Premier Christy Clark announced just yesterday (December 15) that the BC government will be offering a new loan program, matching first-timer buyers’ down payments up to $37,500 or five per cent (with many caveats), from January 2017. As a quick recap, the loan is payment- and interest-free for five years, and is registered as a second mortgage on your home. I won’t go into all the details now, but you can read about the policy here.
And my goodness, what a storm it has created. The UBC economists are up in arms, telling various media outlets that the move is “shockingly illogical” and a “terrible policy” (see this Global BC story, for example). Their consensus is that it will encourage already stretched home buyers to borrow even more money, to put down less down payment than they otherwise might have done, and burden the taxpayer in the process. Other points are that the program can only increase prices, in that it stimulates demand without improving supply. Further, the supposedly inevitable rise in interest rates could mean a widespread repayment crisis in five years’ time when the loan repayments kick in.
Others, more commonly those in the real estate and development industry, are widely in support of the move. After all, much criticism has been made of the recent federal policy to change mortgage qualification rules and “stress-test” buyers who have less than 20 per cent down payment, cutting their buying power considerably and meaning some can’t enter the market at all. 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. (It’s no coincidence that the new loan program targets exactly those whom the new federal mortgage rules adversely affect.) And the Urban Development Institute also asserts that investing in first-time buyers is a laudable use of the “windfall” that the BC government has enjoyed from vastly increased property transfer tax revenues, suggesting the loan scheme will not create an additional burden on the taxpayer.
There also seems to be some rife disagreement over what the program will do to the market. Some argue that this is a contradictory policy for a government that seems to have been trying to reduce home prices (through the foreign buyer tax), as the new loans could conversely increase prices and end up only benefitting home sellers, as buyers will simply bid more for homes with their extra cash. Maybe so, but such arguments do not take the opposing effects of the new mortgage stress tests into consideration. And it’s not really contradictory of the government, since only detached home prices are likely to be brought down significantly by the foreign buyer tax, whereas the new loans are targeted at the other end of the price spectrum. The fact is, it's complicated and multi-faceted.
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 provincial election – an election that could be fought and won over our #1 concern of housing affordability. Nobody is disputing that, whatever else this policy is, it is also a vote grab.
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 really tricky, and it depends greatly on your own financial situation.
Let’s say you’ve raised a five or 10 per cent down payment, and you are considering applying for the government loan to get another five per cent – this is definitely cheap money for you, it will reduce your mortgage payments over the first five years, which is usually when buyers are most stretched. After that point, you’ll have paid off a bit of equity, maybe had a couple of pay rises, and things might be a bit easier (in theory, that is). You could save a considerable amount of money in interest payments on your mortgage.
For buyers who are on the cusp of raising 20 per cent, it might even be worth holding some money back and borrowing five per cent under the loan program instead, since it’s such cheap money, and investing that held-back cash to put into your mortgage later. But you’ll have to do some pretty complicated math. Is it better to raise a smaller down payment and take advantage of this loan, but then also have to qualify under the onerous new stress-testing rules, or just raise the full 20 per cent by yourself and not have to qualify at a higher interest rate? The only way to work this out is with a mortgage expert or financial adviser, who can accurately calculate the long-term financial scenarios, including any post-five-year loan repayments, that apply to you.
Just be careful not to be too short-termist, if you’re thinking of grabbing this money. Sure, you might figure you’ll have paid off some capital and seen a pay rise between now and five years’ time, and be optimistic you’ll be able to start paying the loan back then. But remember that you might also have new financial responsibilities by then, especially if you are starting a family.
And, of course, interest rates will probably be higher. So just at the point that you might be facing increased mortgage payments after your five-year rate is up (remember, those higher rates that you were stress-tested for back in 2017), at the exact same time, you’ll also have to start paying back this loan, which will also be charged at the new higher interest rate. So don’t bite off now more than you’re certain you’ll be able to chew when the time comes.
If you do take advantage of the loan and buy a home, make sure that you keep saving, just as you would have had to do without the loan. Use those savings to pay off chunks of your mortgage and avoid that inevitable repayment shock. Also, don’t ever forget that this loan money is not yours, and it is not equity in your home – it is a second mortgage. And always keep talking with professionals to make sure you’re on track.