Read up on down payments

Read up on down payments

A down payment is the upfront cash you hand over when you buy a home. You can’t borrow it – it needs to be money that’s yours, free and clear.

Why can’t you borrow the entire amount of your purchase price? Offering a mortgage without a down payment is too risky for lenders – they know if you don’t have a stake in your purchase, you’ve got nothing to lose by walking away if the going gets tough. A down payment also shows you’re able to save a decent chunk of money, which helps them trust that you’ll be able to pay back the loan.

What’s the least I can put down?
That depends on the price of the condo you’re buying. If it’s under $500K, you can put down as little as 5%. If it’s between $500K and $1M, anything over $500K requires 10%. The rules change again for properties over $1M. For example:

  • A $500k condo requires a 5% down payment, which works out to $25K.

  • A $750K condo requires 5% on the first $500k + 10% of the $250K above that, adding up to $50K.

Sample down payments for a $600K condo

Should my down payment be big or small?
Choosing a 5% or 20% (or higher) down payment depends on your income, your savings, your life plans (kids, travel, cars) – and how important saving money is to you over time.

A big down payment: the pros

  • The more you put down, the less you’ll owe. That’s something that appeals to a lot of people, especially since it means you’ll pay less interest. If you put down $100K instead of $30K, that’s $70K you won’t be paying interest on, which can make a huge difference over the life of your mortgage. Plus, your monthly payments will be smaller. Looking at the sample numbers above, it could mean a savings of $100K over the life of your mortgage.

  • You could qualify for a lower interest rate. The bigger the down payment, the smaller the risk for the lender, which may mean better rates for you.

  • You could avoid CMHC mortgage insurance. If your down payment is 20% or more, you won’t have to pay the extra insurance, which is another way to save money.

  • You’ll have greater borrowing power. The more principal you put down on your home, the more equity you have. (Equity is the part of your home you actually own). Set up a home equity line of credit, and you can borrow against it for renovations, investments, etc.

A big down payment: the cons

  • You might not have anything left over. Sink too much into your down payment, and you could end up being house poor – which is a cute way of saying all your money’s tied up in your condo and you can’t afford to buy furniture, eat out, go to concerts or take anything but staycations.

  • Delaying can work against you. If you wait to buy until you’ve saved enough for a big down payment, you could end up losing money. As prices go up, interest savings could be cancelled out by a higher list price. So if you look at the $600K sample, yes, you could save over $100K in interest by putting 20% down, but if the price of a condo jumps by $100K in the time it takes to save that amount (and price jumps happen fast in a hot market), you won’t have saved anything – it could even end up costing you more.

  • You could end up losing money. Interest rates are pretty low these days, hovering around 2.5-3%. If you have an extra $10K you were thinking about using for your down payment that’s above and beyond the minimum 5%, you might be further ahead putting it into a mutual fund or some other investment - you’ll probably make more that way than what you’d save with a bigger down payment.

A small down payment: the pros

  • You can buy sooner. You don’t have to spend years coming up with 20%. As long as you have 5%, you can buy.

  • Mortgage insurance may get you lower rates. Mortgages with down payments of less than 20% can often get access to lower rates: lenders like them because they’re insured, which means there’s no risk for the bank if you default.

  • You’ll have money. If you’re not putting down every penny you have, you’ll have savings left over for emergencies, renovations, investments, dinners out, and maybe even a vacation or two.

A small down payment: the cons

  • You’ll pay more interest. The more you borrow, the more interest you’ll pay. But the upside is that mortgages get renewed every few years, depending on the terms. When you get to a point where you can pay more every month, you can increase your payments. And if you suddenly find yourself with some extra cash, most mortgages allow you to pay lump sums that go directly toward the principal (check with your lender for details – they all have different rules).

  • Mortgage insurance. Yes, it’s an extra cost, but it can be worthwhile if you factor in how long it will take to save 20%.

So how do you figure out what’s right for you? Talk to your Condo Pro. They’ll set you up with a mortgage broker and/or a financial advisor who can help you figure out what down payment you can afford – and what makes sense for your budget and lifestyle.

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