Nova Scotia
has decided that young people should stop renting and start owning something, even if their life savings fit in a shoebox.
The province just rolled out a pilot program in which qualified first-time buyers can get a mortgage through a
credit union
with just a two per cent down payment. That’s a measly $8,708 on Nova Scotia’s $435,387 average home price — about the same as a European vacation for two, if you’re not into hostels.
Prior to this, Nova Scotians had to either:
A) Put down a minimum of five per cent ($21,769) on that same home value, plus pay default insurance fees of $16,545, which are typically rolled into the mortgage, or
B) Borrow their down payment.
With this new two per cent down deal, there are no insurance fees whatsoever.
So, essentially, you bring less cash and skip a hefty insurance bill. On paper, that looks like a dream scenario for someone whose net worth is still waiting for its big break.
Well, my young homebuyer friends, before you run out and hustle up a two per cent down payment, here are nine things to remember about this deal:
- The program’s rules lock you in — i.e., there’s no switching lenders until you’ve built at least 20 per cent equity in the home. Assuming a four per cent interest rate, that would take someone about 82 months. That timeline means you’ll almost certainly have to renew your mortgage at least once, because enduring the inflated rates of a seven- or 10-year term would be financial masochism.
- Theoretically, the lender holds all the cards at renewal because they know you can’t shop the mortgage around. That’s led some to criticize the program, which is unjustified, given the upfront savings and the fact that credit unions aren’t like regular lenders. “As social purpose organizations, we’re owned by our members and the goal of maximizing profit is not in our DNA,” notes East Coast Credit Union CEO Ken Shea. In other words, most CUs aren’t going out of their way to stick it to members at renewal. Albeit, see points three and four below.
- Unlike our Big Six Banks, credit unions aren’t blessed with the lowest funding costs. That makes their rates typically more expensive. In my experience, many (not all) are often 30-plus basis points higher than the lowest mortgage rates you’ll find online. You’ll likely pay a premium at renewal as well, since the program prevents you from switching lenders (a policy that seems conspicuously unfriendly to consumers).
- The credit unions I researched for this story charged premiums ranging from 45 to 100 basis points above competitors’ best regular rates.
- Only 14 lenders in the province, all credit unions, offer this program at last count, according to Atlantic Central and League Savings and Mortgage.
- Despite not being able to transfer a two-per-cent-down mortgage to another lender, bocrrowers without 20 per cent equity can always sell their home, buy a new home and get a regular high-ratio mortgage at a competitive rate. (High-ratio means you’re putting down less than 20 per cent.)
- The maximum amortization with two per cent down is 25 years, while first-time buyers with five per cent down can extend to 30 years.
- Nova Scotia has made the debt ratio limits lower with two per cent down, meaning you have to make more income to support the same mortgage amount, versus a standard default-insured loan.
- The purchase price limits are $570,000 in Halifax Regional Municipality (HRM) and East Hants, and up to $500,000 throughout the rest of the province. Regular insured mortgages go up to $1.5 million.
If you run the math, it turns out that the two-per-cent-down program puts most people further ahead than a five-per-cent-down insured mortgage, based on borrowing cost alone. That’s assuming you don’t pay more than 45 basis points more on the interest rate and then hold the mortgage beyond 10 years.
The main reasons are straightforward: (A) you dodge a hefty chunk of default insurance fees, and (B) you keep three extra percentage points in your pocket instead of handing them over at closing.
So yes, Nova Scotians will probably swallow a meaningfully higher interest rate for that two-per-cent-down mortgage, but they’re pocketing roughly $6,800 per $100,000 borrowed at the outset, which is not exactly lunch money.
From a broader policy perspective, it’s a whole different conversation, however.
For starters, anyone pitching this as an
affordability
miracle may be misleading both themselves and the public. When credit gets easier, demand rises and prices usually follow, other things equal.
Sure, if housing supply magically ramps up to match, no harm done. The problem is, demand moves at warp speed while supply takes years to catch up.
That said, this is a pilot program of only 650 people, so any affordability ripple would be modest at best. (Odds are, the province will most likely extend it, some credit union officials told me on background.)
The other criticism is that Nova Scotia is subsidizing mortgage risk using taxpayer dollars, since the province promises to absorb 90 per cent of lender losses if a borrower defaults and the home’s liquidation proceeds fall short.
In practice, however, even mortgages with 100 per cent financing defaults have performed well in the past. Canada has ample historical data from its 100 per cent financing days and from the current borrowed down payment programs offered by Sagen and Canada Guaranty.
Moreover, the stricter debt service limits, stress test and purchase price limits are ample guardrails to keep defaults from going off the rails.
That’s not to say the federal government should use taxpayer dollars to fund its own version of this program.
Even though the projected default risk is manageable (likely less than one in 100 mortgages in a crash scenario, if we take 1980s record defaults into account), it’s healthier for the financial system — and overall price affordability — if borrowers pay insurance premiums, which in turn act as a buffer for losses.
As for the social benefits of getting Canadians into homes quicker, Marie Mullally, chief executive of CUA, says this isn’t merely a dollars-and-cents exercise. “Buying a home is a critical part of people’s life aspirations and financial goals,” she says. “So by helping people become homeowners sooner, the program serves a very important purpose.”
Robert McLister
is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
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