Alright, so we now have a little more information on this program from the BC Government. We still haven’t heard how each specific lender will use the program, but we expect that information to be released over the next two weeks as we near the January 16th date when they will begin accepting applications. Their website for the program is HERE, with a little more depth HERE, along with a happy video.
A few highlights to point out:
1. Qualifying – The Government has worded the program as “everyone on title” needs to comply with the rules and regulations (resided in BC for 1 year min, be a First Time Home Buyer, combined income of less than $150k, etc). That means this program won’t work for people with co-signers (mom and/or dad helping you qualify), because if they cosign, they’re going on title. And if they go on title and they’ve owned a place before, you’re no longer eligible. This means parents/family can only be used as guarantors (cosigners are required to bolster income qualification and go on title, guarantors bolster poor or limited credit history and do not go on title). This may be a challenge for many people, because the program doesn’t help with affordabilty of homeownership, it helps with getting that first chunk of change for down payment.
2. The Loan – Is interest free for the first 5 years and after that first 5 years, interest is to be registered at Prime +0.50% (prime today is 2.70%), so 3.20% as of today. The interest rate will be reset at each 5 year period. The down payment loan will also be subject to legal fees, since it is actually registered as a 2nd mortgage on your property. They say they will let you know the cost of those legal fees upon approval of your application to the program.
3. Your lender – The website outlines the various lenders that are acceptable to them (there are tons, your lender most likely is on this list, and any lender we would find for you would be on that list too). Again, we haven’t heard much from lenders yet, but we do know they’ll have to be okay with a 2nd mortgage being registered behind their mortgage, which we still don’t which lenders are okay with that. They also say it is to be interpreted by lenders as a “non-traditional source of down payment”, but only a few lenders will actually allow a non-traditional down payment, and that interpretation means it increases the CMHC fee as well.
For example, purchasing a $400,000 home with 5% down, you save up $10,000 (2.50%) on your own and need a loan for $10,000 (2.50%), ending you with a desired mortgage of $380,000.
Your CMHC fee increases from $13,680 (3.60% of the mortgage amount) to $14,630 (3.85%). An increase of $950 (or $1,285.45 amortized over 20 years at 3.20%).
So you pay that $10,000 off right after your 5th year with the home, perfect. No interest on the loan (just legal and setup fees as shown above). But if you take the whole 20 years to pay it back, it would mean monthly payments of $56.36 and the total interest would equal $3,526.16 (assuming prime rate stays at 2.70%, which it most likely won’t).
So it is interesting to see these nuggets of information being released, and it is worth noting that this type of program already exists in Newfoundland and Labrador (HERE) as well as in the Yukon (HERE), with variations in each region. I’m looking forward to seeing which lenders choose to opt-in on this program, and their policies. As soon as we have that information, I’ll update this blog.
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DLC Canadian Mortgage Experts Tillit Financial *OAC, E&O