February 12, 2016

The importance of a healthy down payment

The more money you can put down, the more you’ll save over the course of your mortgage

MORTGAGE MATTERS
BY KEVIN LUTZ

From a low-down-payment mortgage to using your Registered Retirement Savings Plan (RRSP) as a source of funds, buying a home has never been easier.

The down payment is that portion of the purchase price you furnish yourself. The balance is obtained from a financial institution in the form of a mortgage. The amount of the down payment (which represents your financial stake, or the equity, in your new home) should be determined well before you start house hunting.

Saving for the down payment is often the most difficult part of the home-buying process, particularly for first-time buyers. How much should you realistically expect to put down?

The answer to that question is different for everyone. While some purchasers put down as much as 20 per cent or more of the selling price, others pay as little as five per cent. You might also need a larger down payment to bring the mortgage down to an amount for which you qualify.

While your decision will be based largely on the resources you have, you should realize that the more money you put down at purchase time, the more you’ll save in interest over time and the less your house will cost in the long run.

Still need convincing? Consider this example using a purchase price of $350,000, a 25-year amortization and an interest rate of five per cent. Keep in mind that I am not using today’s historically low interest rates in my calculation, for this reason: If it takes you 25 years to pay off your mortgage, then your average interest rate will be higher than it is today.

A down payment of 20 per cent versus a minimum of five per cent will save you more than $39,104 in interest costs over the life of your mortgage. These savings increase dramatically when rates increase. I have also not factored in the cost of mortgage insurance — a requirement when you do not have a down payment of 20 per cent.

Although you can now clearly see the long-term savings that can be realized by maximizing your down payment, don’t leave yourself short.

When estimating the amount you have available for your down payment, begin by calculating the total of all your savings including deposits, RRSPs (for first-time home buyers), gifts from family members and perhaps assets such as a vehicle that you could sell. Then estimate your closing costs and extras — which in some cases could be as high as five per cent of your purchase price — and add that to your cushion to cover unexpected expenses. Subtract both of these amounts from your savings.

The remainder represents the amount you have available for a down payment. If you feel the amount is insufficient, then consider delaying your purchase and using that time to build up your down payment — and, as always, seek a mortgage specialist’s advice.

Kevin Lutz is RBC Regional Sales Manager,
Residential Mortgages
@RBCKevinLutz

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