B.C.’s no-interest down payment loans and financial reality
December 22, 2016
Politics and good financial judgment are often at odds. An example of this has just happened in British Columbia.
It has to do with the Canadian dream of home ownership. Many perspective home buyers across our land are wondering if they should take the plunge and commit themselves to a huge amount of mortgage debt.
There are many risks to home ownership and those risks have to be balanced against the potential benefits.
Last week British Columbia announced they will begin offering qualifying home buyers interest-free loans to be used as a down payment on their first house.
The irony of this announcement is that it was made on the same day the Bank of Canada issued yet another report warning Canadians about their high debt levels, and specifically their exposure to the housing market.
These federal warnings have been going on for many years. Now, the government of British Columbia wants to ignore financial reality and encourage non-home homeowners to take the plunge.
The political logic is that the cost of a house is out of reach for most first-time buyers, therefore the BC government wanted to provide interest-free loans to make home ownership obtainable.
We all know from simple economics that supply and demand for any product affects the price.
Increasing demand for housing, by giving first-time buyers an interest-free loan, will effectively increase house prices further.
I do not have an issue with homeownership. The problem is the debt that many Canadians have.
Interest rates are at a historic low and family household debt is at a historic high. If interest rates rise even a small amount, many Canadians will be scrambling to pay their mortgage obligations.
B.C. Premier Christy Clark said, “People need a partner in scraping together that first down payment.” That type of comment sounds like something you might hear during an election.
The new B.C. interest-free down payment program starts in January, 2017. The citizens of British Columbia are scheduled to go to the polls in early May.
On face value, this appears to be more of a partnership of getting re-elected versus helping first-time home buyers.
The lesson to be learned from the B.C. initiative is that homeownership is the dream of many, and it appears that dream is being used for political purpose.
The financial risk has to be considered especially because, for many, their house is their largest financial asset.
My recommendation is to closely consider the financial impact of purchasing a house.
Consider the amount of down payment, mortgage debt, monthly cash flow obligations, and most importantly, anticipate those monthly cash flow obligations if and when interest rates rise.
Your decisions on home ownership will likely affect your financial health for decades to come.