Let’s consider the following example for the answer.
You want to buy your first house for around $400,000 and you’ve so far saved about $20,000 as your down payment (5%). But, you’ve heard that with just a 5% down payment you have to pay a CMHC insurance fee of 2.75%.
Your financial adviser has told you that you would save “big time” on CMHC fees if you could come up with at least a 10% down payment. Then your mortgage insurance (CMHC) fee would be only 2% of the mortgage amount. That would reduce your CMHC premium by about $3,250.
It’s a no-brainer, you’ll just scrimp and save over the next year and come up with 10% down.
Well… there are two problems with this scenario.
First, an extra 5% is another $20,000, not an insignificant amount of money. Just ask yourself, “How long will it take me realistically to actually save an extra $15,000?”
If you put aside $1,650 per month, it will take you a full year!
Second, the Greater Toronto real estate market is not standing still. Recent statistics show that the price appreciation in 2010 was 9%. And 2011 looks like another busy year. Actually by mid-January, prices were already up 5% over the same time last year. So, let’s assume prices rose another 5% this year. That means you’d be paying about $420,000 in a year’s time for the same house you could buy today for $400,000.
But now 10% down payment is actually $42,000. So even after saving $1,650/mth for a year, you are still $2,200 short. So you really needed to be saving $1,833/mth.
Let’s compare the numbers in both scenarios.
Buy now with 5% down:
A purchase price of $400,000 requires a down payment of $20,000. The CMHC fee = $10,450 for a total mortgage of $390,450.
Buy in 12 months with 10% down:
Price $420,000 requires a down payment of $42,000. The CMHC fee = $7,560 for a total mortgage of $385,560.
The difference is $4,980. Yes it true. After saving like crazy for your 10%, your mortgage is only going to be less than $5,000 lower than if you had bought a year earlier with 5% down. Your mortgage payment will be less than $25 lower.
Result – You sacrificed to save another $22,000, plus you wasted another year on rent (multiply your rent by 12) and at the end of the day, you are still paying roughly the same mortgage!
But wait, it gets worse.
We haven’t taken into consideration the effect if interest rates were to increase in the next 12 months.
We haven’t addressed the fact that if you purchased sooner rather than later you would be one year closer to paying off your mortgage.
We haven’t discussed the years of interest you would have saved if you had taken your monthly savings of $1,425 and applied that to reducing your mortgage principal.
And we haven’t discussed the fact that the $20,000 of annual appreciation could be in YOUR pocket instead of the seller’s in one year from now!
Synopsis
I’m not trying to say that you shouldn’t save for a larger down payment or, if personal circumstances dictate waiting, then don’t buy a year from now. Just be sure to calculate all your options first. Take some time to run all the various scenarios.
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Contact the Jeffrey Team for more information - 416-388-1960
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