The 20% Down Payment Conundrum – Should I put more or less down?

Blog Post Written for: Ron Lefebvre

Last Updated: Sept 18 2018

 

Down-Payments: They come in all shapes and sizes! Gone are the days of $0 down mortgages… But contrary to the media hype, you can still put down LESS than 20% while having access to fantastic products and rates.

 

In fact, there just so happens to be a sweet spot for how much to put down and why. Let’s unpack this now:

There are three different types of rates, insured rates, uninsured rates, and ‘insurable’ rates.

 

Insured Rates:

  • Pro: This is where that sweet spot comes in! Insured will get you access to the lowest rates
  • Con: Prop value must be under 1 million
  • Con: Cannot be a rental (only primary or secondary homes)
  • Con: Up to 25 year amortization (no access to 30 year amortization)

 

Insurable Rates:

  • Pro: you can put more than 20% down
  • Pro: better rates than uninsurable
  • Con: rates not as low as insured, (unless you put 35% down then you may get back in to the ‘insured rates’ again)
  • Con: Cannot be a rental (only primary residence or secondary homes)
  • Con: Up to 25 year amortization (no access to 30 year amortization)

*The borrower doesn’t pay insurance, however the lender might.

 

Uninsured Rates:

(Any mortgage that cannot be insured falls under this category.) Note: just because a rate is ‘uninsured’ doesn’t mean it’s scary. A big pro of uninsured rates is that there is obviously no CMHC cost AND you have access to a wider range of products like HELOCs, access for non-canadian residents, rental properties, etc.

  • Con: highest rates
  • Pro: for other needs like rental properties, refinances, etc.

 

While the rates themselves are typically a bit higher when uninsured, they typically aren’t so much higher to make it not worth considering putting the 20% down.  20% is still a good goal to have, it’s just not the be all end all it used to be when rates were the same across the board.

 

Here’s where it gets interesting…

 

Even if you have diligently saved more than 20% down on your home, it doesn’t mean that you will get the best rate or product for your mortgage! If you are considering how much to put down, it’s important to look at the cost of the CMHC insurance itself. If the lower rate you can get access to, due to having an insured mortgage, saves you enough money to cover the cost of the insurance itself, then you have a winner. On the flip side, if the insurance cost is higher than the savings you will get from the lower ‘insurred rate’, then you’re likely to be better off going with the higher ‘uninsured’ rate.

 

You can think of it this way if you want to look at rate alone:

  1. BEST RATES – Insured rates
  2. Second best rates, ( or second tier) – Insurable rates
  3. HIGHEST rates – Uninsured rates

 

Sometimes just because you have saved 20% (or more) doesn’t necessarily mean you should use all of it as your down-payment. This mysterious sweet spot I am referring to happens to be 10%. With 10% down, you’re likely to gain access to the lowest rates available. You can then use the other 10% you had saved for other investments, renovations, or something else productive for you, or your family. (Note: in most cases – if you’re considering a rental, or the property you are buying has some kind of restriction like an adult-only complex, this might not apply)

 

There is so much more to consider than just the ‘interest rate.’ Among the many other considerations, it is important to examine the purpose of the property, “true cost of financing” and cash flow – You have to look at the overall bigger picture. What it really comes down to is having the right, professional mortgage advice to help you consider all the other elements of mortgage financing.

Would you like to chat and see what your down-payment sweet spot is? Connect with me for a chat anytime! https://calendly.com/ronlefebvre

 

 

 

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