According to a recent TD Canada Trust survey, nearly 60 percent of Canadians were disappointed in the size of their down payment. These findings aren’t all that surprising; in a world of record-setting consumer debt, slim savings and lacklustre investment returns, saving for a sizeable deposit can seem like an exercise in futility. And yet, the bigger your down payment, the less interest you’ll pay, the easier it will be to refinance and you’ll enjoy lower mortgage fees.
If you’re saving for a home, but are frustrated by the slow process, rest assured that you’re not alone. More and more first-time home buyers are simply skirting the savings train in order to get the keys to their new home faster. According to the TD survey, roughly 55 percent of the first-time buyers surveyed by TD said they would purchase sooner, instead of saving, if they had the chance to go back and do things over again.
But is rushing into homeownership the best financial option?
Down Payment Requirements
The minimum entrance fee to homeownership is 5 percent in Canada. According to the TD survey, it takes the average first-time home buyer two years or less to bank the minimum. Those who save the recommended 20 percent reported that it took anywhere from one to four years to pull their down payment together.
Many experts feel that these numbers are slightly optimistic, thanks in part to soaring home prices. The national average purchase price for a first time buyer is roughly $295,000 (according to mortgage insurer Genworth Financial Canada). In order to cover the minimum 5 percent down payment, the average first-time home buyer would need to save $16,000 plus closing costs. A 10 percent down payment would be close to $31,000.
How Long Will it Take to Save?
According to Doug Porter, deputy chief economist at BMO Capital Markets, the average Canadian family (median income of roughly $70,000) saves at a rate of 4 percent annually. This means that the median family would be saving about $2,800 each year. Since most first-time home buyers are younger and less established, it’s not surprising that this demographic would be saving somewhat less than the median family. As such, Porter feels that a more realistic savings schedule would be between four and five years for the minimum 5 percent deposit.
The Argument For Saving
While saving up for a down payment may sound like torture, it’s still the best option for buyers. Saving longer will give you a bigger cushion if home prices suddenly drop and you’re forced to sell. What’s more, it will provide you with a better entry price if the market sells off before you’re able to buy (experts are predicting a price correction in the Canadian housing market in the next few years).
In terms of your best rate mortgage, buying with a 10 percent down payment could save you close to $80 per month in payments, not to mention nearly $2,400 in mortgage default insurance.
Of course, there’s always the issue of mortgage rates. Buying today with a minimum down payment enables you to lock in an insanely low fixed rate for as long as a decade.
So, should you buy now with a low down payment or wait until you’ve banked a larger deposit? Here are a few things to help you make an educated decision.
- What are you current rental costs? Are they higher or lower then your monthly mortgage payments?
- How large is your emergency fund? Just because you can carry the mortgage doesn’t mean you’ll be able to manage emergency expenses.
- How financially stable are you? Is there a chance you might lose your job or get promoted in the future?
- Cutting your spending
- Borrowing from your RRSP as part of a Home Buyers’ Plan
- Postponing vacations for 18 months or more.