In Canada, the minimum downpayment required to purchase an owner-occupied home is only 5% of the purchase price if it is under $1M. Yet, despite the requirement, many purchasers still want to know how much they “should” put towards their purchase price if they have more than 5% down.
In the past, the general mentality about mortgage loans was to pay them off immediately because having a larger mortgage meant much more interest paid to the banks, especially if it was amortized out over twenty to thirty years.
But with mortgage interest rates at an all-time low, does this approach to paying off one’s mortgage still work and make sense? If investments can now yield 7-13% returns, would it make sense that someone pays 3% in mortgage interest, instead?
A common reality that home buyers experience is becoming “cash poor.” According to the Vancouver Courier, “Over half of Canadians live paycheque to paycheque, and carry credit card debt.”
Therefore, it’s important that a purchaser asks two fundamental questions: 1. How much money down is absolutely required to qualify for a mortgage? and 2. Is there any possibility of keeping a portion of it in the bank instead?
Why it's smart not to deplete your savings account on closing.
Unforeseen circumstances are often lurking around the corner after the purchase of a new home such as unexpected maintenance costs, repairs or some other financial emergency. Without a rainy day fund to combat the unpredicted, homeowners can easily fall prey to the “credit card trap”, having no choice but to tap into their credit cards to pay for the expenses, and can therefore get stuck making minimum payments.
Depleting one’s savings is never a good idea and it’s important to understand all the options that exist when purchasing. Speak to a mortgage professional like myself about qualifying, and how much of a down payment is required.
A common misconception is that borrowers have to use all of their savings towards their down payment but it may be possible to set some of it aside.
Maintaining liquidity is very important and should also be considered when making an offer to purchase and contemplating one’s downpayment.