The B.C. HOME Partnership Program, Part II: The Plusses

Posted by Vince Cavaliere on Tuesday, January 17th, 2017 at 10:15pm.

Happy New Year everyone! We hope that you have all had a happy and healthy start to 2017!

Back at the end of last year, we shared Part I of our discussion on the new B.C. HOME Partnership Program, where we talked about the potential negative effects of the new government initiative. As the Program officially kicked off yesterday, we wanted to make sure you have all the facts before making a move into the market - and that includes the good stuff too!

So, let's have a look at what we believe are some of the most significant benefits to the B.C. HOME Partnership Program:

1) The Program will enable people to enter the market more quickly.

One of the biggest hurdles faced by first-time home buyers is scraping together enough cash for the down payment that is required for them to make their way into the housing market. The B.C. HOME Partnership Loan will help buyers bear the burden of this cost by contributing up to 5% (up to $37,500) of the purchase price ON TOP of their personal payment amount. Further assisting first-time buyers, the loan is interest-free and payment-free for the first 5 years of the initial 25-year term.

Example 1: The purchase price of your first home is $350,000

     Minimum down payment: $8,750 (2.5%)

     BC HOME Partnership Loan: $8,750 (2.5%)

     Total towards the down payment on your new home: $17,500 (5%)

Example 2: The purchase price of your first home is $440,000

     Minimum down payment: $22,000 (5%)

     BC HOME Partnership Loan: $22,000 (5%)

     Total towards the down payment on your new home: $44,000 (10%)

Up until this point, first-time home buyers have been extremely limited by the rising home prices in B.C., as even a 5% down payment was difficult to put together. Now, with this amount of financial assistance, many of these buyers across the province who are ready and willing to enter the housing market will finally be able to gather the down payment they need to get started.

2) Implementing the Program may ignite slower marketplaces (i.e. small, rural) where prices are lower.

Outside of the major city centers, the real estate markets in some of B.C.’s smaller communities have been fairly quiet as of late. With the new B.C. HOME Partnership Program, more buyers will be able to enter the market, and if these buyers are still hoping to purchase a first home that is moderately priced, some of these small, rural communities might present the perfect opportunity!

There is no doubt that this program will help first time buyers enter competitively priced markets such as Vancouver or Victoria, but buying a home in these cities will still mean a substantial down payment and a significant mortgage payment once the 5-year payment- and interest-free initial period is over. Buyers can still successfully acquire their first home thanks to the B.C. government, but there is nothing saying that they must purchase a property that is at the very top of their price range (or even beyond it), just because they have some help on the down payment!

The real estate markets in communities like Ashcroft, Merritt, Chase, Williams Lake, or 100 Mile House, for example, have a much more vast selection of purchase options that would fall within a reasonable price range for first time buyers, simply because they are outside of the big city bubble! A home that might seem just a little too costly in Surrey might be within affordable range in Clearwater – in this circumstance, it really is all about location! Not only does this provide more options for buyers, but it could mean that some of B.C.'s smaller cities see their real estate markets ignite: benefiting the communities, their businesspeople, and their citizens in general.

3) With the expected appreciation of real estate values, a prudent buyer could possibly pay back the loan in 5 years. 

There is some concern that buyers will enter the market with the help of the B.C. HOME Partnership Program, will spend five years without making significant financial gains, and will then end up in dire circumstances once it came time to start paying off their loan. This is not necessarily the case, however, as a prudent buyer could stand to easily pay off their loan after 5 years - if they make the right choices. With the appreciation of real estate value over time, buyers could find themselves easily able to pay off their loan based on the equity that they build over the initial five-year period as market values grow.

This program cannot be seen as a hand-out and must instead be viewed as a jumping-off point: buyers should still have a plan to develop their financial position, and the B.C. Home Partnership Loan should only be the factor that helps them kick that plan into action. If first time buyers in B.C. look at the program from this perspective, they stand to benefit greatly from participating in it. Developing a great equity position, building a diverse financial portfolio, and achieving the potential for more real estate purchases are just a couple of the amazing opportunities that the program could help provide! All it takes is some sound advice, some careful choices, and some good old fashioned smart thinking to make the B.C. HOME Partnership Program make you a success!

Example: $350,000 initial mortgage > approx. mortgage value in 5yrs = $298,802> market value in 5 yrs {+ 2% annual appreciation} = approximately $386,428 >> net equity gain = $87,625.32

Taking advantage of your equity using the example from above:

Purchase Price in 2017 (with $8,750 B.C. HOME Partnership Loan on down payment): $350,000

Approximate Market Value in 2022 (w/ 2% annual appreciation): $350,000 > $386,428

Principle Mortgage Balance in 2022: $298,803

After the 5 year initial term, you will have to start making principle and interest payments on your B.C. HOME Partnership Loan. Over that time, your new home will have increased in value, leaving you in a positive net equity position. At this point, you can now take advantage of this position and use it to help pay off your loan!

First, you will want to take the steps to essentially refinance your home. If you have at least 20% equity in your home, you will be able to get a new mortgage as well as take out the equity on your home (to apply to an existing loan balance), all at the same time!

Next, you will appraise your home to establish its current market value. If your home appreciates in value by the annual 2% rate that is expected, this would place the re-appraisal price of a home that was initially $350,000 at $386,428. Once you have assessed the appreciated value of your home, you can now borrow a loan of up to 80% of the appraised value of your home, minus the amount you have left to pay on your first mortgage.

In our example...

                              Appraised value of home after 5 years: $386,428

                              80% of new appraisal value: $309,142

                              Amount remaining on first mortgage: $298,802

                              Equity take out after refinancing: $309,142 - $298,802 = $10,340

With this $10,340 of equity take out, you could now pay off your $8,750 B.C. HOME Partnership Loan in one fell swoop! It will not only be extremely satisfying to pay off your loan using money that you acquired through the investment you used it to pay for, but you will see benefits on many different levels!

Firstly, paying off the whole loan in one transaction would prevent you from having to pay the interest that would begin to accrue if you were to plug away at the balance with more frequent, smaller payments. Secondly, since the B.C. HOME Partnership Loan is applied to your property title as a second mortgage, using your equity take out to eliminate the loan would thus eliminate that high-interest, risk-riddled second mortgage. As you can see, thoughtful and economically-minded buyers can participate in this program without incurring unmanageable and overwhelming costs! Just follow the advice of your mortgage broker, financial advisor, or your favourite Realtor (and their blog!), and this program can help you succeed!

 

Sincerely,

                                                                                                                                                                                                                                     

Vince Cavaliere

Written in collaboration with Anna Langford

Team Cavaliere - River City Realty

vince@teamcavaliere.com

250.374.1925

 

NOTE: The example above is a simplified portrayal of the potential equity take out benefits that can be achieved with the B.C. HOME Partnership Loan. It is intended only to provide prospective participants with a scenario that helps explain the concept of an equity take out within the context of the B.C. government's new program, and should not be interpreted as a guarantee of any exact monetary benefit. It must be acknowledged that factors such as banking fees, CMHC fees, pre-payments, mortgage pre-qualification, etc. must be considered on an individual basis in order to fully assess how this program may work for you. There is an abundance of moving parts involved when dealing in real estate, thus a single standardized scenario cannot be generalized to meet every person, family, or lifestyle. If you would like to know more about how the program might specifically apply to you, please contact Vince for a personal buyer consultation. 

 

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