Saving a Downpayment
Posted by Gail | Filed under Home Buying
There’s been a lot of brouhaha about the new mortgage rules that came into effect recently. The maximum amortization for a CMHC-insured mortgage is now 25 years, back to where it was before the government started diddling with the rules so it could use housing to push the economy. That means mortgage payments are going to go up.
You can still get a 30- or 35-year amortization if you have 20% to put down on a home. I’ve never been a fan of amortizations over 25 years because of the whopping amount of interest you’ll pay. At just 5%, chopping your amortization from 30 to 25 years will save you over $66,000 in interest on a $376,000 home, which is the average price of a home in Canada.
I am a huge fan of the 20% down mortgage so you can totally avoid the extra costs associated with CMHC insurance. If you only have 5% to put down on a home, you’ll have to pay a premium of 2.75% on the entire mortgage amount. So on an average home purchased with just 5% down, you’re looking at a premium of almost $9,000.
Trying to figure out how to save a downpayment for a home. Hey, it’s like saving for anything else.
1. First you set the goal for how much you want to have saved.
2. Then you divide how much you want to have by the amount of time (months) that you have.
So if you want to buy a $350,000 house and you want to put 20% down (which you should), you’d need to save $70,000. That part is easy.
If you’re planning to buy your home in three years, you have 36 months to save. So you divide your $70,000 goal by 36 and you come up with $1,944 a month. That’s how much you have to save every month to meet your goal.
Impossible! There’s no frackin’ way you can sock away $1,944 a month. Well, you have three choices:
1. You can extend the amount of time you’re planning to save. Saving for five years instead of three means you only have to sock away about $1167 a month. (I know I’m not including anything for return on your savings here, but it makes this example a lot easier.)
2. You can reduce the amount you have to save. Buy a cheaper home and you’ll need a smaller downpayment.
3. You can cut expenses and find more money – or get another job – so that you have the money to sock away.
Once you’ve decided how much you’re going to save, set up a high-interest savings account (don’t settle for a piddley-assed account that pays next to nothing) and have the money automatically deducted from your primary account and moved to this savings plan so you aren’t tempted to spend the money. That’s the pay-yourself-first way.
I’ve long said that if you can’t come up with the downpayment for a home you’re likely trying to get into a home too soon, or into too much home for your wallet. Home ownership is a big frickin’ deal. It’s a huge responsibility. And it comes with lots’nlotsa reasons to spend money, beyond just the mortgage payments. If you don’t have the wherewithal to save the downpayment, you probably shouldn’t be buying.
July 30, 2012 at 7:30 am
These are great tips. RRSPs can also be a good source of money for a downpayment.
July 30, 2012 at 7:37 am
I agree. A 20% downpayment should be the minimum and the shorter the amortization period the better.
Don’t be misled by those ads that say you can buy a house for what you pay in rent. Your mortgage payment may be about the same as your rent but then you also have the utilities that were included in the rent and all the home maintenance and replacement costs.
July 30, 2012 at 7:44 am
I just had this conversation with my daughter and son-inlaw. I gave them examples of what their mortgage payment would be with only 5% down at today’s mortgage rates and what they would look like when rates go up. It was an eye opener for them. My advise for them was to save as much as they can over the next few years. When rates go up there will be a lot of forclosed homes on the market and they can get more home for their money than buying now.
July 30, 2012 at 8:02 am
Good advice. Except good luck finding a home for $350,000 in Vancouver, Calgary or Toronto. Even Saskatoon is getting up there.
July 30, 2012 at 9:11 am
I am eager to pump up my down payment savings once my debt is eliminated.
Only $976 left to go!!!
July 30, 2012 at 9:30 am
I’m not such a fan of the 20% down in certain markets. One of the problems with the above scenario is it assumes that in three years $70,000 will still be 20% of the home value you’re looking for. But if prices go up (as they have in Toronto) then it’s more likely you’ll need more like $90,000.
That said, buying with 5% down is a recipe for disaster. Personally I think 10% is a more realistic goal given the prices in some city centres, and a hefty amount of cash on hand for closing costs, repairs, surprises, moving, etc.
