Canada Gets A New Subprime Lender – The BC Government

First-time buyers got hit last month when the Fed implemented new mortgage rules. Now the BC government is throwing them a bone using a new, controversial downpayment scheme. Using taxpayer money, the province will use an estimated $1.6 billion to finance up to half of the downpayment on a high leverage mortgages. While the scheme is hailed as a huge benefit by some, there are significant concerns you should consider before jumping in.

The Details

The new program that begins taking applications next month is designed to provide help in putting together a down payment. First-time homebuyers can borrow up to half of their downpayment, to a maximum of $37,500 on a mortgage of up to $750,000. The loan will have to be repaid over a period of 25-years, but the first 5 years of it will be interest and payment free. After 5 years, you’ll be charged market interest rates.

Benefits of The Program

The program is great if you have can pay it off before the interest-free period ends. Especially since the first-time property transfer tax can provide an up to $7,500 in additional savings. Theoretically, these are pretty big incentives, and could be seen as free money. This is especially true if you can find constructive uses for the payments before the interest start accruing. There are some concerns that need to be considered before going for this scheme.

It’s A Subprime Loan

Users of the program need high-leverage, insured loans – which make them subprime. There’s nothing wrong with a high leverage, government backed loan – people do it for school all of the time. The difference here being a school loan is to pay for an asset that typically results in making more money. With a home, you’ll have to absorb the fees by finding more money, or liquidating/borrowing against your home.

Finding more money is easier said than done. Over the past year wages in BC have fallen 2.7% when inflation adjusted. In the booming economy of Vancouver, wages have only increased 10% over the past 15 years when inflation adjusted. With that in mind, it’s not hard to be skeptical of how adding another bill to your home will work out. You’ll start paying this bill back at the same time you’ll be renewing your mortgage, likely at a higher rate. This means you won’t just have to accommodate the downpayment loan, you might have to accommodate higher mortgage payments too.

Depending on liquidity or borrowing against your home is also not an ideal scenario. The usually optimistic BCREA is projecting an 8% decline next year for BC home prices. Let’s assume the 8% drop is it, and it stagnates over the remaining term of your 5 years. If you took out the maximum, you’re facing a decline of $60,000 – more than your original down payment. If you need to exit at this point, you won’t just lose the down payment you didn’t have –  you’ll also need to come up with the difference between the equity in the home and your loss to exit. This is true in all scenarios of price decline, but the risks are more pronounced in a high-leverage circumstance.

It Can Be Beneficial

Now this sounds like the negatives outweigh the positives, but it’s not necessarily the case. If you can budget for the adjustments, and leave room to accommodate rising payments – you’re basically getting “free” money from taxpayers. If you don’t however, you’re betting the farm on optimism of the real estate market. In some areas, that might be a reasonable assessment to make. In other regions, you should really do the math to see if it makes sense to dive into the scheme.

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Photo: Province of British Columbia.