Mortgage 101 – What Nova Scotia’s New 2% Down Program Really Means

Dan Ahlstrand and Clinton Wilkins discuss the new Nova Scotia first-time homebuyers program, which reduces the required down payment from 5% to 2%.

Dan Ahlstrand
Welcome to the February edition of Mortgage 101, or as Clinton likes to call it, Love Your Home. I’m Dan Ahlstrand. He’s Clinton Wilkins.

Clinton Wilkins
I like February because it’s that much closer to spring, right? I think the weather’s been warm, it’s been cold, but I think overall this has been a wintry winter.

Dan Ahlstrand
We’re through Christmas, right? That we’ve got the bills underway now, when it comes to Christmas time and paying things off. And we talked about Merry Debtmas last month, and now it’s time to refocus, to reenergize, to love our homes.

Clinton Wilkins
Exactly. And maybe the home that you’re in is not the home that you’re gonna love, and maybe you want a new home. Maybe you’re renting, and you want to become a homeowner, or maybe you want to improve the property that you’re in already. We’ll talk about all that stuff. But the other thing that we’re really going to touch on, Dan, is what happens when love goes wrong. I think a lot of people stay in relationships sometimes, like through the holidays, just fight it out. Maybe it’s for the kids, or maybe they just want to get through the end of the year. And then, once the New Year hits, that’s part of people’s resolutions to be like, I’m going to write this relationship, right? This relationship right out the door, or something like that. So we’ll talk about a little bit.

Changes in Nova Scotia’s First-Time Homebuyers Program

Dan Ahlstrand
But before we get to all of that, there was some big news this week. This past week here in Nova Scotia, it caught the attention of people right across the country, and that was the news that the province was changing or will change the first-time homebuyers program, and is going to slash the required down payment for first-time homebuyers from 5% to 2%.

Clinton Wilkins
Yes, and it’s currently going to be a pilot program within the province of Nova Scotia. The caveat here is that there’s not going to be any CMHC insurance; Sagen or Karen cannot guarantee it’s going to be backed by the province. So taxpayers like you and I are going to be backing these mortgages that are only going to be available at the credit union now, 2% down payment, that sounds pretty good, Dan, to be honest, right? And I think for some buyers and some borrowers, that’s going to make sense, but I think you need to know all the information to be able to make a really good decision. And that’s where I’m hearing all kinds of noise. There are realtors, there are lawyers who are kind of giving advice out on the internet. I think when you’re getting a mortgage, you need to seek advice from an unbiased mortgage professional. We can look at your situation and decide which way is going to be better. So here are the pros: obviously, no high ratio insurance, lower down payment. Here are the cons. You’re probably stuck with a credit union for a long, long time, because unless you can finance your home at 80% of the property value, i.e., the property value goes up. You pay down the mortgage, you’re stuck with that institution. And typically in Nova Scotia, credit unions have higher rates than bank lenders, and I’m talking like one, 2% higher than we can get with a bank lender. So we need to factor all of these things in when you’re deciding on which way to move forward. And the big difference is it’s a 2% down payment versus a 5% down payment. The province of Nova Scotia has historically also offered a down payment assistance program, right? And it’s unclear if that’s going to continue or if this is going to replace it, but that was actually a pretty good program. Dan, the way that it worked is it was again supporting first-time homebuyers, and they were loaning them the money for this down payment. So basically, they were putting $0 as a down payment, and then that loan was interest-free and was paid over 10 years. There are pros and cons to everything for a taxpayer. I do have concerns that the Province of Nova Scotia is going to be on the hook to back these mortgages for the credit union. That is a concern. What happens in five years, 10 years, 20 years down the road, if the credit union has a loss, the province is going to be on the hook. And we already have default insurers that are federally regulated. We have the Canadian Mortgage Housing Corporation, which is a crown Corp. And we have two private insurers in Canada, Sagen and Canada guarantee they’re already set up to back mortgages for credit unions and bank lenders. All lenders that are approved to do business with them can get this high ratio insurance. So, for me, I think there are pros and cons to every program. I think it’s just really important to kind of weigh those pros and cons.

Pros and Cons of the New Program

Dan Ahlstrand
This new program also has some caveats attached to it, that in order for you to qualify, one of which you’ve already touched on is that it will be administered through credit unions here in Nova Scotia. Household income can be no more than $200,000 a year, which, to be honest, is that’s pretty fair. That is pretty fair, and I think it gives people who are in that lower income bracket a better chance to get the money saved for the down payment. Your credit score has to be over 640.

Clinton Wilkins
Is a threshold which is actually quite low. I would be surprised if we could get a file approved with a 630 credit score through the legacy program. We consider it a flex down, so it’s borrowing your down payment. And you could borrow from a line of credit, or you could borrow from the down payment assistance program. It’s the same type of idea. Typically, you need a higher credit profile because you have less skin in the game. So that’s where it’s a little bit of a concern.

