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Are you a saver or a spender? How you answer that question could have a large bearing on whether or not you should apply for BC’s new interest-free, first-time home buyer loan. The Home Owner Mortgage and Equity Partnership program begins accepting applications today.
It is meant to help homebuyers with their first down payment, with the provincial government matching funds up to $37,500 — or up to 5 per cent of the purchase price — with a 25-year loan that is interest-free and payment-free for the first five years.
“When it was first announced we saw a lot of criticism, and rightly so,” says Romana King, senior editor and real estate specialist for MoneySense. “The BC government is, essentially, allowing people to add on more debt in a really hard market to get into. That’s a bit of a dangerous gamble.”
That said, King believes no one should turn a blind eye to interest-free money. “Even if it’s just for five years, I think people who are smart about spending and saving could actually use this loan to their benefit,” she tells NEWS 1130. “Instead of using the money to buy a more expensive home, how about buying the same home as before but using that money to get a bit of a boost. You won’t pay as much in Canada Mortgage and Housing fees, you can budget so you can throw a lot more money at your mortgage for the first five years and then you can allow yourself to pay off that debt — which is locked in a prime-plus — when you have to start making payments.”
If possible, King advises first-time buyers to place the money in an account that will allow them to make more money than it costs to borrow. “For the first five years it costs you nothing. Take that money out after five years and immediately pay back the loan and you might end up ahead.”
Of course, that involves some discipline, and King suggests the loan isn’t for everyone. “You really need to sit down with your partner and your family and look at your budget. Go online and look at the market calculators and be truthful with yourself. Are you a good saver? If you’re not, this is not a good strategy and I would really avoid it.”
But she says if you know you won’t be tempted to spend the money on a new car or a dream vacation, go ahead. “If you’ll actually invest it so you make money and you can pay off the debt in five years when you have to start making payments, it can be a good idea.”
When Premier Christy Clark announced the Home Owner Mortgage and Equity Partnership program in December, she sold it as an attempt to help middle-class British Columbians overcome the hurdle of saving for large down payments. Some experts, however, say the loan undermines Ottawa’s attempts to reign in risky mortgages to overstretched buyers.