,000. In this case, a consumer would save up $7500 for their portion of the down payment, and the government matches them $7,500 by ways of this initiative. With this specific example of an insured mortgage, a mortgage insurance premium(in this case of $10,972.50) would be added to the original mortgage amount($285,000), meaning the first mortgage would be registered for $295,972.50. In addition to this first mortgage, the consumer would have a second mortgage registered for $7,500 to BC Housing.
Adding the first and second mortgage together, one would find they have acquired $303,472.50 in mortgage debt to purchase a home for $300,000. In this scenario, the consumer essentially has negative equity in their home. This means the size of their mortgage exceeds the value of their property, and is also known as being “underwater”. If the consumer for whatever reason had to sell this home, right from the start they would lose more than they originally invested into the home. This is not even factoring the possibility of depreciation, the costs to hire a realtor to sell the property, potentially paying a penalty to break the mortgage, and legal costs.
For this reason, a consumer should heavily weigh the importance of home ownership against the size of the liability they would be willing to acquire when deciding if using this program is worthwhile for their personal circumstance. They should also be confident and firm in the long term commitment they are making to live in this home. These are the key questions to be asked in regards to using this program with its intended purpose.
How can one use this program to their benefit, as opposed to their detriment?
Although the program is designed for consumers who have not saved up the necessary 5% down payment, anyone who is putting less than 20% down(including the interest free loan portion) can also use this program. If these consumers can carefully navigate through the fine print with discipline, they may find a few scenarios where this program can save them money, or allow them flexibility they did not have before. Here are a few examples of these scenarios:
- Already saved up 10% down? One way to take advantage of this program is using it to put 15% down. When one is able to put 15% down as opposed to 10% down, the mortgage insurance premium drops from 2.4% to 1.8%. Assuming one is able to pay off the government loan before interest starts accruing, this would quantify itself as approximately a reduction of $600 in the mortgage insurance premium on every $100,000 of mortgage acquired. This could potentially save a consumer a fair-sized amount in regards to insurance premiums. For example, when purchasing a $700,000 property, using this initiative to put 10% down instead of 5% would lead to a reduction of $4410 in mortgage insurance premiums. Of course, this is assuming the consumer is proactive in paying off the down payment loan in full before interest begins to accrue after the 5 year interest and payment free period.
- Unfortunately this does not work when using the program to increase your down payment from 5% to 10%, due to how CMHC structures the premiums when using this program.
- It should be noted that in most cases mortgage insurance premiums are not paid upfront, but instead added to the amount to be mortgaged, and amortized over the life of the mortgage.
- Let us look at a scenario where a consumer has already saved up $45,000 as a 15% down payment on a $300,000 purchase, but also has $15,000 in student loan debt with a current interest rate of 6%. On a payment plan to pay it off in the next 5 years, the consumer is subjected to approximately $2,400 of interest in the course of paying off their student loan. One way to take advantage of this program is for the consumer to pay off the $15,000 in student loan debt, and then use this program to get back up to 15% down. As long as they pay back the government loan before interest begins to accrue, they are able to forego paying $2,400 of interest for their student loan.
- Another innovative use, would be for one who has already saved 10% or 15% of the down payment required, but wanted to put an offer on a home which needed a bit of work done. Assuming they are to pay it off before interest accrues and the payments begin, they could use the matching government funds to create liquidity to give themselves a no interest renovation loan for 5 years. If one needed to retain liquidity for other reasons as well, this could also apply with this use.
In conclusion, there is definitely fine print to be wary of when considering using this initiative, and the intended use of the program promotes higher than normal levels of household debt, and in some cases, even to the point of negative equity. Even though the loan is considered “interest free”, there will be legal costs to both register and remove the loan on one’s property, and this would be at the cost of the consumer. One could also be subject to a larger CMHC insurance premium if they are to use the loan to put less than 10% down, opposed to putting less than 10% down all from their own funds. Unable to make any changes to the title of one’s property without the loan becoming fully due could also prove to be a troublesome term of this initiative to many consumers. Nonetheless, if carefully planned and executed, some consumers could potentially find ways to use this plan to their advantage.
If you have any other questions related to this article, or any other mortgage related topics, please either send me an email at firstname.lastname@example.org, or give me a call or text at 778-822-5466 and I would be happy to help!