Until recently, it was generally expected that a home buyer would have to supply a 20% down payment. This is because interest rates were high, which meant the bigger your down payment the smaller your monthly mortgage payment. But in today’s economic climate, most home buyers are expecting to put down just 5%.
There are still some financial experts who will advise you not to borrow more than 80% of the cost of your home. Their reasoning being that if you borrow 80% or less you’ll be able to get a lower interest rate, increase your ability to pass the OSFI mortgage stress test, and avoid paying mortgage default insurance.
Making a 20% down payment may have been doable in the past, but these days it’s near impossible to achieve without help from family or government programs. Most home buyers can’t save 20% fast enough. By the time they’ve built their nest egg, housing prices have gone up and that nest egg looks more like a nest pebble. It’s not enough. This is especially true for first-time home buyers who don’t have the equity from a previous home sale to help them.
But is putting down only 5% (compared to 20%) so bad? Lets look at the numbers.
Example: $455,000 amortized at 3.24% with a 5-year fixed rate over 25 years:
- 5% down = $22,750; monthly mortgage payment = $2,180; mandatory mortgage insurance = $17,300
- 20% down = $91,000; monthly mortgage payment = $1,770; mandatory mortgage insurance = $0
From this we can see that putting 20% down only decreases your monthly payment by $310. This may be more than you can afford, but often you can get a more agreeable monthly payment by bargaining with your lender for a slightly lower interest rate. Even 0.25% less can make a difference. When it comes to mandatory mortgage insurance, most buyers realize the cost is quite small when spread out over the amortization of the mortgage.
It should also be noted that today’s interest rates are near historic lows! Borrowing money in today’s market is cheap, especially compared to the 80s and 90s when interest rates were averaging 6-15% and peaked at 18% in 1982. Today the average mortgage interest rate is about 3.75%.
If you have already managed to save away 20% for a down payment, you’ve managed something amazing! Congratulations. You have the option to use it all as a down payment, or you can break it up and invest it two ways. Make a 5% down payment and use the remaining 15% to invest in a low-to-medium dividend-paying stock. When you put all your money into a house, you have to wait until the equity has built up and you’ve made the sale before you see any return. But when you invest your money into stocks, your cash is more fluid and you see returns much more quickly.
If this sounds like something you’d be interested in, or if you have questions about a mortgage, please contact us.