July 30, 2012 at 9:51 am
I think the most important point here (and one I am in 100% agreement with Gail on) is – in ANY housing market, if you can’t save up 20% of your downpayment, you probably aren’t financially ready for home ownership. There is absolutely nothing wrong with renting.
July 30, 2012 at 10:07 am
This past weekend we were talking to my mom about saving for a down payment for a home.
She said when my father and her got married, they saved $10,000 for their first down payment on a home. She said we should be able to do that too. Then we started looking at the numbers.
My parents first home 30 years ago = $40,000
Down payment =$10,000 (20%)
Wage = $3.00 an hour
Average Cost of a Home in Hamilton, ON = $315,000
Down payment =$78,750 (20%)
Wage = $14.50 an hour (average between both of us)
Percentage Increase in costs/wages
Homes = 785%
Wage = 483%
In order to save for the same percentage of a down payment our parents made, we would have to work 5, 431 hours without spending any money. My parents had to work 3,333 hours to save that down payment.
Lucky for us, we have realized we cannot afford a home that costs so much.
So we are going to have a budget of $150,000 and have a 10% down payment or more. We already have $5,000 saved (while still paying for our wedding in February in cash).
The goal of purchasing a home would be easier if we could both find higher paying jobs (maybe even with benefits), but after looking for the last two years, it seems like a fading hope. I feel our generation (late twenties) are facing a much different adulthood than our parents. I know they struggled, I know they lived in times of HIGH interest rates…. I feel my parents should understand our situation a little more, understand that the jobs they have with the wages and benefits may never exist for my generation.
July 30, 2012 at 10:59 am
we bought a house with only 5 % down the key is staying with in your means. We bought a small house and make extra payments. We have a saving funds and we have saved to buy all the furnishings. We bought when the recession first hit so house prices were reasonable in toronto. Now even saving 20% we would never have gotten our house or any good house.
July 30, 2012 at 11:11 am
I have no regrets, nor do I feel ashamed for buying with 5% down. Our house will have taken 18 years to pay off, and that’s also fine with me. If we had waited to buy to have a bigger down payment, I don’t know how long it would have taken. We bought before my husband’s anticipated lay-off knowing it could be, and was, years before he had steady work again. But we knew we could swing it, although at times things were very tight. The bank wouldn’t have approved us for years after had we waited.
July 30, 2012 at 12:25 pm
Question
Should we do the same for a car?
July 30, 2012 at 12:25 pm
With the imminent (and necessary) predicted housing price correction of 15-20% across Canada, I hope this blog post’s well-laid out cost analysis persuades at least a few couples to put off buying for a year while the behemoth cools down a little bit.
July 30, 2012 at 12:57 pm
From what I’ve observed, I feel the key is ensuring that you have adequate cash reserves for AFTER you buy the house to ensure you can cover the maintenance, small renovations, furniture etc. I’ve seen lots of friends and family members get in trouble because they used their cash reserves and savings to buy a house. They had not anticipated how much they would be spending AFTER they got into the house … blinds were needed, a fence, hot water tank bursts– even things like more garbage cans required after one moves from an apartment to a house.
I think its much easier to wait another couple of months and stay in the rental property until you have saved a good amount of money for basic maintenance/ savings/ furniture. Usually so much easier to save then rather than after you move into the new place!
July 30, 2012 at 1:20 pm
I think you also need to take into account that when you buy you may be at a lower point in your earning potential. I bought my home with 11% down and I had to take a 35 year amortization. However, in under 3 years my income has nearly doubled, meaning I have been able to put extra down and lowered my amortization (though increased payments) to only 20 years. I hope to continue this and pay off more as well.
My house has increased (luckily!) by about $30,000-$40,000 since I bought. If I had waited, I would have lost all that equity.
I agree that I might have seemed high risk at the beginning of my mortgage, which is what the government is trying to discourage, but I think if you are responsible and have good credit, it is a sign that you can get in early and take a risk.
