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The-Mortgage-Gal

Down-payment blues

How much of your savings should go toward your down payment?

There is no definite right answer and sometimes it depends on where the investments or savings are. 

Does the buyer have a large amount invested in RRSPs, TFSAs or is it just in mutual funds or bank accounts?

There are few things that need to be considered: 

Job stability.

  • It does not make sense to use all of your money set aside for an emergency if there is a possibility that you could lose your job. 
  • Experts recommend having at least three months of expenses, which include bills, groceries and accommodations. 
  • If you are self-employed, it is recommended that you maintain six months of savings in an account to cover these expenses. 
  • Do not include theses emergency savings as part of your down payment or closing costs.

Can you save 20 per cent for the purchase?

  • If you have less than 20 per cent down payment on a home under $1 million the lender will require that the mortgage be insured for default by either the government insurer, Canada Mortgage and Housing Corp (CMHC) or one of the private insurers, Genworth or Canada Guaranty.  
  • The minimum down payment for any owner occupied property is five per cent of the purchase price. 
  • The default insurance premium is based on the loan to value and is more expensive with lower down payments.  If a purchaser only has five per cent down they will pay 3.6 per cent of the mortgage amount to one of the three insurers. 
  • So for a purchase of $400,000 with five per cent down ($20,000) the borrower would pay a premium of $13,680 based on the mortgage of $380,000. 
  • The premiums decrease as the borrower increases the percentage of the down payment. 
  • For 10 per cent down the premium is 2.40 per cent of the mortgage, 15 per cent down 1.80 per cent and of course no premium if there is 20 per cent down payment.
  • 3)Will you still have money to go out.

Purchasers need to look at the affordability of the home from their own budgeting perspective. 

There is nothing worse than being house poor and regretting buying. To figure out your budget look at your spending over the last 3, 6 of 12 months. 

Replace the rent you have paid with the estimated mortgage payments but don’t forget to include:

  • utilities
  • property taxes
  • home insurance
  • home repair fund

When you have taken these new costs into account does this exceed your income or does it leave you with a comfortable lifestyle? 

Can you make any cutbacks — the daily Starbucks, for example?

Will you be able to plan for retirement with increased living expenses?

  • Buying a home is a fabulous way to build up equity over your lifetime.  There should be other strategies to look fat to plan for your retirement. 
  • Make sure you have extra income to put away to build up a portfolio. Experts say 30-year-olds should aim to save 12-20 per cent of their gross income and minimum 10 per cent. 
  • Did you earn $60,000 per year, you should ideally save $8,000 per year or $670 per month. 
  • This amount will change as your income changes.
  • If you expect that your income will remain constant over the next five years or more, you should add the retirement savings to your budget to make sure you can continue to save.
  • If you decide to postpone buying or rent, make sure you put away more for retirement as you won’t have the equity building up in your home to help with retirement. 
  • Maybe putting down 20 per cent and when you have a bit extra, you can use it to build a nice nest egg.

Lifestyle

  • Home ownership involves a big lifestyle change as there is a lot of work involved in maintaining a property. 
  •  If you finances are in order, then it is just a matter of preference whether you buy or rent. Some people enjoy yard work and shopping at Rona.
  • Renting is not a bad idea if you there are ample rentals and you can make up for the lack of equity building by socking away money in a retirement savings plan. 
  • Buying is a good idea for some,  as long as you make sure to set aside money for emergence home repairs and the payments don’t you leave you too poor to put away funds for your retirement.

If you need further assistance determining if you should buy or rent please call 250 862 1806 or email

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About the Author

Laurie Baird and Tracy Head are mortgage brokers with Verico Complete Mortgage Services. Together they have over 45 years of experience in the mortgage industry.

As mortgage brokers, Laurie and Tracy spend time getting to know the people they work with and help them understand the mortgage process. They support their clients before, during, and after a home purchase.

Laurie and Tracy are able to offer their clients advice and options. With access to over 40 different lenders, Laurie and Tracy are able to match the needs of their clients with the right mortgage package. They work closely with their clients to find the right fit, and are around to provide support for years down the road!

Contact them at 250-862-1806 or visit:
http://www.okanaganmortgages.com

Visit Laurie's blog at: https://www.okanaganmortgages.com/blog



The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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