The Province of British Columbia recently introduced the BC HOME Owner Mortgage and Equity Partnership (BC Home Partnership program). The purpose of this program is to assist British Columbia residents who are eligible first-time homebuyers by providing repayable down payment assistance loans.
The following are examples provided on BC Housing’s website.
This program offers an initial 25-year term loan which is interest and payment free for the first five years. While the loan will be registered on the property as a second mortgage, no payments on account of principal and interest will be required during the first five years of the term. During this interest and payment free period, the homebuyer may repay the loan in full or in part at any time with no penalty.
After five years, interest will start accruing and the homebuyer will start making monthly payments of principal and interest, amortized over the remaining 20 years (because the first five years were interest and payment free).
Anyone who appears on the title of the home must meet the following criteria to qualify for BC Home Partnership loan:
- Be a Canadian citizen or permanent resident for the last five years
- Have lived in British Columbia for at least the full 12 months preceding the application
- Be a first-time homebuyer who has not owned an interest in a principal residence anywhere in the world at any time and has never received a first-time homebuyers’ exemption or refund
- Purchase a home that is $750,000 or less
- Be eligible for a high-ratio insured first mortgage for the home
- The combined, gross household income of all individuals on the title must not exceed $150,000
- The home being purchased must be used as the principal residence of all individuals on the title for the five years after purchasing.
I was extremely puzzled by the recent introduction of this program given that the federal government had recently tightened qualifications for mortgage default insurance with the aim of ensuring homebuyers could manage their monthly payments at higher interest rates. I, therefore, reviewed the website to gather more information and immediately came up with the following list of concerns.
- Prices for real estate are governed by the fundamental laws of supply and demand. When an external force interrupts the equilibrium between supply and demand, the market adjusts accordingly. One has to question whether the introduction of this interest free loan will encourage some first-time home buyers to overextend themselves even further in order to acquire their first home. Some first-time home buyers might view the down payment assistance loan as “free money” for 5 years. Their thought process might be to kick the can down the road and to figure out at a later date how to service the down payment assistance loan when it converts to a mortgage when the interest and payment free period expires.
- While a first-time homebuyer can repay the down payment assistance loan at any time without penalty, the likelihood is remote of this happening during the first 5 year term unless the property is sold. If a homebuyer has any intention of making prepayments, one would expect prepayments to be made as per the terms and conditions of the mortgages on which they pay interest.
- In the vast majority of cases, first-time homebuyers with high ratio mortgages will likely have made minimal mortgage prepayments AND the full amount of the first-time homebuyer assistance loan will likely still be owing at the end of the first 5 year term. Some of these first-time homebuyers may be in for a rude awakening if interest rates increase relative to current levels and the assistance loan is rolled over into the mortgage at the end of the 5 year term. It is not difficult to fathom that the new mortgage payment at the end of the first 5 year term could be comparable to, or greater than, the payment during the first 5 year term. If this should happen, it is entirely possible that these borrowers would need to renegotiate their mortgage for another 25 year amortization versus 20 years so as to meet debt service requirements.
- I presume that in most cases, down payment assistance loans will be obtained by first-time homebuyers who are obtaining high ratio insured mortgages. If my presumption is correct, the majority of these loans will be of a high risk nature since these loans will rank in second position. Should the borrower default on the first mortgage within the first few years of ownership, and the lender must realize on its security to repay the first mortgage, the probability that a significant amount of the first mortgage having being repaid will be slim. As such, what is the probability there will be any proceeds from sale to repay the down payment assistance loan after all the other obligations ranking in priority are satisfied? If there is any shortfall, it would appear BC taxpayers will be left holding the bag.
- It is far easier for a lender to ascertain whether someone who has resided in Canada all their life is truly a “first-time homebuyer” versus someone who has resided outside Canada most of their life and who may have made a significant profit on the sale of previously owned real estate. I can’t possibly fathom how a Canadian lender would be able to ascertain whether someone did or did not own real estate in another part of the world before relocating to Canada. Are relatively recent immigrants to Canada (keeping in mind the requirement that applicants be Canadian citizens or permanent residents for the last five years), therefore, in a more advantageous position than long-time Canadian citizens?
- A condition of the loan is that the property being purchased must be the principal residence of all individuals on title for the five years after date of purchase. Who is to verify this on an ongoing basis? In addition, what is to say the homeowners actually reside in the property for those 5 years just because they list the property as their principal residence?
- Typically, we have witnessed the exaggeration of declared income on mortgage applications. In this case, it may be possible that some applicants whose combined annual household income exceeds $150,000 may go to some lengths to understate their income to take advantage of the interest free loan. This would place them at an unfair advantage to first-time homebuyers where the combined annual household income legitimately falls below $150,000. Furthermore, why is $150,000 the magical threshold?
- We have all witnessed what transpired in the US when the overheated real estate market underwent a dramatic correction. Given what has been happening with property values in some regions of British Columbia, we should not entirely rule out the possibility of a correction in property values in some regions at some stage in the future. This leads me to question what would happen if real estate values at the end of the 5 year term were to be lower than the combined amount outstanding under the mortgage and the down payment assistance loan.
- I have yet to ascertain what would happen to the down payment assistance loan if the homebuyers’ circumstances at the end of the initial 5 year term had changed wherein the household income were less than at the time of the purchase. What would happen if the income did not meet the lender’s debt service requirements for the balance outstanding on the first mortgage and the down payment assistance loan?
It strikes me as odd that the BC government would introduce a program which encourages its residents to possibly go hundreds of thousands of dollars in debt in exchange for a nominal loan to assist with the purchase of an ill-liquid asset that could potentially fall in value at a later date. In my opinion, the BC government is putting the hangman’s noose around the necks of first-time homebuyers who may have been unable to raise sufficient equity from their own resources to qualify for a high ratio mortgage.
My suspicion is that the BC Home Partnership program is going to be an abysmal failure and that BC taxpayers will foot the bill on a slew of delinquent loans in the future.