You’ve most likely heard the rule: Save for a 20-percent down payment before you buy a home. The logic behind saving 20 percent is solid, as it shows that you have the financial discipline and stability to save for a long-term goal. It also helps you get favorable rates from lenders. In Canada, it can save you BIG on CMHC Insurance costs, so you need to factor this in (here are more details from the official CMHC site Canadians).
But there can actually be financial benefits to putting down a small down payment—as low as five percent—rather than parting with so much cash up front, even if you have the money available.
The downsides of a small down payment are pretty well known. You’ll have to pay Private Mortgage Insurance (CMHC Fees in Canada) for years, and the lower your down payment, the more you’ll pay. You’ll also be offered a lesser loan amount than borrowers who have a 20-percent down payment, which will eliminate some homes from your search.
The typical average for home appreciation is between 3 and 6% per year, depending on where you live (ask a trusted REALTOR® for more details). The appreciation is independent from your home payment, so whether you put down 20 percent or three percent, the increase in equity is the same. If you’re looking at your home as an investment, putting down a smaller amount can lead to a higher return on investment, while also leaving more of your savings free for home repairs, upgrades, or other investment opportunities.
THE HAPPY MEDIUM
Of course, your home payment options aren’t binary. Most borrowers can find some common ground between the security of a traditional 20 percent and an investment-focused, small down payment. Your trusted real estate professional can provide some answers as you explore your financing options.
Talk to a great mortgage broker to help you get started on what’s right for you and also to talk about the numbers – it’s hard to write this type of article when our real estate markets are so local. BE PRUDENT! The article below may be helpful to you as well!