In the ever-evolving landscape of Canadian real estate, determining the optimum down payment for a house invariably stirs up a lively discussion. For many prospective homeowners, the typically recommended 20% down payment seems an intimidating amount, sparking the question: does putting down less than 20% on a house actually help save money? This article delves into the potential merits and pitfalls of such a financial strategy, aiming to equip you with the necessary insight to make a well-informed decision.
Demystifying Down Payments
In the Canadian context, a down payment refers to the initial amount paid out of pocket towards the purchase price of a home. The minimum requisite for a down payment fluctuates depending on the price of the house. For a house costing up to $500,000, the minimum down payment stands at 5%. For those priced between $500,000 and $999,999, it’s 5% on the first $500,000 and 10% on the remaining balance. Homes priced at $1 million or above necessitate a 20% down payment.
The Sub-20% Route: Benefits and Drawbacks
Perks of a Lower Down Payment
Opting for a down payment of less than 20% comes with certain undeniable advantages. The most apparent benefit is the decreased initial cost. A lower down payment facilitates a quicker home purchase, circumventing the need to amass a hefty amount. This strategy can prove particularly beneficial in markets where house prices are escalating faster than savings.
Another potential advantage of a lower down payment lies in the opportunity to invest the money elsewhere. If your investments in stocks, bonds, or other ventures yield a higher return, it might be prudent to make a smaller down payment on your house and invest the difference.
Drawbacks of a Lower Down Payment
Despite the advantages, a lower down payment also has its share of disadvantages. The most notable downside is the requirement for mortgage loan insurance. In Canada, if your down payment is less than 20% of the home’s purchase price, you are obligated to purchase mortgage loan insurance. This insurance safeguards lenders against the risk of default, with the cost being borne by the borrower. Depending on your mortgage size and down payment, this insurance can add thousands of dollars to your mortgage cost.
Another potential drawback of a lesser down payment is a larger mortgage principal, leading to higher monthly mortgage payments. Over time, these increased payments can accumulate, potentially offsetting any savings garnered through a lower down payment.
Balancing the Costs and Benefits
When contemplating whether to go with less than 20% down on a house, it’s crucial to meticulously weigh the potential costs and benefits. As everyone’s financial circumstances are unique, what might be a feasible option for one might not work for another.
If you’re considering a lower down payment, begin by determining the cost of mortgage loan insurance. The Canada Mortgage and Housing Corporation (CMHC) offers a mortgage loan insurance calculator to assist you in estimating this cost.
Next, contemplate the potential impact on your monthly mortgage payments. Numerous financial institutions provide online mortgage calculators to help estimate your monthly payments based on different down payment amounts.
Lastly, consider the opportunity cost of a larger down payment. Would your money yield a higher return if invested elsewhere? This mandates a careful evaluation of your risk tolerance and investment objectives.
Conclusion
The choice to put down less than 20% on a house in Canada is a nuanced one, replete with potential benefits and drawbacks. While a lower down payment might enable a quicker home purchase and possibly allow for investment in other areas, it also necessitates mortgage loan insurance and results in higher monthly payments. Thus, when making this decision, it’s imperative to thoroughly assess your financial standing and seek advice from a trusted advisor. Ultimately, the aim is to make a choice that bolsters your financial well-being and aligns with your homeownership aspirations.
