No Down Payment? No Problem?

Conventional wisdom states that you must save 20% of your down payment before buying a home to avoid paying the mortgage default insurance, and conventionally; this is absolutely true. But let’s take a look at the not so conventional side of things and weigh out the pros and cons of buying with 5 or 10% and when this decision would make sense.

Down Payment

Home prices, in the GTA specifically, have steadily increased year after year while interest rates have remained low. Now, sooner or later prices will comes back down to earth a little bit. But let’s deal with what we have in front of us. Traditionally, one would prefer to save up 20% of their purchase price to use as a down payment and obtain what is called a conventional mortgage.

TIP: Conventional Mortgage = A mortgage of 80% or less of the property value.

High Ratio Mortgage = A mortgage of 80% or more of the property value. I.e less than 20% down.

With a down payment of 20% or greater, the purchaser is not subject to pay the default mortgage insurance premium which could be up to 3.60% of the purchase price (or higher in some cases). This premium is bundled into your mortgage and paid out with your regular mortgage payments. For example, if your purchase price was $300,000 and you put $15,000 down your insurance premium would be $10,260 (3.60%). Your total mortgage amount would then be $295,260 ($300,000 – $15,000 = $285,000 + $10,260(premium).

Now of course you would rather avoid paying an extra $10,000 on an already expensive home purchase, but what if you consider this. That $300,000 purchase, depending on the area could potentially be valued at $330,000 – $350,000 in just a couple of years. When you factor in the year it could take to save the extra down payment to accumulate the 20% required, the opportunity cost now far outweighs the initial $10,260 premium. Just to be clear, we’re not advising anyone to rush and go buy a house nor are we promising that your value will jump that much. What we are saying is to do your research when you’re making a decision like this and speak to a professional. They may be able to give you the knowledge needed to help you make the right move, and in cases like this it could mean quite a large difference to your net worth.

Down Payments

If you are curious about your net worth and how much equity is in your home if you are thinking about a re-finance, or you’re considering a purchase but aren’t sure if the time is right; give us a call and we’ll walk you through it.

Do you believe you should save the 20% before buying a house or would you purchase with 5 or 10% down? Let us know in the comments!

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Have any questions, need any advice? Visit us at www.thefinancialforum.ca. Email us at mortgages@thefinancialforum.ca. Call us at (877) 335-4486.

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