the other hand giveth away.
Just when you thought the governments were all aligned to beat down our monster of a housing market, BC decides to give away free money to people without any. In an effort to buy some votes from those pesky left leaning millennials, the BC Liberals have offered them up to $37,500 to hand over to the condo developers.
It’s called the B.C. Home Owner Mortgage and Equity Partnership Program and here’s the details:
- Program starts taking applications January 16, 2017.
- Maximum loan is 5% of purchase price.
- Open to Canadian first time buyers earning less than $150,000 and purchasing a place under $750,000.
- Loan is interest and payment free for 5 years, and must be repaid over the following 20.
The kicker is that you can use the free money as part of your down payment as long as you had scraped together at least half. So on a $500,000 condo you now only need $12,500 down which combined with various mortgage cash back programs I’m sure you can whittle down to almost zero.
So while the feds have taken specific aim at first time buyers with the new mortgage stress tests, the province is actively undermining those policy moves before they even have a chance to take effect. Election years sure have a way of leading to schizophrenic policy decisions.
The issue here is threefold:
- The only thing this will do is drive up prices for first time buyers. Handing out free money sounds like a great idea but really it just means prices will jump up to match the extra cash people now have.
- Higher loan to value ratios are correlated with higher default rates. In other words, if you have less skin in the game you are more likely to default and that is especially true in a declining market (as the CREA just predicted 2017 would be). Again, just after the feds raise the down payment requirements on loans over $500,000, the province negates the change. Ridiculous.
- With an interest free loan for 5 years, you are setting people up for payment shocks when they have to start paying back those loans. Anyone remember the havoc that adjustable rate and interest only loans caused in the US? Now our loans won’t be huge so the shock will be less, but this is a bad direction to go in. Also given the abysmal repayment rate on the Home Buyers Plan (only half repay them properly), I suspect the province will spend a lot of money chasing those first timers down.
Certainly makes sense to take advantage of it if you are thinking of buying next year but I doubt this will do anything to make housing more affordable. Do you think this is good news for first timers or not?