Last week the BC government announced what they billed as a tremendous opportunity for first-time home-buyers to get into home ownership. It could be a nice Christmas gift.
Or not!
What the government announced was that they would fund up to half of the down payment for first-time homebuyers by way of a loan. This means that you only need to save up half as much for a down payment as before. There is a maximum, though, of $37,500 funding which corresponds to a maximum property value of $750,000. For first-time home-buyers, that’s plenty high.
This could—and the emphasis is on the could—be great for those who are considering a rent 2 own program. Normally, the R2O program is set up to have you save up enough for a 10% down payment by the end of the term, plus closing costs (for a total of 11-11.8% of the value of the property). This means a substantial payment every month in addition to the basic rent. It makes the program unaffordable for many people.
If the government is willing to contribute half of the savings component, then we only need to build enough into the program to get your credit account up to 6-7% by the end. On a $350,000 property with a three-year term, for example, this would reduce your monthly rent by close to $400.
But, as I mentioned above, the emphasis is on the “could.” Third party contributions have not usually been accepted by the lenders as legitimate sources for down payment funds. Will the lenders change their policies? Will they make an exception if the third party is the government? None of that is yet know
n. I suspect they will accommodate somewhat.
The other complication is that this money is a loan, not a grant. It needs to be paid back, albeit only after five years. Now, your maximum allowable mortgage is largely determined by your income, and specifically your income’s ability to service the mortgage debt, as well as all other debts. There is a maximum percentage of your monthly income that can go to servicing debt. If this government largesse is an additional debt that must be serviced, then your debt-servicing limit will be reached at a lower valued home.
Because the payback schedule does not begin for five years (unless you sell the house in the interim; then it is immediately payable), I suspect there will not need to be any additional debt servicing taken into account at the outset. So, it may not affect your maximum property value.
But, what happens after five years when your original mortgage is up for renewal? Now you’ll have to include that debt service amount, as well. If you were previously at or near your limit, that extra payment may now make you ineligible for mortgage renewal. What happens then: Lose your home? Go back to another rent 2 own, to avoid being forced out of the home, and eventually get it back?
So there are lots of questions that will have to be sorted out before January 16 when the program goes into effect. We will try to stay on top of developments and keep you informed.
This might be a nice gift, announced just in time for Christmas (you think the timing was coincidental?) But it may also reflect a lack of consultation or full due diligence by a government looking to shore up ratings before a coming election. Either way, we can probably help you.
In the meantime, here’s a real sincere Christmas wish from us at Fraser Valley Rent 2 Own: that you’ll have a Very Merry Christmas with your friends and family and great hopes and anticipations for 2017.
