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 your 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 .

Down Payment	Premium	Amount	Savings
5%	3.60%	$11,970	0
10%	2.40%	$7560 `	$4410
20%	N/A	$0	$11,970

  

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 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 money big time by doing so. 

for more information on this and other mortgage topics , visit http://davidcooke.ca or call David directly at 403-836-1201

    

Changes to down payment requirements coming February 15, 2016

Today Finance Minister Bill Morneau announced changes to down payment requirements. Effective February 15, 2016, the minimum down payment for new insured mortgages will increase from five per cent to 10 per cent for the portion of the house price above $500,000. The five per cent minimum down payment for properties up to $500,000 remains unchanged.

Homes priced at more than $1 million by law require a minimum down payment of 20 per cent. Today's announcement therefore focuses on homes priced between $500,000 and $1 million.

In the Mortgage Professionals Canada (MPC) Fall Report, Chief Economist, Will Dunning discusses why raising the down payment could cause problems for the housing market, including this cautionary observation: “Rising prices have made it increasingly difficult for first-time home buyers to accumulate down payments. Increasing down payment requirements would, most likely, severely dampen housing demands from people who are financially well-qualified to make their monthly mortgage payments.”

MPC notes that the 10% requirement does represent a graduated approach while the Ministry of Finance commented that they believe this will only impact 1% of home purchasers.

Click here for the government’s official news release.

Handy chart below - click to enlarge.

Only 2 weeks left to get a Cashback Mortgage

   October 31st is the deadline for getting a cash back mortgage that you can use the proceeds for your down payment. After October 31st, cash backs will be available but you will receive them after possession and can use them for buying drapes , new appliances etc. 
      What do you need to qualify for this type of mortgage? You need a good steady job, very good credit, and you have to be buying a nice property.
      What are the terms of this type of a mortgage? They are the same as a regular mortgage, the difference is that you pay the bank posted rate of 5.24% for the first five years and then get 5.5% back that you can use for a down payment or for other expenses you may have. 
   There is only one lender offering this and they do not deal directly with the public in western Canada. You can only get this deal through a mortgage broker.
Contact me if you want more information on this and to see if this is a product that would be good for you.
David Cooke
Dominion Lending Centres Westcor
Calgary, AB

 WEBSITE