Why BC’s interest-free $37,500 loan is a terrible idea

Although I am in Mrs. T’s home country Denmark for the next 3.5 weeks, I have been keeping an eye on Canadian news here and there through Facebook and Twitter. Today I was shocked to see a lot of responses on the BC government’s announcement of interest-free $37,500 loan for first-time home buyers. Here are some of my thoughts on why BC’s interest-free $37,500 loan is a terrible idea.

BC’s Interest-free loan for first-time home buyers

  • A maximum of  $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.
  • Home buyers will pay no monthly interest or principal payments over the first five years as long as the home remains their principal residence.
  • After the first five years, home buyers begin making monthly payments at current interest rates.
  • Hombuyers will repay the loan over the remaining 20 years, but may make extra payments or repay it in full at any time without penalty.
  • The maximum purchase price of a home that qualifies for the loan is $750,000.
  • Applicants must be permanent Canadian residents for the past five years and B.C. residents for the past year.
  • The income or combined income of applicants must be $150,000 or less.
  • Homebuyers needs to be pre-qualified for a high-ratio insured mortgage and can buy anywhere in B.C.

Note: Points taken from CBC.

Some Twitter reactions from personal finance bloggers

Why I think this “interest-free” loan is a terrible idea

  • Gives people the wrong impression that they can afford a larger house than they can actually afford
  • Teaches financial irresponsible people to be even less financially irresponsible.
  • It will drive the already red-hot-not-affordable Vancouver condo market even hotter and even less affordable.
  • If someone is living pay cheque to pay cheque during the 5 years of interest-free period, what’s the chance that he/she will get into major financial trouble? Probably very high!
  • The interest-free loan is tied to the current interest rate after the 5 year grace period. What happens if interest rate is say 3% higher than today’s rate? Can you afford the extra interest payments?
  • Considering the average Canadian consumer debt is already at all time high, this new loan will only encourage people to take on more debt.

I thought it was very interesting one of the conditions is that you must be permanent resident for minimum 5 years and lived in BC for at least 1 year. It seems to me the BC liberals are trying to buy votes for next year’s provincial election. Now I don’t have a problem with tax incentives to help people but I have a problem using my tax money on something so irresponsible. Not to mention this new loan will probably hurt many people financially down the road.

Dear readers, what do you think about BC government’s announcement of interest-free loan for first-time home buyers? If you are eligible, do you plan to apply?

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32 Comments

  • Reply
    Financial Samurai
    December 15, 2016 at 2:48 pm

    Can’t fight the government! Gosh, you Canadians really got it good.

    But even better would be Canada providing $37,500 in FREE MONEY to all home buyers. Now that would be sweeet.

    Sam

  • Reply
    Primal Prosperity
    December 15, 2016 at 7:07 pm

    I agree it is a bad idea for all the reasons you listed, unless it can be used for investing, if the numbers work out. We just bought a condotel in downtown Milwaukee for a total of $41k. If there are properties in BC for this cheap, then it might be a good idea to make a cash offer and pay it off in 5 years. But, my understanding is that housing is more expensive there.

    • Reply
      Tawcan
      December 16, 2016 at 2:50 am

      Houses are way more expensive here in BC, especially Vancouver. $41k might not even get you a tool shed in Vancouver. 🙁

  • Reply
    Norm
    December 15, 2016 at 8:37 pm

    Wow, that’s interesting! I don’t think I like it either. $37,500 is just way too much, and the floating interest rate is terrifying.

    In the US we had a similar thing, but it was only $7,500, to be paid back over 15 years, and there is no interest. My wife and I used it to buy a new washer and dryer (the house came with very old ones), and then saved the rest. We’re paying it back at $500 a year.

    Of course, after we closed on our house, the government made it a straight up tax credit that you didn’t have to pay back at all! They made that effective retroactive to two weeks AFTER our closing date. So if we had only closed two weeks later…! That would be our money free and clear! Oh well.

    • Reply
      Tawcan
      December 16, 2016 at 2:52 am

      I think anyone with some common financial sense will agree this is a really bad idea. I just don’t understand how the BC provincial government can come out and say this is great for the average people in BC. Mind you, the Canadian federal government just recently tightened the rules on housing. But now the provincial government is loosing the rules. Makes a lot of sense.

  • Reply
    Revol
    December 15, 2016 at 10:09 pm

    Horrible move. It reeks of buying votes and this may be the downfall for BC Libs.

    Alas, BC NDP is a far worse choice and if the BC Liberals are not voted back in during next year’s election it will be nothing but bad news for the next 4 years.

    Good luck!

    • Reply
      Tawcan
      December 16, 2016 at 2:53 am

      Not trying to turn this into a political debate but we need better options here in BC.

  • Reply
    Dividend Dolphin
    December 16, 2016 at 1:13 am

    These are Dutch types of home loans. And we just are stopping those principal free motgages. It’s a bad idea, you’re right

    • Reply
      Tawcan
      December 16, 2016 at 2:54 am

      Interesting, didn’t realize there’s similar type of loans in the Netherlands too.

