How much do you need for a down payment on a house? For a long time it was common for housing professionals to suggest buyers plan to provide 20% down. But in the current economic climate it is far more common for buyers to provide 5% down.
Some financial experts will tell you not to borrow more than 80% of your home’s value because it allows you to avoid paying for mortgage default insurance. It also increases your chances of passing the OSFI mortgage stress test and gives you access to lower interest rates.
However, being able to save up 20% has its challenges. By the time you can save up what you need based on today’s prices it may not be enough based on future prices. Saving 5% is much more manageable, especially for first-time home buyers who have no equity from a previous home to work with.
According to the Canadian Real Estate Association, the average Canadian home is $445,000. (Outside of Vancouver and Toronto the average is $360,000). Lets see how a 5% down payment compares to a 20% down payment on a property with a sale price of $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
Most buyers want to avoid the mandatory mortgage insurance because it is an extra expense. But this extra cost can often be offset by bargaining with your lender for a slightly lower interest rate. Even 0.25% can be enough.
One of the reasons people used to make large down payments is because interest rates were so very high. Interest rates hovered between 6-15% in the 80s and 90s and peaked at 18% in 1982. Making a large down payment meant minimizing the monthly mortgage payment and being better equipped to handle the high rate of interest. But these days interest rates are near historic lows! Comparatively, borrowing money today is pretty cheap!
If you’ve already saved the 20% for a down payment you don’t have to spend it all on the house. You have the option of making a 5% down payment and putting the rest of your savings into a stable higher returning investment, such as a low-to-medium risk dividend-paying stock. Instead of waiting to sell your house in order to access the equity you’ll have more liquid access to your money’s growth.
To find out what kind of rates you can get access to, or for more information on down payments, call us today.