The Government of British Columbia plans to provide first-time homebuyers with an interest-free loan for their down payment on a home.
The B.C. Home Owner Mortgage and Equity (HOME) Partnership program will provide buyers pre-approved for an insured mortgage with up to $37,500 (or up to 5% of the purchase price) with a 25-year loan that’s both payment-free and interest-free for the first five years.
After the five years are up, homebuyers will need to start making monthly payments at current interest rates. Homebuyers will then have to repay the loan over the remaining 20 years but may make extra payments or repay the loan in full anytime without paying a penalty. However, the loan must be repaid in full when the home is sold or transferred to another owner.
“The first step into the market can be the hardest step, so our government will partner with homebuyers to help them achieve their minimum down payment,” says Rich Coleman, minister of natural gas development and minister responsible for housing. “This partnership program is another important way we’re taking action on housing affordability.”
The announcement was welcomed by Mortgage Professionals Canada (MPC).
“This single action by the Clark government will ensure that tens of thousands of middle-class British Columbians will be able to move from renters to homeowners,” says MPC president Paul Taylor. “It also means that B.C. will be able to create more jobs through increased housing activity which will support economic growth for all British Columbians.”
The impact on first-time homebuyers
A first-time buyer with $25,000 saved has enough for a down payment on a $500,000 home under the current rules. But the HOME program will increase their affordability to $750,000.
And a buyer who had the minimum down payment of $50,000 and intended to buy a $750,000 home would bring his/her down payment up to 11.7% from 6.7%, or $87,500. As a result, the buyer will save $9,291 on mortgage insurance and have an additional $39,272 in home equity at the end of a five-year term. Based on a five-year fixed mortgage of 2.35% amortized over 25 years, the buyer would save $205 a month on mortgage payments. Assuming a monthly savings of $205 a month over the entire 25 years, a homebuyer who borrows the full $37,500 will save $12,300 in payments over the first five years of their mortgage.
After the first five years, homebuyers begin making monthly payments at current interest rates. Based on the current prime rate of 2.7%, the repayment on the maximum loan of $37,500 is $202 a month—roughly equal to the monthly payment savings.
To qualify for the program, individuals with a registered interest or title must reside in the home and:
- Have been a Canadian citizen or permanent resident for at least five years
- Have resided in B.C. for at least one year immediately preceding the date of application
- Be a first-time buyer who hasn’t owned an interest in a residence anywhere in the world at any time
- Use the property as their principal residence for the first five years
- Purchase a home that has a purchase price of $750,000 or less (excluding taxes and fees)
- Obtain a high-ratio insured first mortgage on the property for at least 80% of the purchase price
- Have a combined, gross household income of all individuals on title not exceeding $150,000
- Have saved a down payment amount at least equal to the loan amount for which the buyer applied
B.C. expects to invest about $703 million in the program over the next three years to help about 42,000 households enter the housing market for the first time. The HOME program will begin accepting applications on Jan. 16, 2017 for purchases that’ll close on or after Feb. 15, 2017.