B.C. new mortgage program means more debt for property virgins.

To help keep housing affordable in the province, the B.C. government is offering an interest-free loan to first-time homebuyers. The B.C. Home Owner Mortgage and Equity Partnership program will provide property virgins with a loan of up to $37,500. This amounts a maximum five percent of the purchase price or half the down payment. The loan is interest-free loan for the first five years, amortized over 25 years.

The program starts accepting applications January 16, 2017, running for three years. The B.C. governments estimates roughly 42,000 homebuyers will take advantage. The program significantly boosts the purchasing power of first-time homebuyers. Under the new program, a buyer with a $25,000 down  payment could spend up to $750,000 on a home instead of only $500,000, an increase of $250,000.

The program comes with some restrictions:

• Before applying for the loan, you must be pre-approved for a mortgage from an approved lender.
• Your mortgage must be high-ratio (you have less than a 20 percent down payment).
• The property must be in B.C. with a purchase price under $750,000.
• You have a household income under $150,000
• You must be a permanent Canadian resident for at least five year, and a resident in B.C. for at least a year.
• The loan is interest- and payment-free as long as the home remains your principal residence for the first five years.

B.C.’s new program is a big move compared to Ontario, which recently doubled the provincial land transfer tax rebate for first-time homebuyers.

Are First-Time Homebuyers Really Better Off?

On the surface the new program looks like a major win for first-time homebuyers in B.C., but here’s why it’s not. Instead of addressing the shortage in supply of affordable housing, the B.C. government is once again addressing demand.

The new program encourages first-time homebuyers to take on more debt at a time when the Bank of Canada is especially worried, citing household debt and rising home prices as the largest vulnerabilities to our economy. The facts speak for themselves: Canadians owe an average of $1.67 for every dollar of disposable income. We also hold the dubious honour of having the highest consumer debt burden in any G7 country.

The new policy flies in the face of the new mortgage rules introduced by the federal government, aimed at cooling the housing market and protecting homebuyers from taking on too much debt.

With a provincial election on the horizon in May 2017, the move seems to be more about winning votes than good policy. B.C. Premier Christy Clark expressed her concern with the rising level of household debt. She said the program is to help those who can afford mortgage payments, but aren’t able to save a down payment (although she failed to mention the higher debt burden property virgins will have to carry).

Yippee! More Debt For First-Time Homebuyers

Living in Toronto, I understand firsthand the difficulty in saving a down payment when home prices are rising faster than you can save, but a new program that encourages first-time homebuyers to pile on more debt isn’t the solution. I’m no economist, but if property virgins have more money, chances are they’ll end up spending more on homes. Without a new supply of affordable housing coming down the pipeline, this will only lead to higher home prices and more mortgage debt.

It’s important to recognize that the loan from the B.C. government isn’t free money. It’s considered a second mortgage. The program comes with more flexibility than a traditional mortgage. Homebuyers can pay back the loan at any time in full without paying a penalty (but there’s a fat chance of that, unless you win the lottery). If you’re not able to repay the loan in the first five years, you’re required to start making monthly payments based on current mortgage rates, which depending on where interest rates are, could be a lot higher than today. The loan then must be fully repaid over the remaining 20 years.

After sitting on its hands, there’s been no shortage of real estate rule in changes from the B.C. government. A 15 percent foreign buyers tax and vacant homes tax were introduced this year. This is on top of changes at the federal level – a higher minimum down payment and new “stress test.” If I was a first-time homebuyer, my head would be spinning from all the changes.

Why You Should Think Twice About This Program

If you’re a homebuyer in B.C., unless you can repay the loan in full in the first five years, you should seriously think twice before signing up. Taking on more debt is the last thing you want to do, especially at a time when mortgage rates look to be heading higher. If your parents are in the financial position to help you, you’re better off going to the Bank of Mom and Dad, (depending on how’s it’s structured, it’s not considered a second mortgage in many cases).

Unless you want your mortgage to be a life sentence, you’re better off buying a home you can truly afford (I discuss this in my book, Burn Your Mortgage). That may mean moving slightly further out or choosing a more affordable property type like a condo or townhouse instead of a house, but if you’re anything like me, you’ll be able to sleep a lot better at night without a massive mortgage hanging over your head. And nothing beats a good night’s sleep.

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians, available now on Amazon and at Chapters, Indigo and major bookstores, and as an Audiobook on Amazon, Audible and iTunes.