Is 5% better than 20%
If you’re buying a home in Canada, should you put as little down payment down as you can or should you look at increasing it to at least 20%?
When Canadians decide to take the plunge into home ownership they have a few different options. Most homebuyers purchasing a primary residence will come up with a down payment between 5-20%.
For most, simply getting in at the bare minimum is accomplishment enough, but if one has the choice should you try and come up with a 20% down payment?
One major reason a home buyer might look to opt for the 20% is to avoid Mortgage Default Insurance (CMHC Insurance).
If a homebuyer in Canada is putting down less than 20% they will need Mortgage Default Insurance.
This insurance is to ensure that should a borrower default on their loan the bank is protected. Insurance premiums are added to the mortgage balance and the borrower pays off the insurance over the life of their loan.
The insurance is tiered.
5-9.99% – 4% (of the mortgage balance)
10-14.99%- 3.1% (of the mortgage balance)
15-19.99%- 2.8% (of the mortgage balance)
(Ie. A borrower puts a 5% down payment of $20,000 on a $400,000 property. This would leave the borrower with a $380,000 mortgage balance. Add 4% for Mortgage Default Insurance and the borrower has a mortgage balance of $395,200.)
Although this may seem high, this allows borrowers to enter the housing market without the need to wait for a long period of time, saving up a 20% down payment.
Benefits of entering the market sooner; Canadian real estate has steadily appreciated over time. If a borrower waits to buy they may get priced out of the market. Once you own a home, you’re steadily paying the mortgage principal down every month.
5%-19.99% down payment mortgages (high-ratio mortgages) also come with slightly lower interest rates because they are insured against default. Lessening the risk on the lender.
While putting the lowest amount of money down on a property is appealing, a larger down payment will lower your monthly payments and save you thousands of dollars in interest over the lifetime of the loan.
(Staying with a $400,000 purchase; a 5% down payment, at a 2.74% high ratio interest rate, 5-year term and amortized over 25 years, the borrower will pay $9,341.65 in interest on the loan in 5 years. With a 20% down payment, at a 2.89% conventional insurable rate, 5-year term and amortized over 25 years, the borrower will pay $7,996.53 in interest one the loan in 5 years. A difference of $1,345.12).
*Remember also that with 20% down we automatically skip the $15,200 in Mortgage Default Insurance.*
Putting a higher down payment also helps shelter a borrower from future interest rate hikes. With a lower mortgage balance your risk position will be much better if you have to pay higher mortgage rates in the future.
More equity (money) in a home also gives a borrower’s flexibility down the road for things like a refinance and a Home Equity Line of Credit. Both require the borrower to have a certain amount of equity in their residence.
Ultimately there is no ‘right’ answer. Every borrower will have specific goals and needs.
These could include having enough money set aside in case of emergency. The opportunity cost of being able to earn more money with the down payment money outside the mortgage interest rate savings or perhaps peace of mind that your mortgage payment is lower.
What is important is to work with real estate professionals who take the time to walk you through the process.
Written by Ron Quaroni
To learn more about mortgage down payments watch or listen to this episode of the Saskatchewan Real Estate Podcast:
If you are looking for more information when it comes buying a home in Saskatchewan feel free to get in touch with Ron Quaroni. Ron is a licensed Mortgage Associate with iSask Mortgage Brokers Inc.
With a client first mentality, he works with over a dozen financial institutions to find mortgage rates and products that best suit his clients needs. To get fully prepared for the home-buying process get started with mortgage pre-approval. Click the following the link to access Ron’s online application.
Ron also works with a number of trusted professionals in all areas of real estate. If you are in need of a realtor, lawyer, home inspector, insurance professional he would be happy to pass along a referral.
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The above information is for demonstrative purposes only. It does not take into account the specific objectives, circumstances and individual needs of the reader. Its purpose is educational and should not be relied upon in that regard. The information is believed to be reliable, but its accuracy, completeness and currency cannot be guaranteed. The author and sources and any other party identified in this article do not assume any liability of any kind in connection with the information provided.