35% Down Payment… The New Conventional Mortgage?
If you’re looking to buy a home, one of the most difficult things can be putting together a down payment. So how much do you really need before you can get into the home of your dreams? Let’s take a look at some of the different options, with their various pros and cons.
0% Down – A Thing of the Past?
If you’ve been in the housing market before, you might remember when banks offered the “zero down payment” mortgage. Although very attractive for obvious reasons, you may remember something called the Great Recession of 2008. The downside to these mortgages was that too many unqualified buyers were opting into mortgages they could not afford. When these people defaulted en masse, it led, in part, to the collapse of the housing market. As a result, Canadian legislators moved to implement safety measures preventing such high-risk mortgages from being so freely available.
Now if you’re looking to buy a home through a federally-regulated lender, you need a minimum 5% down payment. On the other hand, most major credit unions do still offer zero down mortgages. Lower income families are the primary target of zero down mortgages. The benefits of this are obvious, requiring less money up front, but what are the downsides? The biggest drawback is the high interest rate. Most of these plans carry an interest rate up to 150% higher than mortgages with 20% or more down. This interest can add up very quickly, in addition to mandatory insurance required for any mortgage with below 20% down. Over time these costs can become daunting expenditures, reducing the attractiveness of these mortgages.
Mid-Range Down Payments – 20% Down
In the Canadian housing market, 20% down is a bit of a milestone. Default insurance will be required if you put together less than 20% for a down payment. This is a pricy addition your regular mortgage payments. However, if you have 20% or more, you will be exempt from this burden. Common wisdom dictates that, in the long run, you will save a substantial sum of money if you can put together at least 20% for a down payment, as it will reduce your monthly payments substantially.
If you fall somewhere between 0% and 20% in terms of your ability to put together a down payment, you might want to look into the climate of your housing market. For example, when moving into a very popular housing market, where prices are increasing at a fast pace, it could be more expensive to wait until you have a larger down payment, as the prices will increase at a rate which negates the benefits you’d receive by not having to pay insurance. In a mellower housing market, you may be better off saving up and avoiding the higher interest and insurance premiums of a lower down payment mortgage, since the cost of housing will not be likely to climb so quickly.
Whatever your specific situation, it helps to have professionals look into it with you and crunch the numbers to make sure that you’re making the best decision for you!
35% Down Payment – The Ideal Mortgage?
Further conventional wisdom dictates that if a 20% down payment is good, 35% must be even better. CMHC insurance is no longer required if you have a 20% down payment. But what if you can afford an even larger down payment? Simply put, the more money you’re able to commit up front to a home, the less expensive it will be in the long run. Not only will you have less to pay off, but you will qualify for even more appealing interest rates. With lower interest rates and no insurance to worry about, the overall cost of your home will be substantially lower and you will be finished paying off your home far more quickly than if you were to put down the minimum.
Of course, not everyone can afford to put down 20-35% on a home. It’s important to note that, although there are benefits, a princely down payment is not required to get into the housing market. If you are a first-time buyer or belong to the low-to-mid income class, there are options available for you as well.
What’s truly important is to take a frank, honest look at your finances, be clear about what you can and can’t afford and get professional assistance. Buying a home should be an exciting and rewarding experience, and it can be, provided you put in the necessary footwork! Steve Marshall at Dominion Lending in Kingston would be happy to help, give me a call at 613-561-5433.