Last week Premier Christy Clark made an announcement stating the BC government was going to help First Time Home Buyers by matching their down payment, contributing up to $37,500 towards the purchase of their first home.   My initial thought was this is great!  In light of the recent changes made by the Federal Government any opportunity or program that keeps the real estate market buzzing seems like a good idea.   

But we are talking about the government so reading the fine print is always important and the more I read the less impressed I became.   We all know the recent spike in real estate values is making it more and more difficult for First Time Home Buyers to get into the market.   The current benchmark value of a home in Victoria according to the VERB November stats is $753,800 nearly a 24% increase from one year ago.  To understand this program a little more let's have a look at the numbers.  But rather than looking at the benchmark value let's look at a more reasonable starter home.

*Rates on years 1 to 5 based on 2.8%.  Years 6 to 10 based on 3.3%, 2^nd mtg has 0.50% rate surplus

While I do appreciate the BC Government helping homebuyers get into the market if they have not been able to save enough of a down payment just yet, otherwise they have to sit on the sidelines while they save more and possibly watch the values continue to climb faster than they can save.  It is a little scary to see a First Time Buyer that has borrowed 101% of the value of their new home.  With all the recent changes made by the Federal Government to reduce so called risky lending this move seems like a step in the opposite direction. 

One of the comments that caught my attention was how this could save a new homeowner interest costs as they would be able to put a bigger down payment on their new purchase.  Of course, I was curious to see if that was true.  To save you the headache of reading over dozens of numbers let’s just look at the mortgage balance and interest costs over the first 10 years of the mortgage based on the same rates and purchase price as above.  But let’s assume Borrower #1 has the 5% and doesn’t apply for the grant while Borrower #2 with the same cash savings does.  

Borrower #1

Total Amount Borrowed (no grant)  $538,720

Interst Paid Years 1 to 10                  $137,619

Balance Remaining After 10 Years   $370,458

Borrower #2

Total Amount Borrowed (no grant)  $531,760

Interst Paid Years 1 to 10                  $133,591

Balance Remaining After 10 Years   $369,510

Yes, it looks like you can save some interest over the first 10 years of your mortgage by taking advantage of this grant from the BC Government.  But wait, what if Borrower #1 took the same amount money from the proposed payments Borrower #2 has to make for the 2^nd mortgage and made a principal payment of $178 per month for years 6 to 10?   Well the answer is Borrower #1 would save an additional $907 in interest costs, still not more than Borrower #2.  However, the big difference in Borrower #1’s favor would be the mortgage balance after making the extra payments, only owing $358,871 after 10 years.  

While I applaud the thought behind stimulating the market for First Time Home Buyers this program may not be suitable for everyone.  All the more reason you need to come talk to your local Mortgage Broker.