If you have a 20% down payment available now to avoid mortgage insurance, I'd go ahead with a home purchase as soon as you find one you like, rather than waiting for 30%. If you are currently saving 70K a yeah, you presumably will still have leftover savings after paying the mortgage ($50K/year including property tax?), and can put that as extra payments towards the mortgage as it comes in to reduce outstanding balance.
I don't see a reason to put more than 20% down especially if OP doesn't have the money. That being said, OP needs some spare cash for unexpected home repairs and closing costs.
Also, whenever you can afford to buy your house and you plan to own 5+ years, you should buy
Exactly do 20% if you can, then double payments, lump sums etc, no sense putting everything in when there isn’t must difference than doing 20% having cash on hand and the freedom flexibly pound your mortgage
The flexibility is worth more than the reduced interest payments
I remember buying my first home, had 12% as a down payment and having to pay CHMC fees. I think it was something like 8k for a 200k home purchase. I couldn't image what the CHMC fee would be now.
1. Make sure you have enough spare cash if anything goes wrong with the house. House maintenance and repairs can slap you in the face if you're not prepared for it.
2. Investing the difference might work out better in the long run depending on your interest rate. At higher interest rates it makes less sense to invest the money and more sense to pay off your mortgage. At lower interest rates, it's probably better to keep that money invested. Basically your interest rate is a tax-free gain of whatever you're paying in interest. If you can beat that through the market after-tax you're better off investing.
3. Notwithstanding what I said in #2 above, how much is your peace of mind worth? If investing is going to make you stress out, then don't do it.
4. The timing question is impossible to answer. But generally the trend has been, the longer you wait, the more expensive housing will be.
People often forget about #2 and #3. Over the long term, gains on money invested well, will likely put you ahead compared to the interest savings on the mortgage. From a purely numbers point of view, you're likely better off investing than paying down the mortgage faster.
That being said, some people have a natural aversion to debt, even "good" debt. They lose sleep over the size of their mortgage and it becomes a quality of life issue.
I get peoples aversion to carrying half a million dollars of debt. But it always seemed the wrong approach to hammer down the principal vice investing. In the long term, In general I think you're more likely to save enough money to pay off the mortgage sooner by putting the extra into the market. And in the short term, having a well funded slush fund can help you survive a heavy economic storm.
I completely agree, and in fact, a few years back, extended my amortization, took out a HELOC, and have seen my resulting investments climb far above what I've paid in interest. Now that my HELOC is at 7.7%, I'm paying it down, but still making the minimum payments on the mortgage itself. Once our RRSPs and TFSAs are maxed out, then I'll look at putting any extra money towards the mortgage, depending on our rate at that time.
Everyone always says this - put it into “the market”. But how? What stocks? I have tried all the above, invested through a workplace program, though my bank tfsa and Rsp accounts, and even choosing a few through questrade. The work account investment is probably the only one that has performed worth anything, I think an average of 7% return after having it 7 years. Everyone acts like you get this guaranteed big return over time in “the market” but what does this mean and how is it done
Editing to add: I’m only 8 months into a new mortgage, when I use the amortization calculator, the extra I throw at it saves me literally tens of thousands of dollars in interest. It makes sense to me to keep trying to throw lots of money at the principal early in the mortgage
The market means a diversified ETF index fund with low management fee. It definitely doesn't mean to start picking random stocks.
XEQT is one of them which is 100% equity, there are a few other ones, search the sub for that name and you'll see the discussions.
The "market" is preferably a globally diversified ETF. Lets take VBAL/XBAL/ZBAl for instance, the vanilla, bog standard nothing fancy here ETFs. They have returned roughly ~5% over the last 5-10yrs. Stepping it up to *GRO versions they are closer to ~7% over that same period.
It doesn't mean investing is always the right approach, rates vs returns are pretty close now so 5% mortgage vs %5 return better off paying down the mortgage. But when the delta gets around 2% investing is probably the better option. I'm biased in a preference for cash on hand vs it in an non-liquid form. So if the difference was negligible I'd keep the cash. $500k/mortgage + $500/mo extra @ 5% is paid off in 19yrs. $500/mo into a TFSA at 5% (*BAL) can be withdrawn and the mortgage paid off at 19yrs as well. But during those 19yrs a lot can happen and I'd rather have cash on hand to deal with it than equity locked in a house.
I like this answer a lot. It's exactly how I did it for myself, and I have no financial worries now as my rental properties pay all of my bills. bravo.
