Should I buy a home now or save for a bigger down payment?
When buying a house, it is good to follow this general rule: be sure about staying in the area or location for a minimum of five years. If you are not sure about this aspect, you may suffer a financial hit.
Here is an intelligent piece of financial advice from experts that I have talked to: Ideally, it is good to wait till you have a minimum of 20 percent of the down payment before purchasing a house. This way you don’t have to buy credit default insurance (CHMC and Genworth are two of the biggest mortgage insurance companies in Ontario). However, if it is taking a couple of years to put aside that much money, you might discover that increasing prices more than counteract the mortgage insurance savings.
Failing almost all predictions, the real estate market in Canada showed record-breaking performance in 2015. While Toronto and Vancouver markets continued to boom, provinces like Saskatchewan and Alberta experienced a drop in sales. But the remaining nation’s residential real estate markets began to balance out and moved closer to a more steady and reasonable market.
Basics of house-buying
Going back to the topic of mortgage insurance, if your savings don’t amount to 20% of the down payment, then you will be required to give a high premium to the lender as a guarantee in case there are payment defaults. The amount gets typically added to the mortgage principal.
We can use the standard house resale price in Canada for illustrating the amount of mortgage insurance that gets added to your expenses when purchasing a house for the first time. If in the month of August, the average home price was $433,367 – a mortgage insurance supplier informs that a 10 percent down payment can generate an insurance premium amounting to $9,361.When this amount is added to your mortgage, the per-month payment for a 5-year fixed mortgage plan (at 2.59%) would amount to $1,807.
On the other hand, with 20 percent down payment, per-month costs would amount to $1,569. Also, the total amount of interest paid during the 5-year mortgage term would drop from $47,681 to $41,390. This indicates a $6,291 difference. However, is it really a good idea to postpone your house purchase by 3 years trying to collect 20 percent of the down payment?
Buy or save?
If your city’s real estate market is sluggish, then it is a good idea to hold back and save a greater amount of money before buying a house. For example, if you held back for 3 years so as to double your down payment amount to 20 percent for the average-priced home and prices increased 2 percent annually, you’d be ahead over $140 per month.
Experts claim that a down payment is not one of the most strategized elements of buying a home. Even then, it could have a huge impact on the overall long-term cost associated with owning a home. The traditional wisdom related to 20% down payment might be correct on the finances, but does not really apply to a hot real estate market. You will have to either take a decision immediately or hold back and save for an indefinite period of time.
You will find that in a majority of the cases, it is more sensible to make a purchase now instead of saving a bigger deposit. Why? This is because the cost mortgage insurance is usually quite less as compared to the rate of growth of the property.
However, if the local area does not seem to increase in value, you can easily wait for a while. It is sensible to delay the purchase and secure your financial status.