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

https://twitter.com/caitflanders/status/809499593368965120

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

  1. 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
  2. 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
    • 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
  3. 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
  4. 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
    • 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
  5. 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
  6. 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
  7. 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
    • 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
  8. 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

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