And yes, home ownership aint cheap! I got stuck with some crazy property taxes due to it not having been assessed (yes, this was sorted out through lawyers but it is lost in mortgage and I had to pay them with cash until I was caught up). My maintenance fees also practically doubled in those 3 years!
July 30, 2012 at 1:57 pm
I think it’s import to highlight that it doesn’t have to be 5% or 20% – you can have 10% or 15% down and pay less for CMHC fees that if you had 5% down.
If you live in a market where homes don’t cost $500,000 it’s not as big a chunk of change. I personally would prefer to put 10% down and have the additional funds in emergency savings or budgeted for household repairs/purchases.
July 30, 2012 at 2:24 pm
To purchase a $350,000k home with 20% down you need to save 21.5% of the price. That extra 1.5% misfortune the closing cost including LTT solicitor etc.
Just wanted to add.
Have a good day.
July 30, 2012 at 2:26 pm
Sorry, typo by the phone. I did not mean to write misfortune. Please read it “is for”
July 30, 2012 at 3:00 pm
My husband and I just purchased a house 7 months ago at 5% down. We never would have been able to save the 20% and we pay $500 a month more than renting (including maintenance) for something that is literally 4 times the size. We could have gone bigger and more expensive but we planned it so we could afford it when the time came for me to go on maternity leave and we’re not even pregnant yet.
I agree with Chris there’s nothing wrong with renting but you can be ready for home ownership without being able to save $100,000 in a reasonable amount of time for a 20% downpayment.
July 30, 2012 at 4:14 pm
Conflicting advice from the pros. If you are an average income earner (45K) in Canada (37.5K after tax dollars) and wanted to buy a cheap property (200K), realistically, saving a 40K down-payment would take 5-10 years. Paying rent will cost almost the same as a mortgage at this price.
With 5-10% down and 5-10 years worth of equity I bet most average Canadians will be better off buying a house sooner rather than later.
People under 30 or those who can afford to quickly save a sizable 20% down-payment should take Gail’s advice but if you are staring 40 in the face get your feet wet I say.
July 30, 2012 at 5:17 pm
@ Linda, I completely disagree with you. I got pregnant by surprise while I rented an apartment and my boyfriend (now husband) rented a house. We had both started good jobs but had no savings yet and we needed a house. We qualified for the no downpayment mortgage and our monthly mortgage cost is $100 less than the rented house was. We paid utilities on the rented house and those costs actually went down when we bought because this house is smaller, in one proper piece and insulated.
I don’t think the extra CMHC costs are too much to pay for having a home for our family and building equity. I think it would be the same for other responsible people who just don’t have the downpayment, the CMHC provides them with a way to get ahead.
July 30, 2012 at 11:48 pm
@Largentine In my opinion, you should buy ANY depreciable asset in cash. If you can’t afford a new vehicle, buy something used, withing your price range.
p.s. yes, I have the ugliest vehicle on my block. But it’s MINE.
July 31, 2012 at 6:27 am
We bought our first house with 10% down (1989)…and had to pay CMHC…but we made a decent profit when we sold in 1993…we had to have 25% back then to avoid CMHC which we had when we bought the second house in 1993 which we are still living in…both times we did what was right for us and did fine because we also saved for the other needs we had due to owning our own home…paying CMHC isn’t the end of the world but if you don’t have anything else saved to pay for all the other needs (not even the wants) that come along with home ownership then waiting to buy and saving more money is the better way to go otherwise that debt will just snowball out of control….remember you might not have quarters and loonies so save with those nickels and dimes!
July 31, 2012 at 9:22 am
@ Largentine
I bought a new car last year and did not pay cash, nor did I have a 20% down payment for it (I realize that it has depreciated significantly in value, but I still love it…).
I was able to get it financed by the dealer at 0% over 48 months. They offered me a 60-month term, but at 0.9% – and I said no, since I wanted to pay it off sooner and not pay anything in interest (as small as it may be).
