Starting on Monday (January 16), some first-time homebuyers will be eligible to borrow up to a five-percent down payment for a primary residence.
Under the B.C. Home Owner Mortgage and Equity Partnership—also called the B.C. HOME Partnership—the provincial government will make this loan interest-free for five years and it must be repaid over 25 years. The maximum anyone can borrow will be $37,500.
When Premier Christy Clark announced this program in December, critics alleged that it would boost demand for housing, jack up prices, and pile more debt on millennials. Supporters, on the other hand, said it would help thousands of B.C. residents become homeowners.
But what if both of the claims are false? Tough new federal mortgage rules have already capped how much people can borrow in comparison to their income.
What if lenders cut the amount they’ll provide to first-time homebuyers who choose to also borrow from the government? Does this mean the program will have no impact on first-time buyers' purchasing power?
“There’s a really interesting and live question about how the banks are going to be treating these government loans for down payments,” B.C. NDP housing critic David Eby told the Georgia Straight by phone. “Some of the early responses I’ve seen suggest that the banks might actually be treating these loans as what they are, which is loans, not down payments. And if that’s the case, it may not actually increase the buying power of any first-time buyer trying to get into the market.”
Eby said he assumed in December when the program was announced that the government had spoken to bankers, who would treat B.C. HOME Partnership loans as down payments.
That led Eby to conclude that this “would mean an incredible increase in the amount of capital in the housing market, causing inflation in an already overheated market”.
Since then, he said, he has read correspondence from some of the big five banks saying they only had a few days’ notice before the heavily advertised program was announced.
“They weren’t sure yet how they were going to respond to it,” Eby said. “The whole thing just might be an election-year promise that has no impact at all.”
Canada Mortgage and Housing Corporation deems B.C. HOME Partnership loans to be a “nontraditional source of down payment”, which includes any arm’s-length funding not tied to the purchase or sale of a property. People who borrow under this program must pay the highest mortgage-insurance premium, 3.85 percent, on their entire mortgage if their loan-to-value ratio is between 90 and 95 percent.
Under new federal mortgage rules, borrowers can’t qualify if over 39 percent of their household income would go to gross debt-servicing charges, which include mortgage payments, heat, and taxes. The total debt-service ratio, including carrying costs and other payments, cannot be more than 44 percent of household income for a borrower to qualify for a mortgage.
The CEO of the Mortgage Brokers Association of B.C., Samantha Gale, told the Straight by phone that the B.C. HOME Partnership program will enable people to get a down payment if they already have a high enough family income to service a mortgage.
She added that the cost of repaying the B.C. government loan will be included in a borrower’s debt-servicing ratio.
She also suggested that B.C. HOME Partnership loans will typically be between $10,000 and $12,000, which isn’t going to be too onerous to repay over a 25-year period.
“Right now, there’s a certain segment of the population—a lot of them are millennials, first-time homebuyers—who are struggling to keep up with the market,” Gale said. “They cannot afford to save enough money for that down payment. So it’s going to help them.”
Eby, however, remains skeptical, noting that young people are already dealing with record levels of both student and credit-card debt. And there’s no guarantee that borrowing rates won’t be far higher when first-time homebuyers are required to pay interest on the government loan in five years.
“So even if the program worked as intended, it seemed like a pretty dismal proposition,” the B.C. NDP housing critic said. “But we’re now facing the situation that it may not even work as intended. And it may be a massive government advertising campaign for a program that actually doesn’t do what it’s supposed to do.”