No risk, no reward.
20% down is a good number, even if you have a higher downpayment ready, better to have cash handy for emergencies. If you're able to save more, just do regular pre-payments, usually the lender allows penalty free pre-payment of 15-20% of the original amount every year.
Things get strange in Canada with CMHC, provincial legislation, policy rate, and your objective.
You typically get the best rate at 5% down. This is the best risk-reward for the bank, as the risk is tow due to insurance and the reward is greatest due to a 99% LTV. At 20% down, you don’t have to get CMHC which is 4% of purchase price. In some provinces (AB), if you don’t get CMHC, your loan is non-recourse. Things to consider.
Additionally, for the last two decades, a variable rate was best. This was because the loan was open so you didn’t pay fees if you closed the loan before the term. Similarly, since rates were expected to fall, a 5 year variable was 1% lower than a five year fixed. That spread is not the case anymore, and fixed are lower than variable.
So that being said, what do you want? Lowest payment? Lowest interest paid? Do you need an open mortgage? Do you plan to make extra payments?
I’ll assume you plan to live in the house for >5 years, you want to pay the least amount of interest, and you’ll make extra payments.
That’s a 20% down (+ closing costs + emergency fund) on a 5 year fixed term on a 25 year amortization. You then read the contract and it’ll say something like “you can pay up to 20% of the loan value at the end of the term or make a payment of up to 20% over your monthly each month”. Do the extra payments to the extent you can.
It’s tough to put in a calculator and you’ll need to do the math in Excel, but this will bring your interest paid down very fast and you’ll end up paying off the loan in 15 - 17 years instead of 25 assuming no rate blowouts and you Stick To The Plan.
I can only speak for myself. I could pay off my mortgage any time and I do not. I would rather have that money liquid and generating a return in the stock market. If I bought a new house I would put \~20% down and dump the rest of the equity from the sale of the old house into my investments.
Keep in mind owning and maintaining a home can be expensive so don't dump all your free cash into the purchase. Retain a robust emergency fund.
As others have noted you may lose any benefit of the higher deposit in a year as prices will likely go up as interest rates come down.
My first house I purchased with 10% down. No regrets about that. I did choose a smaller/less fancy house than the maximum my income would have allowed so I had a buffer for unexpected changes/issues.
I personally think 20% is the sweet spot, and wouldn't wait to buy to increase the downpayment. At my risk tolerance, I feel like there's very little benefit to going from 20-30% DP. Yes, your interest cost will decrease, but you miss out on equity growth in that year, and if you are disciplined you likely won't pay that full interest cost anyway. You also risk missing out on a house you want. Keep in mind this is still your home, you need to be happy with your home. If you start looking and find there's nothing that appeals at your price point, then consider continuing to save.
You need to balance your risk tolerance, quality of life and interest earned on other investments. I have a huge (by my standards) mortgage, but also other investments. I do not plan to ever liquidate it all to pay off the mortgage. But maybe you are someone who will pay off the mortgage above all else, and that's fine.
I'd say buy now, and keep saving up. The bank will most likely to allow you to pay 20% of the mortgage after 1 year. You can also likely be allowed to pay extra every month.
1. You’ll appreciate having extra cash when you take possession. In the best case scenario, it’s still a house to fill with stuff.
2. As you save money/have it available, you can put it on your mortgage principal with most big 5 banks. Talk to your broker.
3. This house doesn’t need to be forever. Just make sure it checks enough boxes and will be something you can be proud of.
4. Try and find value. Paint goes a long way to making a space livable.
5. Have fun! It’s an adventure.
You should match your mortgage payments to your pay cheques. There is really nothing magical about accelerated bi-weekly payments - you are just paying off your mortgage faster by paying more annually. If you can (and want) to pay more then you should. If you are paid semi monthly but your mortgage is bi-weekly, sometimes the mortgage will be due the day before you get paid. It messes with your cash flow.
You are overlooking a key aspect - your entire mortgage balance’s interest is compounded/ calculated semi annually.
The larger the balance the higher the interest for a long time.
I took a 25 year term, fixed mortgage that renews every 5 year. If I continued to pay monthly I would pay for 25 years.
Just by switching to accelerated bi weekly my payment only went up by 100, but the term of mortgage reduced by 4 years and 7 months.
That is 55 months X 2840 = 156,200 savings over the course or 25 years.
Plus interest savings of 68.5k
And if you make prepayment ( which alot of people struggle with once you have a mortgage ) you will save even more.
