For Buyers looking to get into the market, or those looking to upgrade, one big question needs to be considered: with interest rates so low, should you wait until you have a 20% down payment?
First – why is a 20% down payment so important?
Ten amount of your down payment determines whether or not you’ll have a “conventional” mortgage or an insured high ratio mortgage. What is means in simple terms is if you have less than a 20%down payment, that you will also have to pay an insurance premium, which could run you thousands of dollars over time and affect your level of affordability. Typically this mortgage insurance fee is added to your monthly mortgage payments, though it can also be paid as a lump sum when you get the mortgage. Insurance premiums are typically anything from 0.5% to 3% of the purchase price, with lower premiums as you get closer and closer to 20% down. At the end of the day, it’ll cost you to have a mortgage with less than 20% down.
Mortgage Insurance protects the lender in case the borrower (you) defaults on the mortgage payments
Reasons For and Against a 20% Down Payment
Another reason why it’s often useful to have at least 20% down is that you don’t have to go through an insurance company who may not want to insure a home that you want to buy. When you have to get mortgage insurance, that company has to approve the property in question, and they’re often quite strict on the types of properties they approve. How does this affect you? Say you wanted to buy a unit in a building that is not rain screened, or only partially rain screened, or is in the midst of some building work – it will be tough to get the mortgages insurers approval which may mean that you can’t get financing. Of course, buying a unit in a fully rain screened building is ideal, but not every building it rain screened, and not every building will be fully rain screened. Even if the price of the unit is lower than your pre-approval, it may still be tough to get official approval.
One reason why it may be useful to go for a mortgage even without the full 20% down is because interest rates are very good right now, and because property prices keep climbing. If you wait 5 years to save a little bit more money for a down payment, you may still not reach the desired 20% down payment thanks to higher price points. However, if you bought now, the increase in value you may have realized may have wiped out the amount you paid in insurance, all while you’re building equity.
The 20% down payment goal is often why parents help with down payments, or why younger buyers wait until they’re a couple to purchase.
Buying a home with less than 5% down is typical these days and you will have options. Contact a Mortgage Broker (we’re happy to refer you to fantastic brokers – view our mortgage page or send us an email!) to discuss your financial goals and how that affects homeownership.