While an interest free loan sounds great at first glance, it looks like the new BC Home Owner Mortgage & Equity (BC HOME) Partnership is going to have some extra fees and restrictions to consider that may, in the end, make the program a lot less attractive that we’d hope.
It’s been an interesting start to 2017 in the BC mortgage industry, as we try to figure out how the new BC HOME program is going to work when it goes live on January 16th. While lenders have not yet decided on their official underwriting qualification rules, CMHC has released some additional information for how they will treat files using the BC HOME Partnership for some of the down payment funds, and BC Housing has clarified aspects of the program as well.
First and foremost, we now know that CMHC will consider BC HOME loan funds as a ‘non traditional’ source of down payment. This will increase the cost of the high ratio mortgage insurance charged to the purchaser.
For example, on a $400,000 purchase a client would need to have a minimum of $10,000 from their own funds and the BC HOME Partnership loan would supply a matching $10,000 (together equaling the minimum 5% down payment). Because the down payment is using borrowed funds (from the BC HOME Partnership) the high ratio mortgage insurance will fall under the ‘non traditional’ CMHC program and the fee will be 3.85% of the mortgage amount ($380,000 x 3.85%), so $14,630. This is roughly $1,000 more than for a client who is able to provide the 5% down payment fully from their own sources.
As well, the BC HOME Partnership program will deduct from their loan an amount to cover their legal fees in arranging the second mortgage. It is unclear still how much these fees will be (they state that the fees will be disclosed upon approval to the program), but we estimate they will be around $500.
The BC HOME Partnership rules now clearly indicate that all participants (applicants) on the primary mortgage must be on title (owners) of the property, and that all the participants must be first time buyers (never owned a principal residence anywhere in the world, ever). This means that co-signers will not be allowed on these mortgages – applicants have to qualify on their own with enough income and credit strength.
Also, since the BC HOME Partnership loan will be registered as a second mortgage, it will significantly restrict your flexibility regarding your primary mortgage. Before considering the program, you’ll want to keep the following in mind:
- All the people who purchase the property must live in the property as their principal residence for the first 5 years. If anyone wants to move out before the 5 years, the BC HOME Partnership loan must be repaid in full.
- You cannot change the owners on title for any reason. For example, if a couple gets divorced and one party wants to keep the house (buy out the other party), the BC HOME Partnership loan will need to be repaid in full before the title can be changed.
- When your primary mortgage comes up for renewal (5 years after purchase) you will not be able to change to a new lender without paying out the BC HOME Partnership loan in full. This means that you will be at the mercy of your current lender to offer you competitive rates at renewal, because you will not be able to change lenders if you do not have the means (or your property value has not gone up enough) to pay the government loan back.
The key advantage of the BC HOME Partnership loan is that there are no payments required (and no interest accruing) for the first 5 years. If the loan is not paid back in that time, you will start making payments at the end of your 61st month of ownership. The payments will be based on your current balance owing amortized over 20 years, and the interest rate will be set for each 5 year period based on the Royal Bank of Canada’s prime rate + 0.5%. Based on today’s rates, that would work out to a rate of 3.2%.
So returning to our example above (a client who borrows $10,000 through the program), if they did not pay down the BC HOME loan during the first 5 years they would begin making required monthly payments at the end of month 61. Their actual payment would be calculated based on the Royal Bank of Canada’s prime rate at the end of month 60, but using today’s Prime of 2.7% results in a monthly payment of $56.36 to the BC HOME loan. This is in addition to the monthly payment required for the primary mortgage.
Qualification Process and Calculation Still Unclear
The biggest key factor that is still unclear is what sort of monthly payment lenders will use as a liability in their mortgage qualification calculation. To be approved for a mortgage, lenders have to factor in a ‘payment amount’ for all debts, but right now we don’t know how that payment amount will be determined. Until the lenders decide on a policy for this, we cannot calculate any reliable qualification amounts for clients. We hope to have this information from lenders within the next week leading up to the official opening of the program on January 16th.