Last December the provincial government announced a plan to loan up to half the down payment to first-time home-buyers, a Christmas gift and pre-election goody. We blogged about that at the time.
The program is now in place, and we have a few more details as to how it’s playing out.
The good news is that, provided you qualify, you only have to come up with half the down payment now. You can finance the rest over time, with the government loan. And that loan is interest and payment free for the first five years.
Back in December when I wrote about this, I was unsure how the lenders would react because they haven’t usually accepted loans as a legitimate form of down payment. It seems that, as I speculated back then, they are making this exception, with many lenders accepting this as down payment. That’s also good news.
Here’s a hitch, though. The typical payment amount of that loan, calculated as if you were repaying it (even though you’re not) must be added as a monthly debt obligation. Because your other debt obligations influence the amount of mortgage you can afford, in many cases, this will lower the value of property for which you may qualify.
Furthermore, the calculation of that phantom payment is not in your favour, either. It must be calculated on the basis of the monthly payment required to amortize a 20-year amortized mortgage at the “posted rate.” The posted rate is currently 4.64%, far above rates at which you will actually get a mortgage presently.
Here’s the other catch. Since all mortgages with less than 20% down payment must be insured, CMHC (or a competitor’s) insurance will apply. The rate of that insurance depends on the amount of your down payment; the less the down payment, the higher the rate. With one of these deals, even though you have 10% down with the government loan, because it is a loan, your CMHC rate will calculated on the basis of 5% down payment, not 10%. Currently, that rate is 3.85%.
Note I said the “current” rate. The feds have, meantime, announced an increase in CMHC rates. Effective March 17, that 3.85% rate rises to 4.5%. So, your 90% mortgage on the property, effectively, becomes a 94.5% mortgage, plus a second mortgage owed to the provincial government of 5%.
Overall, it is good news for those few who want to get into a rent 2 own program and meet all the following criteria:
- it is your first home,
- shortage of a down payment is your major barrier to getting your own home,
- you don’t have significant other debts,
- you are able to qualify to service the additional debt, even though you don’t have to pay it for five years.
For those who fit into this scenario, you could get into a rent 2 own with significantly reduced requirements. As mentioned in the December blog, it could reduce your payments on a $350,000 property by about $400 a month.
Alternatively, for some, it could reduce the length of time for which you will need to be in a rent 2 own, possibly from 3 years to 2 years. Or it could reduce the minimum deposit you need, to start the rent 2 own program.
If you think you fit the criteria mentioned above, I would encourage you to apply to our rent 2 own program. Or, if you have been turned down because you didn’t fit in under the higher qualification requirements, you may want to reapply now.
