How much money do you really need for a down payment? Most of us have always been told to aim for 20% down, but in the current economic climate, banks, realtors and other housing professionals have been encouraging a down payment of 5%.
Most personal finance experts will tell you that it’s best not to borrow more than 80% of your home’s purchase price because it allows you to avoid mortgage default insurance, gives you access to lower interest rates, and increases your chances of passing the OSFI mortgage stress test.
However, the time it takes to save up such a big chunk of cash may take longer than you can afford to wait. Historically, income rates have not kept up with inflation rates, which means that if you wait to save up 20% (based on today’s prices), it may not be enough by the time you’re ready to buy. A 5% down payment is often far more attainable for home buyers, especially first-time home buyers who have no equity from a previous home to work with.
Lets compare the numbers. According to the Canadian Real Estate Association, the average Canadian home is $445,000. (Outside of Vancouver and Toronto the average is $360,000).
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
The mandatory mortgage insurance often puts off buyers because it slightly increases their monthly payment. But this extra cost can be offset by negotiating a lower interest rate. Even 0.25% less will do the trick.
Speaking of interest, nobody likes to pay it, but it should be noted that rates today are at near-historic lows! Previously, it made sense to make a large down payment on a house because it meant you would have an easier time dealing with crazy high interest rates (which hovered between 6-15% in the 80s and 90s and peaked at 18% in 1982.) Comparatively, borrowing money now is cheap! Take advantage while the gettin’s good!
If you already have your 20% down payment saved and waiting, there is another option to spending it all on a house. When the cost of borrowing money is low, it also means that it is easier to find stable, higher-returning investments. You have the option to choose a 5% down payment and to put the rest into a low-to-medium risk dividend-paying stock. This makes your cash more liquid. Instead of putting the full 20% into the down payment and waiting for the equity once you sell, you’ll have access to your dividends much sooner.
To get access to the lowest rates and for more detailed numbers in your specific circumstance, contact us today.