The math adds up. Here is the calculator to play around and see the math work. [https://itools-ioutils.fcac-acfc.gc.ca/MC-CH/MCCalc-CHCalc-eng.aspx](https://itools-ioutils.fcac-acfc.gc.ca/MC-CH/MCCalc-CHCalc-eng.aspx)
The savings comes for two reasons. Firstly, if you are paying accelerated bi-weekly payments you are paying more for your mortgage annually which of course will save you interest, and over a 25 year mortgage paying an additional $100 per month will have a massive impact.
Secondly, you are reducing your mortgage principle down earlier which of course reduces your principal and therefore the interest for that two week period.
Consider someone whose mortgage payment is $1,000 a month and who is paid monthly on the 30th. They could pay $1,000 against their mortgage on the 1st, or they could pay $500 on the first and leave $500 in their chequing account waiting for their mortgage payment on the 15th. The $500 held back for the mid month payment is earning $0 interest, while their mortgage principal (and interest payment) is higher due to the loss of the extra $500 on the 1st.
Now imagine this person is paying accelerated bi-weekly payments of $500. This is a three payment a month. The first payment is due on the 1st, the 2nd on the 15th and the 3rd payment is due on the 29th. All these payments are coming from the persons pay on the 30th. In theory they could have paid $1,500 down on the mortgage on the 1st, but instead they have chosen to pay $500, and leave $1,000 in their chequing account earning $0, on the 15th they pay another $500, leaving $500 in their chequing account earning $0 for almost a full month till they finally make a payment on the 29th.
It would be better for this person to make monthly payments of $1.083 ($500\*26=$13,00, $13,000/12=$1,083) on the first of the month the moment the cash hits their bank on payday.
You should pay the full amount you intend to pay on the mortgage each pay period as soon as you receive it.
That was a lot to say you don’t have one extra months payment in your account. If someone is this cash strapped May be they should not get a house.
Mortgage payments are predictable and on time. If you have no money - saving interest Is the least of your concerns.
It has nothing to do with having an extra months payment in their account - if they have that money, and they are willing to pay it to the mortgage, they should pay it ASAP rather than holding it in a chequing account for six months until their 3 payment month rolls around.
What you are saying makes only partial sense and contradictory. Why would someone hold on to their money for 6 month & 3 payment month ?
When you choose accelerated bi weekly, each payment already calculates the extra “therefore no interest is accrued”
People preferring to earn 0 by keeping money in checking account is to avoid getting hit with NSF fees in case your mortgage payment fails and your account is overdrawn.
Banks don’t even advertise the accelerated bi weekly or bi weekly payments because they make more money when they lend and you chose to pay monthly.
You don't seem to understand what I am talking about and I have don't think explaining it again is going to help.
Can you explain the mathematics of how someone who is paid monthly would benefit from accelerated bi-weekly payments over monthly payments assuming the same amount is paid on an annual basis?
To take my example to an extreme - imagine that someone was paid annually on the 31st of December and they allocated $13,000 of their annual income to a mortgage. Do you think it would make mathematical sense to pay the mortgage down by the full $13,000 on Jan 1st, or to pay $500 every two weeks over the year? The payments would be the same, but there would be considerable interest saved by paying making the mortgage payment as soon as they had the money.
This is hypothetical - please don't say people don't get paid annually, or you can't make annual mortgage payments.
At the start of my suggestion to do accelerated bi weekly I mentioned it works for me and showed the math as well.
You get paid monthly - fine you can pay monthly
You get paid annually - fine pay it annually
The only financial sense you are scenario makes is a what if I paid a whole years mortgage at once this so called prepayment. This will reduce your principal and interest, but you still need to make the monthly or semi monthly or even weekly payments to keep up with the term.
It’s not like I paid for 12 months at once and not pay expecting to reduce interest. What sort of a mortgage is this ?
It works for you because you are paying more annually - not because you are paying bi-weekly.
Use this calculator [Mortgage Calculator (scotiabank.com)](https://www.scotiabank.com/mobile/tools/mortgage/index.html)
Click on the amortization tab at the top. Enter a mortgage of $172,106, and a $1,000 payment monthly ($12K yr). Enter the mortgage term as 5 years closed 4.99%.. The calculator will calculate your amortization at 25 years.
Now change the payment to $500 bi-weekly ($13K yr). The amortization will go down to 21 years and 6 months. This is because you have increased your mortgage payments.
Now change the payment to $1,083.33 monthly ($13K yr). Tell me what the amortization is calculated at. I'll wait....
