BC Interest-Free Mortgage Loans Explained (Finally)

On December 15, 2016, the British Columbia government announced the BC Home Owner and Equity Partnership (BC HOME Partnership) to help 1st time home buyers by providing interest free loans to help with down payments.

The Goal (as per the Province)

To provide a repayable down payment assistance loans to 1st time home buyers.

The Goods

• Must be a 1st time home buyers
• Household income must be below $150,000
• Max property purchase price of $750,000
• Must have under 20% total down payment and high-ratio insured
• Max loan of $37,500 or 5% of the purchase price
• 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
• Qualified at 20 years amortization
• 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).

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 premium 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.

Example 1

Household income of $90,000 and $15,000 as a down payment.
We are using the a high income so income qualification is not a factor.

Before the BC HOME Partnership, this household would have been capped at a purchase price of $300,000, or 5% of the purchase price. Their CMHC premium here is $10,260 (3.60% of $285,000).

After the BC HOME Partnership, this household can match their $15,000 down payment for a total of $30,000, and purchase a property for around $400,000. The CMHC 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.
*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.

Example 2

Household income of $149,000 and $50,000 down payment.
We are using the highest income possible so income qualification is not a factor.

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% thereafter). The CMHC 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 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 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 BC HOME Partnership, this household could purchase a $405,000 property with $25,000 down payment. The cap here would be household income as a $380,000 mortgage plus CMHC fees would take up all of the household’s mortgage servicing requirement.

After BC HOME Partnership, 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.
(There are two affordability ratios: GDS and TDS. GDS must be 39% of gross income or lower and TDS is at 44%.)

If lenders use GDS, then this program would not work to increase a household’s purchasing power and their total purchase price would still be $405,000.

Impacts

Not very much!

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.

It is my opinion that the municipal government has not done enough to help housing supply.

Still In the Dark

There are too many unanswered questions.

• 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?

As soon as we have more information, we’ll update this page. In the meantime, please don’t hesitate to call 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.

Warmest Regards,
Eitan