A B.C. developer wants to sell condos in Metro Vancouver's red hot real estate market to first-time buyers who don't have the cash for a down payment.
"It's just a different spin on, 'How do we provide an affordable home ownership option to buyers who otherwise can't get into the market?'" says Townline vice-president of marketing Chris Colbeck.
The company is proposing buyers on limited incomes could be allowed to purchase a unit in its Port Moody development for eight percent less than the appraised market value.
The appraisal would be done by an independent third party, allowing the eight per cent to be used as a virtual down payment for a mortgage.
That would mean the bank would be financing 100 per cent of cost for the consumer, says Colbeck.
The idea has already been approved by B.C. Housing, and now Townline is hoping Canada Mortgage and Housing Corporation (CMHC) will approve the program as well, he says.
"It's a partnership we've made with B.C. Housing that's providing us the ability to do this affordability program that hasn't been done before. They're the ones that have structured this program," he says.
Under review by CMHC
Townline's proposal is still under review, confirmed CMHC spokeswoman Karine LeBlanc.
Normally home buyers are required to put down a minimum of five per cent to qualify for Canada Mortgage and Housing Corporation insurance, and 10 per cent for homes costing more than $500,000. It is protection that banks and other lenders insist on when providing a mortgage worth more than 80 per cent of the home's value.
In this case the CMHC may grant an exception under its Flexibilities for Affordable Housing program, says LeBanc, but she stops short of saying buyers could be able to buy a home without a down payment.
"Under this program, CMHC will accept a broader range of down payment sources — that means alternatives to cash from borrowers. This could include sweat equity, grants, borrowed down payments or rent-to-own payments. This is not the same thing as requiring no down payment," said LeBlanc in a statement on Monday.
Raising the risk?
UBC Sauder School of Business associate professor Thomas Davidoff says the program may help the developer sell the units quickly while the buyers save some cash, but he still has concerns about who is carrying the risk if the property values fall.
"CMHC normally requires some sort of down payment from the buyer because they want to know if the property value falls, the buyer will still have some equity and not default on the loan," says Davidoff.
"Otherwise CMHC has to pay the difference to the lender upon a default.... If there is a large price decline CMHC is in a first loss position"
Davidoff notes buyers without down payments have not demonstrated the ability to save, and that left many banks in drop trouble during the U.S. housing crash of 2008.
"As the U.S. housing market did better and better in the early 2000s we saw people believe it was impossible for prices to fall. And when you believe it is impossible for prices to fall you get into creative debt financing products that look bad in retrospect."
"Lenders don't have an upside in price volatility. They only have a downside, and we are in a very volatile price environment and I would think lenders and their insurers would want to keep that in mind."
The fine print
Colbeck notes the proposal would not create a second mortgage, and the eight per cent recognized would not need to be repaid, but there would be other restrictions on buyers.
"The program is registered on title by a restrictive covenant to ensure that it has to be for an end user, a principal resident. You must live in the home as your principle residence for a minimum of two years. And after that two years you're free to sell your home with no restrictions at market value."
"To qualify you have to be a qualified household income. A qualified purchaser is defined as somebody with a family income that must be $65,850 dollars or less for a one-bedroom or a one-bedroom and den, or $92,430 for a two-bedroom."
Townline is eventually hoping to offer 84 condos up for pre-sale this spring, if the program is approved.
"At the moment, we are simply doing an information session," he says.
A previous version of this story said to qualify, buyers must have an income of more than $65,850 dollars for a one-bedroom unit or $92,430 for a two-bedroom unit. In fact, they must have incomes below those thresholds.Jan 18, 2016 11:57 AM PT