Let’s say you’ve got 5% to put down on a place right now, but you keep renting while you save for a bigger down payment. That logic makes sense: the more you put down now, the less interest you’ll end up paying over the life of your loan.
However, here’s an eye-opener: it could be costing you a lot more than you might realize to keep renting while you save.
Related info: Rent or buy?
Let’s run the numbers.
Let’s say you’re renting a condo now for $2,100 a month, and to buy a similar unit, you’d be looking at about $585K. The cost of ownership for a $585K unit is probably around $3,100 a month with mortgage payments, maintenance fees and other incidentals.
If you put 5% down (the minimum), you’d be looking at a $29,250 down payment. But with a small down payment, you’d also be forking over an additional $22,000 for mortgage loan insurance (it’s mandatory for anyone putting less than 20% down). That’s a significant chunk! So instead of almost doubling their down payment, some people choose to keep saving until they have 20%.
Calculate how much you’d pay for mortgage loan insurance
At first glance, that makes sense. Save more, spend less. But in the long-term, waiting could actually end up costing a lot more than that...especially now, when the condo market has softened and you can get more for your money.
You have two options:
Option #1: Wait and save
Let’s say it takes you three years to save $165,000 (20% of $585K plus closing costs). Historically, the Toronto market goes up an average of about 7% a year (some years are lower...like this one, and some are much higher...like 2019). So even if you factor in the recent softening in the Toronto condo market, in three years prices will likely have gone up, the unit will probably have appreciated by over $100K, and the $165K you saved will no longer be enough to hit that magic 20% threshold.
Plus, with a pricier property, all your other costs go up too: land transfer taxes, title insurance, property taxes, etc.
And let’s not forget one other little reality check: when you’re already paying $2,100 a month in rent (or even $1,800 with today’s reduced rental rates), saving $165K in three years is HARD.
Related info: Read up on down payments
Option #2: Buy now with a smaller deposit
On the other hand, if you bought today with only 5% down (actually, it would be 5% for the first $500K and 10% for the rest, so 5.73%) – yes, you’d have to pay that $22K in insurance, and more in interest over the life of your mortgage. BUT you’d be saving over $100K by not waiting until the condo was worth more, and in those three years, you will have put down over $45K in principal AND avoided paying $79K in rent.
To buy a $585K property today, with 5.73% down, including mortgage loan insurance and closing costs: $45,087
Total monthly cost to carry YOUR OWN property: $3,082
Waiting 3 years to save that $22K will cost: $100,000+
Paying rent for 3 years at $2,100 a month: $79,200
But what if I don’t even have enough for 5%?
Do whatever you can to get there. Get creative. Get a second job. Ask family for help. Buy pre-construction. Getting into the market now means serious savings over time.
Related info: Saving up for your down payment - 17 smart strategies
The numbers don’t lie: if you want to buy, don’t wait.
Yes, the Toronto condo market is slower than it’s been in years thanks to the pandemic, but we’ve seen slowdowns before, and things have always recovered. People need places to live, and they’ll want to live in the city even if remote work becomes the norm long-term. Immigration will start again, with higher numbers than we’ve seen in recent history, and many of those new Canadians will settle in the GTA. Colleges and universities will reopen for in-person learning, bringing renters and buyers back into the core.
History tells us that the market will bounce back, and prices will go up. But even if they stay flat, 3 years of rent will always be money you won’t get back. Of course, if you’re happy renting long-term, great. But if you have owning a home on your bucket list, the money you pay for mortgage loan insurance really is a drop in the bucket, especially when you see how quickly you can build equity.
Want to know if the numbers work for you?
Talk to a Condo Pro! Our market experts can see if buying now makes sense for you, and give you tips on finding the best place for your needs.