Interest Free Loans for First Time Buyers

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BC HOME Partnership Announcement

Following on from the recent news regarding the BC Government’s announcement to offer interest free loans for first time buyers, we spoke with our resident mortgage broker, Eitan Pinsky of Pinsky Mortgages to get some insight into the recent announcement. Not only does he provide his take as a professional and seasoned mortgage broker, but has included some examples to help us get a sense of the numbers.

At the end of the day, mortgages are a much more nuanced and confusing piece of the real estate puzzle that chatting with a mortgage broker about your affordability and your options is very important. Contact Eitan and his team at Pinsky Mortgages to get started: 778-990-8950 or email him here.

Eitan, the floor is yours!

On December 15, 2016, the BC Government announced the BC Home Owner and Equity Partnership (BC HOME Partnership) to help first time home buyers by providing interest free loans to top up their down payments.

Qualifying for the First Time Buyers Down Payment Loan:

  • Must be a first time home buyer
  • Household income must be below $150,000
  • Property purchase price must be $750,000 or less
  • Must have a down payment of less than 20%
  • Max loan of $37,500 or 5% of the purchase price
  • The loan must match your own down payment
  • Interest and payment free for 5 years (interest at market rates thereafter)
  • After 5 years, payments are amortized over 20 years, though it can be paid off anytime
  • Registered as a second mortgage on title
  • Program runs between January 16, 2017 to March 31, 2020.

The BC Home Partnership loan is due and payable in full if home is no longer the homeowner’s principal residence in the first 5 years. Homeowner must repay the loan if property transfers ownership (sold).

A couple notes about the BC HOME Partnership:

Because the payments are amortized over 20 years, after your initial interest-free and payment-free 5-year period, your payments will be about $60 per $10,000 borrowed.

In most cases, the CMHC insurance premium (the required insurance Buyers pay on their mortgage if they have less than 20% down) will increase by $250 per $100,000 borrowed. This is due to the 3.60% normal CMHC premium increasing to 3.85% due to non-traditional sources.

The CMHC insurance premium mentioned below is over the life of the mortgage, so a $1000 difference over 20 years isn’t huge.

Some lenders already allow buyers to use lines of credit to increase their down payment. What has changed here is that the BC HOME Partnership Program’s borrowed funds are qualified at 20 years amortization at 4.64% and lines of credit are qualified as 3% of the outstanding balance used. The former is about 6 times easier to qualify for than the line of credit.

Examples of how the BC HOME Partnership Affects Mortgages

Example 1: Household income of $90,000 and $15,000 as a down payment.

Before the BC HOME Partnership, this household would have been capped at a purchase price of $300,000 with a down payment of 5%. The CMHC insurance premium would be $10,260 (3.60% of $285,000).

After the BC HOME Partnership, this household can match their $15,000 down payment for a total down payment of $30,000, and max purchase price around $400,000. The CMHC insurance premium here would be $14,245 (3.85% of $370,000).

This program has increased our household’s purchase power by increasing their down payment.

Example 2: Household income of $149,000 and $50,000 down payment.

Before the BC HOME Partnership, this household could purchase a $750,000 property (CMHC rules of 5% down payment on the first $500,000 and 10% on the portion between $500k and $1-million). The CMHC insurance premium here would be $25,200 (3.6% of $700,000 mortgage).

After the BC HOME Partnership, $37,500 can be provided for a total down payment of $87,500. The CMHC premium here would be $23,850 (a $1,350 difference). Remember, the difference in CMHC insurance premium is over the course of the entire mortgage life.

In this case, the program provides for $37,500 in extra cash that is interest free and payment free for 5 years. Without the Program, the household would pay a monthly mortgage payment of around $3,370. With the program and down payment help, our monthly mortgage payment decreases to $3,190.

After 5 years, our household who did not use the BC HOME Partnership Program continues to pay $3,370 (provided interest rates stay the same). The household that used the Program will now have slightly higher payments at around $3,395.

The benefit to this buyer is a lower monthly payment for their first 5 years and a decrease in total mortgage costs of around $6,250 (comprised of $1,350 in CMHC fees and around $4,900 interest costs).

Example 3: Household income of $80,000 with a down payment of $25,000.

Before the BC HOME Partnership Program, this household could purchase a $405,000 property with $25,000 down payment. The limiting factor here would be household income given that a $380,000 mortgage plus CMHC insurance fees would take up all of the household’s mortgage servicing requirement (aka gross debt service ratio, an affordability ratio that states that mortgage approval is only offered if your gross debt service ratio is 39% or less).

After the BC HOME Partnership Program, the household may be able to purchase a $430,000 property with $25,000 down payment and $25,000 from the government. This would only work if lenders do not assume a loan payment on a client’s gross debt service ratio.

If lenders assume the BC HOME Partnerships Program increases the Buyers debt, then this program would not work to increase a household’s purchasing power and their total purchase price would still be $405,000.

Unanswered Questions about the BC HOME Partnership Program

This news is new enough that we don’t have all of our questions answered, including:

Will all three insurers approve of this program?

Which lenders will approve of this program? Currently, almost all lender policies prohibit second mortgages.

Will lenders require an assumed payment for brokers to input for GDS? If yes, then any increase to a household’s purchase power will be wiped out.

Can the saved down payment for a household be gifted from a family member?

Impacts of the BC HOME Partnership Program

Nothing significant!

Yes, households with low down payments can purchase properties that would have been out of their reach, but these households must have sufficient incomes to take on the added debt. The added affordability here is … almost negligible. But, as seen in example 2, there are some savings going on. However, the 20% decrease in affordability rule changes that the Government of Canada put in place on October 17th far outweigh any benefit of this program.

If we are serious about changing affordability, all three levels of government have to help. The federal government instituted affordability changes (mixed opinions and results not in), the provincial government brought in a 15% property transfer tax for foreign buyers and now this new (strange) program, and the city is working on rental housing and some densification.

In the meantime, please don’t hesitate to contact us for all of your mortgage needs. We’re available to meet in Vancouver and the lower mainland and available by phone at your convenience.

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