Thoughts: First Time Buyer Down Payment

Buying | January 12, 2017 | written by Dan

The following are my thoughts on the new first time home-buyer policy to be ratified on January 16th.

In short, I don’t think this is a good long-term direction for a few reasons;

I am very concerned about the increase in demand in a market where supply is already constrained. Especially given the subset of the market I feel this program will mostly target, attached homes.

There is already a lack of supply in this space specifically as well as all subsets of the real estate market; this policy will introduce droves of new buyers putting upward pressure on prices in a market that is already unbalanced in favour of vendors, simple economics really.

I think that this program could be potentially dangerous based on what is forecasted to happen with interest rates. In five years when these first time home buyers go to the bank to renegotiate their mortgage and find they are now paying roughly 4% instead of 2.5% and they are going to bare loan payments in addition to payments on the outstanding balance of their mortgage they will see a lifestyle altering increase to their monthly expenditure on housing.

If prices are in a valley when this is happening we could potentially see people walking away from their homes in masses. Which is very scary for our economy as a whole.

It is this fear of default on mass which triggered the federal government to take action in terms of increasing the interest rate stress test based on monthly income vs payment for mortgage funds; effectively prequalifying borrowers for a higher interest rate that don’t meet the 20% down payment requirement. Given that buyers can now effectively borrow their way out of this stress test I feel this Provincial policy blatantly undermines prudent action by the Federal government.

Having said this my advice for first time homeowners would be to use this program to your advantage; with the caveat that you start saving each month to pay off the borrowed amount in full at the end of this five-year term. If you borrowed the full 34,000 I would set your banking up so that you’re transferring $567 a month to a saving account the same day your mortgage is due, at the end of the 5 years you’ll have the funds to pay the loan amount in full. I would try and front load the repayment as much as possible, plan for interest rates to go up and your mortgage payment to increase.

If you already have the funds saved for a down payment and are in the housing market put half into a low risk portfolio or bonds (Talk to your financial advisor about your level of accepted risk) and realize a profit from this investment. Set your term up so that at the end of 5 years when the loan is due you can liquidate that investment and pay the down payment loan off in full and realize a profit.

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