  • Reply
    Biglaw Investor
    December 16, 2016 at 5:05 am

    Very interesting. I guess it’s a good deal if you have the money to buy the house. You make the downpayment yourself, take the interest free loan for $37,500 and then use a mortgage to finance the rest? This feels like credit card reward programs where the credit card companies know that some people will take advantage, but the vast majority will end up falling prey to the problems of easy credit.

    • Reply
      Tawcan
      December 17, 2016 at 12:34 pm

      I don’t know how many people can actually take advantage of this interest-free loan like you mentioned. I’d have a slight problem with people taking advantage of this at other tax payers’ money.

  • Reply
    Mr. Tako @ Mr. Tako Escapes
    December 16, 2016 at 5:26 am

    Yeah, that doesn’t sound like a good idea. If anything, I think they would want to restrict buyers….to those only most able to afford it!

    • Reply
      Tawcan
      December 17, 2016 at 12:34 pm

      Exactly! Seems no sense to me that the provincial government is trying to add more fuel to the fire.

  • Reply
    Liquid
    December 16, 2016 at 7:28 am

    I’m not eligible anymore for this new program because I’m not a first-time home buyer anymore. But overall I don’t think this is a good idea for the B.C. economy because it will increase the cost of living for everyone. Adding more money to the housing market will only inflate the prices even further. On the bright side, my condo will probably be going up in value next year lol.

    • Reply
      Tawcan
      December 17, 2016 at 12:35 pm

      Good call on increasing the cost of living for everyone. That’s not good. 🙁

  • Reply
    Andrew@livingrichcheaply
    December 16, 2016 at 8:06 am

    I had the same thoughts as Cait…I thought they were trying to cool off the housing market so why do this? It’s never a good thing when the government distorts market prices. I guess if you were going to buy a house anyway and don’t let the money determine how much you can afford, it’s nice to get an interest free loan for 5 yrs

    • Reply
      Tawcan
      December 17, 2016 at 12:36 pm

      The odd thing is, the BC government introduced a foreign buyers tax in the summer as a way to cool off the housing market. Now this. Makes no sense.

  • Reply
    R
    December 16, 2016 at 9:22 am

    Yes, agreed.

  • Reply
    Money Miser @ Money-Miser.com
    December 16, 2016 at 11:17 am

    Being a Vancouverite looking to enter the housing market one day myself, I cannot fathom this decision whatsoever. Since when is getting a loan, in order to get a mortgage, ever a good idea? It’s financial suicide. Sure, it’s interest free for 5 years, but then after that you have to repay your mortgage AND the down payment back? Did we not learn anything from the US Housing Crisis, whereby loaning people who cannot afford a house is a bad idea?

    If you can’t afford a down payment, you can’t afford a house, end of story.

    Not only that, the federal government here is doing their best to cool the Vancouver and Toronto housing market by imposing stricter mortgage regulations. What sense does it make now for the provincial government to turn around and make it easier for first time buyers to enter the market? Both governments are working against each other.

    This is going to end up UGLY!

    • Reply
      Tawcan
      December 17, 2016 at 12:37 pm

      I wonder how many people will take the repayment of this loan & interest in their housing affordability calculation. Hopefully everyone because if they don’t they’ll get into financial disaster.

  • Reply
    Money Miser @ Money-Miser.com
    December 16, 2016 at 11:21 am

    You’ll be lucky if you can even rent a 2 bedroom place for a year here in VanCity for $41,000 soon.

    • Reply
      Tawcan
      December 17, 2016 at 12:38 pm

      Yeah rent is getting pretty stupid in Vancouver.

  • Reply
    Investment Hunting
    December 16, 2016 at 7:04 pm

    Sounds dangerous to me. Give people enough for a down-payment on a house that they cannot afford.

    • Reply
      Tawcan
      December 17, 2016 at 12:38 pm

      Very dangerous indeed!

  • Reply
    Soundman
    December 17, 2016 at 9:58 am

    Would have liked them get rid of the MSP instead of this. That would have actually helped people.

    • Reply
      Tawcan
      December 17, 2016 at 12:39 pm

      You know what, that is actually a pretty good idea because it would actually hep people.

  • Reply
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  • Reply
    Freedom 40 Guy
    December 20, 2016 at 5:33 pm

    Wow! I thought the DC area was expensive when it came to housing, but it sounds like Vancouver has us beat. Any thoughts on what is driving prices so high? Are there lots of good jobs in the area or are people buying into a bubble?

    • Reply
      Tawcan
      December 21, 2016 at 8:47 am

      There are lots of good jobs but salary has not really kept up with the housing price. So yes you can say we are almost in a bubble.

  • Reply
    morten
    December 23, 2016 at 4:14 pm

    Denmark! where? Im a dane, which is a happy reader of your blog 🙂

    • Reply
      Tawcan
      December 24, 2016 at 1:19 am

      Very cool. We were in København now in Jylland (near Bramming). Where about in Denmark are you?

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