Does the BC Home Down Payment loan program help first time buyers?
The BC Government recently announced a first time buyers interest free loan for those looking for a property under $750,000 who need or want down payment assistance in order to get into the property market. Thankfully, one of our resident mortgage brokers, Eitan Pinsky of Pinsky Mortgages, has taken the time to break down different scenarios to give us a sense of how the BC Down Payment Loan Program helps, and whether or not that interest free loan is worth it. Note that everyone’s financial situation is different, so if you are really interested in using this program, have a conversation with Eitan about your particular situation.
If you want some background about the program, check out our blog post: Interest Free Loans for First Time Buyers.
As you’ll discover after reading this article, mortgages are a much more nuanced and confusing piece of the real estate puzzle that require the help of professional. Chat with a mortgage broker about your affordability and your options as these decisions can make a big difference long term. Contact Eitan and his team at Pinsky Mortgages to get started: 778-990-8950 or email him here.
Over to you Eitan…
Is the BC HOME Partnership Program Worth It?
The quick answer is YES.
The long answer is: YES, the BC HOME Partnership Program (the First Time Buyers Loan Program) is worth it in almost all scenarios.
We will be looking at three scenarios where this interest free down payment loan helps first time buyers:
- Buyers with less than 5% down payment,
- Buyers with more than 5% but less than 10% down payment, and
- Buyers with 10%+ down payment.
NOTE: In all of our scenarios, we have assumed that the borrower can qualify for the Program based on their income. Based on the math, almost all borrowers will qualify for the Program unless they have large debts.
Considerations:
1. The loan costs $560 in registering and in paying BC Housing’s legal fees. This amount is tacked on the loan and does not have to be paid up front.
|
2. CMHC Rate Premium Table |
|||
|
Borrower |
BC HOME Loan |
Total Down Payment |
CMHC Rate |
|
Less than 5% |
Less than 5% |
Less than 10% |
3.85% |
|
Less than 10% |
Less than or equal to 5% |
Less than 15% |
3.60% |
|
Greater than or equal to 10% |
Less than or equal to 5% |
Between 15% and 20% |
1.80% |
NOTE: on March 17, 2017, the CMHC rates will change: 3.85% becomes 4.50%, 3.60% becomes 4.00% and 1.80% becomes 2.80%.
3. I have not assumed any payment strategy on the part of the borrower after 5 years… The ability to pay off the loan after 5 years would be a very important discussion piece I, or any other Pinsky Mortgages team member would have when we discuss whether this Program makes sense for them.
Scenario 1: Buyer with less than 5% Down Payment
Say we have a purchase price of $400,000 and our Buyer has $10,000 as their down payment (2.5%). CMHC requires all borrowers to have at least 5% down payment; so this scenario is one where the First Time Home Buyers Down Payment Loan Program comes in handy. A client here would now be able to purchase the property with a matching 2.5% down payment loan from the Program.
|
Value |
Percent |
|
|
Purchase Price |
$400,000 |
100% |
|
Borrower |
$10,000 |
2.50% |
|
BC HOME |
$10,000 |
2.50% |
|
Mortgage |
$380,000 |
95.00% |
|
CMHC Fee |
$14,630 |
3.85% |
|
First Mortgage |
$394,630 |
98.66% |
Benefit: In Scenario 1, the borrower can purchase a property that they would not normally have been able to purchase.
It’s important to note although this Buyer has now purchased his or her property, they are now “underwater”. This means that the value of all the mortgages on the property are now more than the value (purchase price) of their home. In this case, the mortgage is at 101.3% of the value of the home.
|
First Mortgage |
$394,630 |
98.66% |
|
Second Mortgage |
$10,560 |
2.64% |
|
Total |
$405,190 |
101.30% |
Scenario 2: Buyer with a down payment of between 5% and 10% down
In this scenario, we’re going to assume 5% down payment from the Buyer for the same purchase price. In this case, the Buyer would NOT NEED the the Program. We’re going to compare not taking the interest free loan compared to taking it below:
|
No BC HOME Loan |
BC HOME Loan |
|
|
Purchase Price |
$400,000 |
$400,000 |
|
Borrower |
$20,000 |
$20,000 |
|
BC HOME |
$0 |
$20,000 |
|
Mortgage |
$380,000 |
$360,000 |
|
CMHC Fee |
$13,680 |
$12,960 |
|
First Mortgage |
$393,680 |
$372,960 |
|
Second Mortgage |
$0 |
$20,560 |
|
Total |
$393,680 |
$393,520 |
The comparison above doesn’t tell the full story… It shows that we’re very close in terms of total mortgage amount, however it doesn’t say how much interest a Buyer may pay over the next five years. Remember, the loan is interest free!
So let’s make a couple of assumptions: our first mortgages’ payments are based on 25 years amortization and a 2.79% rate.
|
No BC HOME Loan |
BC HOME Loan |
Difference |
|
|
First Mortgage |
$393,680 |
$372,960 |
$20,720 |
|
Payment |
$1,821 |
$1,725 |
$96 |
The above chart shows that each monthly payment is $96 less if they get the Program’s interest-free loan.
In Scenario 2, the borrower saves 5 years of interest on the BC HOME Partnership Program loan.
|
After Year 5 |
No BC HOME Loan |
BC HOME Loan |
Difference |
|
Total Payments |
$109,254.77 |
$103,504.52 |
$5,750 |
|
1st Mortgage |
$335,128 |
$317,490.00 |
|
|
2nd Mortgage |
$0 |
$20,560 |
|
|
Total Mortgage |
$335,128 |
$338,050 |
($2,922) |
|
Financial Benefit |
$2,828 |
||
The chart above is stating that there is a $2,828 benefit to getting the interest-free loan after 5 years than not getting the loan at all.
Scenario 3: Buyer with a down payment of 10% or more
This is where the benefits to the Buyer are a little better… Let’s say a borrower has 10% down payment and they get another 5% from the Program:
|
No BC HOME Loan |
BC HOME Loan |
|
|
Purchase Price |
$400,000 |
$400,000 |
|
Borrower |
$40,000 |
$40,000 |
|
BC HOME |
$0 |
$20,000 |
|
Mortgage |
$360,000 |
$340,000 |
|
CMHC Fee |
$8,640 |
$6,120 |
|
1st Mortgage |
$368,640 |
$346,120 |
|
2nd Mortgage |
$0 |
$20,560 |
|
Total |
$368,640 |
$366,680 |
In the scenario above, we actually have a lower overall mortgage amount, even though we’re charged $560 for the legal fees to BC Housing. The reason why there is this difference is because the CMHC fee went from 2.40% to 1.80%.
|
After Year 5 |
No BC HOME Loan |
BC HOME Loan |
Difference |
|
Total Payments |
$102,305.62 |
$96,055.83 |
$6,250 |
|
1st Mortgage |
$313,812 |
$294,641.58 |
|
|
2nd Mortgage |
$0 |
$20,560 |
|
|
Total Mortgage |
$313,812 |
$315,202 |
($1,389) |
|
Financial Benefit |
|
$4,860 |
|
Benefit: In Scenario 3, we are almost $5,000 better off having successfully applied to the BC HOME Partnership Program. The Buyer is benefitting from lower CMHC premiums as well as the savings on the interest free loan.
Please don’t hesitate to get in touch with us if you would like more information about the BC HOME Down Payment Loan Program. We would be happy to help with your mortgage needs.
Eitan Pinsky
- Mortgage Expert with Pinsky Mortgages
- 778-990-8950
- [email protected]
- www.pinskymortgages.ca
