Why a Big Down Payment is Better
First time home buyers look to their families, the media and the Internet for all their information on how to buy a home. As a result, they know that they need 5% of the total home purchase price to buy the home of their dreams. While this is true, there are a few things that family may not tell you or they may not be aware of.
Putting down as much as you can afford is a great idea. We have all heard that mortgage rules are tightening, the economy [in Alberta] is down and lenders are being a lot more selective in who they give mortgages to. What you may not have heard is that the mortgage insurers – CMHC, Genworth Financial and Canada Guaranty – are also looking at lenders more carefully before approving mortgage default insurance. They are looking closely at employment, credit and how likely you are to stop paying your mortgage. While 5% is the minimum, if you have a few late payments from your college days or a collection from a cellphone company on your credit report, they will think twice about giving you an approval. However, if you put 10% down they will look at you differently. Putting twice the minimum down payment shows commitment. It shows that you have “skin in the game” and are less likely to default on your mortgage. If they are reluctant to approve your mortgage, a higher down payment can sway their decision.
The second advantage of a larger down payment is lower monthly payments. Let’s face it, when you get into a home, your paid off car will eventually need to be replaced and you will now have car payments and repairs chipping away at your monthly income. If you are newly married, child care expenses, baby furniture and starting an RESP will come up. You may be able to afford higher monthly payments, but you will be better off down the road if you have lower payments.
The third advantage is a lower CMHC premium rate. The bigger your down payment, the lower the risk to the mortgage insurer and the rate that they charge you. With 5% down you must pay 3.60% on the mortgage balance. On a home purchase of $350,000 this comes out to a premium of $11,970.
10% down results in a lower premium of $7560 and if you can make a 20% down payment you can avoid mortgage default insurance and pay $0.
Finally, the bigger your down payment the smaller your mortgage balance is to start. As a result you will save lots of money over the term of your mortgage.
A 5% down payment will result in a payment over 25 years of $115,381 of interest. 10% down lowers this to $108,042 and 20% down lowers this to $93,786.
In other words, if you can come up with a 20% down payment you will save over $21,000 in interest over the term of your mortgage. This is based on today’s historically low interest rates. I’m sure that sometime over the next 25 years rates will go up to the 5.79% that people were paying 6 years ago and they could go higher.
In conclusion, if you have a chance to put more money down on the purchase of your new home, you should consider it. You can save BIG TIME money by doing so. If you need more advice, contact your local Dominion Lending Centres office.
Thank you to my DLC colleague David Cooke for this article.