Dan Ahlstrand
Is this going to give people with a little more dented credit an opportunity to get into homeownership?

Clinton Wilkins
I think it’s going to give people who have had some bumps in the road, potentially, a step up, so they can get into homeownership. The concern is, what happens then, once they own the home, if something happens to the home, if you have no cash and even no access to credit, and you need to put a roof on your house to protect the investment, what’s going to happen? And I think that is kind of that question mark. And, through this program, you still need to go through the stress test, right? You still need to qualify at a rate of 2% higher than the contract rate. And I already said earlier that the rates are going to be higher. You’re going to take a rate that’s going to be one 2% higher than you could get with a bank lender, and then you need to qualify 2% above that contract rate. So that $200,000 worth of income for a cap purchase price of 570 in HRM, you might need all that $200,000 worth of income to qualify, especially if you have a couple of car loans or something.

Eligibility and Financial Considerations

Dan Ahlstrand
And that cap was, was the very first thing that sort of shot up a flag for me in HRM, and I think it’s Hants, it’s 570,000, which is the maximum correct that you can get under this program. And outside of those two communities, it’s $500,000, which I think in the rural parts of Nova Scotia, is probably a little more palatable. I think it’s going to work great in rural areas. The minister himself, on Tuesday, when they announced this, admitted that he thought it was still going to be a little tough for somebody in HRM to qualify under that $570,000 rule.

Clinton Wilkins
I 100% agree, I think this program is going to be best for people that are in rural Nova Scotia, primarily, that’s the community that these credit unions are typically servicing. Yes, there are credit unions in Halifax, don’t get me wrong, but credit unions are more deeply entrenched in the community, typically, and they’re more deeply entrenched in more rural areas. So, I think this program is going to work best for maybe people that are outside of HRM enhance and to be frank, there are not as many bank lenders out there, and there’s certainly not as many mortgage brokers out there in rural Nova Scotia.

Dan Ahlstrand
You and I’ve talked several times on this program, Clinton, about that sort of thing, that sweet spot, particularly in HRM, when it comes to home prices, and we kind of settle in around that $600,000 range, the average or so. You think, yes. Do you think that with this, this incentive now for people to look at properties $570,000 or less, that that’s going to put a run on that market, and we’ll see the supply drop very quickly, and thus drive prices up?

Impact on the Housing Market

Clinton Wilkins
Well, I think certainly more borrowers can qualify. So that’s number one, but it’s the noise that we’re hearing now in the media. Yes, we’re part of this in the media, but more people are talking about it. Trust me, we’re getting a lot of inquiries in our office as well. Let me tell you, as soon as this news dropped, it was kind of like a scramble, and the industry was consulted. I typically say when these announcements come out, they weren’t calling the industry to say, was this a good idea? I’m sure the province talked to the credit unions. Obviously, they talked to them up front. But for the people who are doing the bulk of the transactions here in Nova Scotia, there was no consultation. Luckily, we do have a relationship with credit unions, so we will be able to do these types of transactions. I haven’t received any information. I know as much as what’s available online on the Province of Nova Scotia website, but my big concern is that more demand in the market means that the prices are going to go up, and there’s certainly going to be fewer properties available that are under 570,000 here in HRM.

Dan Ahlstrand
I took a quick look when the announcement came out the following morning, just to see what was kind of out there, and I was able to find a few single-family homes that were under that 570, but a lot of it was condos. A lot of it is semi-detached. Yes, maybe small homes, and I don’t think the mobile homes will even qualify.

Dan Ahlstrand
Is that sort of where you think this is going to live in those, those kinds of areas?

Clinton Wilkins
I think semi-detached. I think condos, I think that is going to be more of a sweet spot for this type of program. And, I think that’s the type of real estate likely that is going to be traded, and these types of bores are going to get into, and that’s okay, a starter home is what a first-time home buyer should get, right? And I think we kind of forego that over the last 10 years or so, we’re talking about granite countertops and say. In the seal appliances. But I think we’re in a situation now that first-time homebuyers will be in more of a starter home type situation.

Dan Ahlstrand
So obviously, still very fresh, still the details being worked out, the proverbial Devil is still in, the details still to come, and we here at Mortgage One on One, we’ll be keeping our eye on this, of course, moving forward, and we’ll bring you the very latest information once it becomes available.

Clinton Wilkins
We will be reporting back, and I’m sure we’re going to be talking about it all.

Dan Ahlstrand
We’re off and running on the season of love here. I still have The Love Boat theme in my head! We’re going to take a break here on Mortgage 101.