Is Ottawa’s proposed Shared Equity Mortgage “plan” a good idea? Okay, so I only know what I saw on CBC News the other night. They reported that the Canadian Government has yet to work out the details of the “plan”. We can’t fully assess it until we have those details… but the concept seems misguided to me in many ways:
1. The government has made several moves in a row over the past few years to tighten mortgage rules making it harder for people to buy or over-extend themselves. Now they suddenly want to drop 10% equity debt on first-time buyers to make it easier to over-extend themselves?
2. They are calling it “shared equity”, not a loan. Does this mean the government will be added on title? Sounds like it to me. After ten years when a lot of people cannot afford to buy back the equity, what happens? This is the most socialist concept I’ve ever heard in Canada. If you want the government to own your house (albeit in this case a minority stake in it), move to Russia.
3. Presumably the thinking is that over ten years, the worst case scenario is that regular mortgage payments will create enough equity to allow people (and I would suggest the rules are going to force people) to refinance to buy back the equity. In theory the socialist aspect corrects itself. The plan allows people to buy now, and buy back the 10% equity later. I’d prefer they simply roll back one or two of the mortgage rules so people can buy on their own now as long as they can save up the 5% down plus closing costs.
4. Can the 10% shared equity be used in place of the 5% down payment? If so, this is simply a way to put people with no budgeting discipline into a massive debt hole… many of whom have already proven they do not have the discipline to pay it back. Mortgage defaults will likely rise in Canada under this plan… not good for the market or for the victims.
5. Okay, so I’ve read that buyers will still have to come up with the minimum 5% down payment to qualify for the 10% shared equity plan. While this is less risky, it seems to render the plan useless. How are buyers who have saved up 5% and qualify for a mortgage under the current rules, which include the posted-rate stress test, going to benefit from a 10% equity injection? You may argue that purchase prices are just 10% out of reach for many first-time buyers. But if that’s the case, the stress test is putting prices out of reach by at least that much. So, why not just remove the stress test to achieve essentially the same thing – without all the complications.
6. What complications? Some are purely pragmatic and some are related to the socialist attributes of this idea. Do the home owners share the appreciation with the Government? That is, if the house increases in value, does the Government get the appreciation on their 10% share? What if the house goes down in value – do the buyers have to pay back the 10% plus the depreciation?
7. If a lot of people jump on this plan, market demand increases. The reason homes are expensive now (if they are) is that demand is much stronger than supply. This “plan” will make the problem worse, spiking house prices.
Save up your down payment and get in before they put this “plan” in place and too many people have used it.
This is a pure Big Government spending promise designed to get votes from people who don’t necessarily think through the costs and benefits.