I “practiced” having a car payment for 6 months, putting into savings what I was willing to pay per month when the time came to purchase a car. I used a part of those savings as my “down payment” (even though I wasn’t required to). My car will be paid off in 36 months, and will still have a good amount of warranty left on it – which will make it easier to sell, should I decide to at that point.
I don’t know of very many people who can purchase a brand new vehicle with cash… but if you are able to, all the power to you!
Oh and with respect to the topic at hand (i.e.: down payment for a house)… my fiance and I didn’t have the 20% down payment when we purchased our current home… we had a little more than 5%. At the time, I was unaware of the fees we would have to incur as a result of this… and when we saw the amount of actual mortgage (minus the down payment, plus the fees), it was as if we had barely put anything as a down payment at all. That serves as my lesson to NEVER do that again… and as we are looking for another home, our goal will be to have that 20% down payment – which might mean that we will have to be in our first home for an extra year, and we might have to increase our prepayments when we can. Lesson learned!
July 31, 2012 at 5:57 pm
I am at odds with the new legislation. We bought a house 3 years ago in Calgary (a time when the values had dropped from the previous couple of years). Initially, I was against a 35 year amortization period due to the fact that it would mean being in debt longer and paying more interest; however, the lower payments (biweekly) meant that we could increase the amount we pay on every payment and have the extra go directly against the premium. Between the extra $200 / month we have put on the mortgage since we bought and a lump sum we try to make every year our principle payments almost equal our interest payments already (and by this December I think they will be equal). My goal when we bought was to have $50,000 paid off the principle by the time we renew our mortgage. At the rate we are going, we will actually have more than $50,000 paid off by the time we renew and this includes a maternity leave where our income is reduced considerably. The 35 year period allowed us to make this happen. If we had to have a 25 year period when we bought we would not have been able to put on extra payments or save up a lump sum annually and would be paying down our mortgage much longer than it will take us with the set up we have.
The new rules punish people like us who know what they can afford and use the lower payments to their advantage for getting their house paid off faster. I understand that the government feels the need to prevent us from getting too deep in debt by limiting our exposure but I don’t think that this necessarily works for everyone.
August 1, 2012 at 2:11 pm
@Jennifer
Just to clarify, whether you have a 25 year amortization or a 35 year amortization, if you are making $x payment per month, you will end up paying the exact same amount of interest. While your pre-payments will be applied to the principle, if you had the higher payments under the 25 year amort, a greater % of the payment would have gone to the principle, and it works out the same either way, as long as you are making the same $ payment under each scenario.
What I do like about taking a longer amortization and making pre-payments is that if you have an emergency, you have the freedom to reduce or eliminate your pre-payments. You don’t have this sort of flexibility if you choose a shorter amortization with higher payments. That said, most people do not have the discipline to make those pre-payments consistently, so taking the shorter amortization is probably a good idea for many.
August 12, 2012 at 4:07 am
Thanks for these useful insights….
August 12, 2012 at 6:37 am
I love Canadians. Their inability to understand basic mathematics is what allows ‘us-the banks’ to capitalize on your ignorance, here have a VISA Gold card – its good for you
. Anywho, nobody has 20% down, everyone does the 5% deal and agree on a mortgage payment that is 90% interest. Then move homes after about 3 years and repeat the cycle. And I don’t see them making changes to the 5% rule anytime soon as this would effectively eliminate alot of firsttime homebuyers. And if they were to ever got back to 20% down, CMHC would be obsolete which ain’t gonna happen. It’s just like the game of monopoly. Only one person can win, everyone else has to go bankrupt….
November 9, 2012 at 10:56 am
I bought a condo with 5% down in 2009. Paid about $5000 in CHMC fee. Three years later I sold my condo for 35K more than I purchased it for. With the money I made off the condo I have enough to afford 20% down a house. But I almost feel like paying 10% or 15% and paying the CHMC fee assoicated with the house so we don’t have to take out a loan for a wedding and upgrades. We are buying a brand new house in a growing market so I hope that I will have a similar scenario where the value of my home in the future will more than make up the CHMC fee.