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?

Written by Tawcan
Hi I’m Bob from Vancouver Canada, I am working toward joyful life and financial independence through frugal living, dividend investing, passive income generation, life balance, and self-improvement. This blog is my way to chronicle my journey and share my stories and thoughts along the way. Stay in touch on Facebook and Twitter. Or sign up via Newsletter