Which Mortgage Down Payment Options is Right For You?
Traditionally speaking, mortgage down payments were pegged at 20% of the total mortgage amount; so if you had a mortgage of $200,000, a down payment of $40,000 was the norm. Conventional wisdom held that you should save at least 20% and really save as much as you can before buying a home so that you can cut down on your interest payments and shrink the life of your mortgage. It’s still a good idea to put down as much as possible, but in today’s difficult times, many people find that they will have a hard time saving up enough money for their home and yet continually paying rent on a property that they will never own. For this reason, most banks and mortgage lenders have variable down payments, ranging from 0% to 25% and more, depending on your needs. But you should be very careful in choosing the right down payment option for your mortgage; simply flying into a really low down payment could bite you later. Let’s examine various options.
By law, Canadians are supposed to scrape together a minimum 5% down for their new home. 5% is a lot less than 20% and so it’s a lot easier for twenty and thirty something’s to save. However, 5% down has its own perils. This little chip in your mortgage makes it a lot harder to get out of the mortgage if you have to sell your home. If housing pricings suddenly drop, you could find yourself in a situation where even if you do sell your home, you’ll still have to shell out thousands of dollars to cover the balance of your mortgage. And while most people would try to ride this period of time out, it may become intolerable due to work or family demands. If you’re going to aim for the absolute minimum down, make sure you love your home and will love it for the term of the mortgage!
If you want to go for the 5% down payment, make sure that you have a solid savings account (at least three months worth of living expenses), you have a good job and plan to make additional payments on your mortgage so that it’s paid off faster. Another thing to note is that with any mortgage taken with less than 20% down payment, you will be required to purchase mortgage insurance, which will be applied directly to your mortgage.
The old fashioned 20% down was the norm for a long period of time and it’s still a good idea if you can be patient. Saving up 20% may take a while, but there is no real downside to it. Either you’ll have a hefty down payment on a home to put towards paying off the mortgage faster or you’ll have an even heftier down payment on your home (or the ability to get a more expensive home in the same term) if the prices drop. Either way, you win! Furthermore, if you want to avoid paying mortgage insurance, you have to lay down at least 20%.
Finally, we have the 0% down payment and this one is a bit weird. Most people accomplish the 0% down payment not by paying nothing down, but rather by financing the down payment.
0% down payments are highly restrictive, require prepayment restrictions (and claw back) and/or you may have to pay a higher interest rate. Really, you’re paying additional costs on the money your bank gifted you to pay your down payment. Most banks don’t really offer 0% down; instead, private lenders may be more willing. What you are actually getting is a ‘gift’ from a bank (or rather a loan since if you pay your mortgage off early you have to pay it back) that is very restrictive and has a higher interest rate. It’s probably not worth it for most people, but it’s worth discussing if you like the idea of it.
Down payments can range anywhere from 0% to 20% and higher. Some people put 7% down, others aim for 15%. Keep in mind that if you put down less than 20%, you’ll incur additional costs in mortgage insurance. We can help you figure out the best down payment for your needs and help you negotiate with the bank or mortgage lender.
There are lots of ways in which Canadians can get a mortgage today, even with the banks becoming increasingly tighter with their funds in the wake of the 2008 crash and scares ever since. The trick is to carefully do your research and save as much money as you can. It is possible to buy your first home and perhaps sooner than you think! Good luck.
If you have additional questions about this topic or others, please contact us at Higgelke Mortgage Group.