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Saving up 20 per cent down payment for a house not always the best move

Stephenie Morris
In certain situations, it's better to get into a home sooner than to wait around saving money. (CP)
In certain situations, it's better to get into a home sooner than to wait around saving money. (CP)

I live in a tiny one bedroom basement apartment with my fiancé. We are constantly in each other’s way, waiting to use the lone bathroom, or listening to our neighbours walk around above us. We despise living here but we do it because as Torontonians, buying a home seems out of the question since the real estate market in this city is insane.

The cost to get into a home can be staggering, especially if you abide by the “20 per cent rule;” the common belief is that you should be putting down 20 per cent of the total property price upon purchase to prevent yourselves from shelling out money for CMHC loan insurance. Loan insurance sounds terrifying, but it’s essentially calculated as a percentage of the loan based on your down payment amount. The higher the percentage that you are borrowing, the higher percentage that you will have to pay in insurance premiums, and no one likes paying more than they absolutely need to.

Is this ominous-sounding insurance really something that we should be avoiding while still living in our basement apartments, hating life and saving up that 20 per cent in order to avoid the extra cost altogether?

Not necessarily.

Dan Eisner, CEO of True North Mortgage which operates in B.C., Alberta, Saskatchewan, Ontario, Nova Scotia and Quebec, says that he has been seeing down payments trending toward less than the standard, allowing individuals to break into the market earlier.

“Very few first time home buyers have enough money to put 20 per cent down,” he says. “In fact, we find right now that about a third of our total clients are putting less than 20per cent down. I am including all our clients, not just first time home buyers. Typically, second or third time home buyers have built up enough equity to not need insurance. That being said, about 50 per cent of second time home buyers use CMHC.”

CMHC loan insurance is a handy tool to get people through the door of their new home sooner but comes with some strings attached, so buyers beware. The rate that you pay is directly dependent on how much you are able to put down, something that can be difficult to achieve for people entering the pricier markets across Canada.

Trying to time the market is a fools’ game.

—Dan Eisner, CEO of True North Mortgage

Accredited Mortgage Professional Patricia Collins out of Greater Vancouver says she understands the struggle first time homebuyers face when trying to enter the pricey Vancouver market while using 20 per cent as the goal.

“Given the current environment here of constantly increasing values, it has been better to put down the five per cent or ten per cent a buyer has saved up now and simply get in the market,” Collins says of the Vancouver real estate market. “In the year or two that the purchaser would have spent saving more of a down payment, the equity earned over that time if they had just bought will have paid for any insurance premium incurred. Add to that scenario that people who waited are now finding themselves priced out of the market as prices continue to climb. It’s a moving target to save for as prices continue to climb.”

Eisner says he agrees that there is no time like the present to break into the heftier real estate markets.

“Given the property values in Toronto, saving for a significantly larger down payment may take years, so generally we would say buy when your lifestyle requires home ownership,” he says. “Trying to time the market is a fools’ game.”

The key is to live within your housing means so that your purchase becomes one that you can both afford and get into quicker. Collins suggests being realistic about the market when searching for your dream home while trying to achieve financial security, stating that it should be a gradual process, especially in Vancouver’s real estate market where people tend to trade up from condo to townhouse to house.

“You aren’t going to find a house under $1 million in Vancouver as a general rule, but you will in the outlying cities, which are all very accessible and great in their own right.”

The suburbs and rural areas can be a great alternative to saving some of the costs associated with living in the larger cities. Stanley T. Chapman, Broker of Record at TipTop Realty Inc. services Northumberland County in Ontario, which is a more rural setting for people looking to own their first home. With the costs of homes being significantly less than their big city counterparts, a 20 per cent down payment is more plausible. Chapman says he suggests the more money down, the better, but for someone starting out a small down payment of five to ten per cent would be workable.

“Just getting into the market, start building up a bit of a base of equity by paying the mortgage down a bit in the first five years, and hoping that the market will continue to trend up even two or three per cent a year over that first five years is really a good first step,” he says.

While a 20 per cent down payment can reverse the need for CMHC insurance, it is important for the buyer to consider all of their finances before jumping into a mortgage. For example, if someone is paying $2,000 in rent and taking three extra months to save to reach the 20 per cent down payment when the insurance itself costs $2,000, it wouldn’t make sense to do so.

“Rent here is at least as high as your mortgage payment, if not higher,” Collins says of Vancouver’s marketplace. “If rent were lower, my feeling might be different, but given the choice of giving someone $2,000 per month to pay their mortgage, versus having my own place and putting that money toward my future, I would definitely prefer it to go toward mine.”

Chapman says he agrees and that even outside of city limits it can be a waste of money to delay entering into real estate to save for the hefty down payment.

“When you buy a home, keep in mind that is a lifelong investment,” Chapman says. “You need a place to live anyway, and when you are paying rent, you are likely paying for a mortgage, it’s just not your mortgage. It’s the landlords.”

To help buyers know what they can afford, experts recommend finding a real estate professional to help you along the way wherever you live in Canada.

“Find a good realtor who you feel comfortable with,” Collins says. “It’s important you have someone who understands your wants and needs, and they are invaluable to the equation with their knowledge of neighbourhoods and property details. Find a great mortgage broker; they will provide invaluable mortgage advice and placement throughout your homeowner years and will help you manage and pay off this new debt you’re about to take on. Use professionals to make the best decisions you can during this process and the journey will be an exciting and happy one.”