First-time home buyers in Prince Edward Island now have another option when it comes to saving for a down payment on a home which, in some cases, can take years.
On Oct. 9, the Island province joined Nova Scotia to offer a home down payment assistance loan program for first-time buyers. It was announced in Charlottetown by Finance Minister Heath MacDonald.
Similar to Nova Scotia’s program, the P.E.I. Down Payment Assistance Program is intended to help first-time home buyers with a “conditionally” interest-free loan to cover the five-per-cent down payment. The maximum price of a home allowed under the program is $225,000, meaning the maximum that can be borrowed for the down payment is $11,250.
The program is part of the province’s Housing Action Plan. It’s intended to help potential buyers with household income of $80,000 or less that have good credit and are earning enough to make payments on a mortgage but are having trouble saving the five-per-cent down payment for reasons such as paying high rent and student loan repayment costs.
“After (young people) get their career and start to plan a future, this is the next step. And, putting equity into a house is one of the best investments you will ever make,” said MacDonald. The program is being administered by Finance P.E.I., a provincial crown corporation.
It is scheduled to expire March 31, 2020, or once the $1 million allocated is used up, whichever comes first.
Other factors determining program eligibility include being pre-approved for mortgage insurance (including meeting the so-called stress test) and having a satisfactory credit rating with no defaulted outstanding debt.
After (young people) get their career and start to plan a future, this is the next step. And, putting equity into a house is one of the best investments you will ever make.
“They’re going to go through the same process that anybody would, that’s trying to access a mortgage through a financial institution. That’s part of a safeguard,” said MacDonald.
One issue raised is the $225,000 maximum price for a home, which is based on the average price of home sales on the Island over the first half of 2018. That average was actually $214,000, but it was rounded up to $225,000 for the program.
At issue is that homes in that price range are more likely to be found outside of Charlottetown. MacDonald said the maximum home price benchmark could be tweaked upward over time to reflect applicants’ needs. But for now, the benchmark could also be a way to help grow rural communities, he added.
Kim Reddin, owner and mortgage broker with Centum Mortgage Partners Inc., also attended the Charlottetown announcement. She agreed that homes around $225,000 are more likely found outside of the city. She supports the program but added having the loan payment as part of a client’s debt may reduce what can be qualified for, or it may mean a client doesn’t qualify because they can’t afford all of the payments.
“There’s just certain applications that will work and certain applications won’t. So, it does sound like a great program – free money for a down payment, but you have to remember that you have to pay it back. That payment is important,” she said.
“Credit is a big factor. You have to have good credit. You have to be able to afford the mortgage payment, the down payment assistance loan payment as well as any other payments (the client) has. So, we’ll be looking at all those factors when we do a pre-approval.”
John Eisner, president of Credit Counselling Services of Atlantic Canada Inc., said he likes the idea of helping lower-income people with the down payment on a home. But one thing he’d like to see changed is the term of the down payment loan to go beyond 10 years and mirror the length of term of the mortgage, usually 20 or 25 years.
“That would have helped people out even better,” he said.
Eisner is also concerned with lenders “overextending” the amount a client can borrow and pre-approving someone for a mortgage for a more expensive house.
“As long as you’ve got good credit and a certain income, banks will lend you the money,” he explained.
What can happen is that with property taxes, repairs, mortgage payments and the loan payments, the more expensive home is difficult to afford. He recommends that people get credit counselling advice and a full assessment to make sure buying a home and borrowing the down payment, especially since defaulting on a payment could result in interest being charged, is the right thing to do.
“That’s where the extra help can come in, by seeking someone that says: ‘Let’s go through everything,’” he said.
Programs vary slightly by province
The Nova Scotia Down Payment Assistance Program launched on May 1, 2017, already distinguishes between urban and rural home prices. Under the program, which runs until March 31, 2019, the maximum purchase price for a home in the Halifax Regional Municipality is $280,000, and elsewhere in Nova Scotia is $150,000. This translates into loans to cover the five-per-cent down payment at $14,000 for the HRM and $7,500 elsewhere. Since launching, the program has helped 153 first-time home buyers.
Many of the program features are similar to P.E.I. The differences are a lower total household income requirement of less than $75,000 and applicants are required to be Nova Scotia residents for 12 months. The P.E.I. program only requires applicants to be Canadian citizens, but the property must be located on P.E.I.
According to a spokesperson with the Department of Community Services, the Nova Scotia home price benchmarks are based on 2016 MLS data for average home prices in the province.
But an important similarity between the P.E.I. and Nova Scotia programs is the finer details with respect to the interest-free aspect of the loans.
Under the P.E.I. program, the loan is interest free so long as the borrower doesn’t default on a payment. Over the course of the loan, five-per-cent annual interest is applied to the principal of each monthly payment. If the borrower makes all the payments in full and doesn’t default, the interest is forgiven. If a default occurs, the principal and interest are due in full.
Nova Scotia will also apply interest on the interest-free loan if the terms of the loan are breached during repayment.
As well, both programs allow participants to waive their payments in the first year of the loan to accommodate for any unforeseen costs with home ownership.
Newfoundland and Labrador replaced its Down Payment Assistance Program in 2018 with a new home purchase program and a similar First-time Homebuyers Program. The new home purchase program offers grants of $3,000 to go toward a down payment on new homes valued under $400,000 (including HST) while the First-time Homebuyers Program provides participants with five-per-cent of a home with a maximum purchase price of $250,000. The five per cent is comprised of a $2,000 grant and the remainder is a repayable loan.