CHOF :: no payment, no interest and no fees for five years!
Maroney on Money for November 30, 1997
Its acronym has all the appeal of a Christmas CD by Preston Manning. And with no payment, no interest and no fees for five years, it has all of the trappings of yet another year-end furniture deal. But the truth be known, the new Canadian Home Ownership Foundation (CHOF for short) actually offers something of value if you’re considering entering the real estate market.
CHOF, a two year old foundation, is a non-profit organization registered under the Society Act of British Columbia. Despite its age, CHOF has just commenced fulfiling its mandate to make the dream of home ownership a reality.
CHOF is designed to provide qualified parties with an interest free, no payment loan of up to 20% of the total purchase price of a new home for five years. Since there are already a number of entry level home ownership programs on the market, CHOF is really geared to those who could be categorized as middle-class looking to acquire a new condominium or townhouse.
To qualify you will need a minimum down payment of 5% of the total purchase price of the home. In addition, you’ll also have to meet the usual requirements for a conventional 75% first mortgage insured by Canada Mortgage and Housing Corp. (CMHC). In addition, your chosen dwelling must be selected from a CHOF approved development. Note that there is no requirement that this be the first home purchase of the applicant.
The benefits of the CHOF home buyers’ program can best be seen by way of an example. Consider the case of Mrs. Myrtle Class who is looking at acquiring a $200,000 townhouse.
Following the traditional route Mrs. Class would have to come up with a minimum down payment equal to 5% (i.e., $10,000) of the purchase price of the property. In addition, because the mortgage is considered high-ratio, she would be required to insure the mortgage through CMHC at a cost of 2.5% of the mortgage amount which works out to $4,750 in this case. Thus, Mrs. Class will have total financing on the property of $194,750.
At an interest rate of 6.5% for a five year term with a twenty-five year amortization period she will be looking at a monthly payment of roughly $1,275. Using a gross debt service ratio (GDS) of 30%, Mrs. Class will require a monthly income of $4,250 to service a debt of this size.
Looking forward to the end of the five year term, Mrs. Class will have repaid $19,183 in principal leaving her with a total remaining debt of $175,567.
Under the CHOF route, Mrs. Class will still be required to cough up the $10,000 down payment, however, CHOF will kick in an additional $40,000 of interest-free money as a second mortgage which doesn’t have to be repaid for five years. Mrs. Class will then have a down payment of $50,000 (i.e., 25% of the purchase price) which will drop her CMHC insurance premium to $1,125. The total first mortgage financing in this case will be $151,125.
During the next five years Mrs. Class will only have to worry about repaying the first mortgage financing. Using the same 6.5% interest rate and terms as above, Mrs. Class will find her monthly mortgage payment has dropped by $285 to $990. The monthly income required to service this payment is $3,298 which is $952 lower than under the traditional model.
At the end of year five, Mrs. Class will be left with a first mortgage of $136,239 and a $40,000 second mortgage. The total debt under the CHOF scenario is $176,239 which is only $672 higher than following the traditional route.
Of course, at the end of the five year term, the $40,000 second mortgage will either have to be paid out or consolidated with the balance of the first mortgage. What happens at this stage determines whether or not the borrower is going to reap the benefits of the program. At the end of five years the borrower should either be in a position to pay out the second mortgage or, in the more likely scenario, to refinance the first mortgage from a combination of principal reduction, property value appreciation and personal savings.
In essence, the CHOF program enables a person, who might otherwise fail to qualify for financing, to buy into the housing market today; the hope being that qualifying individuals will be able to improve their financial circumstances during the next five years to go it alone.
CHOF is a non-profit organization and charges no fees for its services. Now we all know that even “non-profits” need a source of income, so if CHOF participants aren’t paying fees just where is the money coming from? CHOF is funded primarily by developers, builders and financial institutions who stand to benefit indirectly by increasing the pool of potential buyers in the marketplace.
CHOF is not for everyone but it does have appeal for those on the verge of home ownership.
Jim Maroney is a chartered accountant with Andrews, Brown, Maroney in Maple Ridge
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