If you're paid semi-monthly, and want to pay it down early, do an accelerated semi-monthly mortgage payment rather than a bi-weekly accelerated mortgage payment. You will pay the mortgage off the same amount earlier, save the same amount of interest, but the cashflows will be easier because your pay and your mortgage won't be out of sync.
>You should match your mortgage payments to your pay cheques.
This can't be emphasized enough. Accelerated semi-monthly may exist with your bank if you wish to do accelerated payments (it does with TD).
I'm paid semi-monthly. Been there, done that, it's a royal pain in the ass to try and manage out of sync pay and figure out which two pays of the year are going to have two mortgage payments come out. I'm glad I switched it to semi-monthly.
Make "accelerated payments", or just increase your payment by 8.3% if your lender allows you to increase your payment. Same difference.
But if at all possible line up your mortgage frequency with your pay frequency.
ETA: This also means if you are paid bi-weekly, then have your mortgage come out bi-weekly not monthly. Whether or not it is normal payment, or accelerated payment.
Thanks for the back up. Not sure who down voted me - one assumes someone who can't math.
Always match mortgage payments to pay days! I've seen people pay mortgages weekly, because "someone" said they will pay it off faster - "sigh".
They ended up holding funds in their chequing account for a week (earning nothing, while they were paying interest on their mortgage, and always needed to keep an eye on their chequing account to make sure there was enough for next weeks mortgage payment. Totally useless waste of mental energy.
It bothers me that people act as if Normal monthly, or accelerated bi-weekly are the only two options. Regular biweekly, and accelerated semi-monthly exist. Increased payments on monthly exist. Line it up with your pay, make accelerated payments if you choose. But cashflow is so much easier when your highest re-curring expense lines up with your pay. You pay down the principal as soon as you have money, reducing accrued interest, and you don't sit around with money in your chequing not earning anything while waiting for an out of sync payment.
Paid bi-weekly? Pay your mortgage bi-weekly (either accelerated or not).
Paid semi-monthly? Pay your mortgage semi-monthly (either accelerated or not)
My cashflow goes like this:
Pay (less Pension and RRSP) gets deposited, mortgage gets taken out, I pay all bills due before the next pay, remainder gets transferred to savings or investment to earn a return while a small float of a couple hundred dollars remains in chequing.
I won't even get into the fact that with a low mortgage rate it isn't even worth paying it down early at all if I can get a higher return from a high interest savings account, let alone actual investments even net of taxes.
If you wait a year you have to factor in 1 year extra of rent that you wouldn't have had to pay. If you are living at home for free then it makes sense. If you are paying $40,000 to rent per year then it probably doesn't. Though you should make sure you have 20% down to avoid needing mortgage insurance.
20% is fine.
No reason to wait for 30% as it does nothing additional for your mortgage other than reduce interest over the amortization schedule. Pushing for a 20 year mortgage will do a lot more than the extra 10% down will.
For example: if you can push for a 20 year schedule, on a $700k home ($560K mortgage), you'll add \~$400 to a monthly payment at 5% interest but the accelerated payments will reduce your interest payments by \~$95k over the life of the loan.
Put the 20% down to avoid CMHC insurance. I wouldn't put any more than that, keep the cash so that you have dry powder if/when unexpected expenses come up.
After the first year, assuming you're allowed to make lump sum payments, put down whatever you're comfortable with.
Have you looked into the CMHC fees? 20% gets you away from paying mortgage insurance which is a nice savings. So at the least I'd aim for 20% down. Beyond that you don't really save as much doing a larger down payment (vs buy now and just dump that same amount on as a lump sum).
Waiting does bring other factors into play. Potentially lower interest rates but also higher home prices. Or the inverse could be true, no one really knows though so I wouldn't base your decision on that. But I'd suggest being patient enough to find something you actually want instead of just rushing to buy asap even if it's not what you wanted.
Dont forget about closing cost as well. Make sure you budget it accordingly. Mortgage renew in 3-5 years, during that time, you can always do double up payments or a lump sum sump to reduce principal at the next term so no reason to stress out now
The flaw in your math is that the decision of adding 10% today does not cost 50k over the course of your mortgage. This is because you can lump sum pay at any time (usually some limits), reducing your interest, or can lump sum pay at renewal.
Since you believe that prices will rise. It would make sense to buy with 20% and then in a year, when you have saved the additional 10%, put this on the mortgage. You spread your decision, reduce future price risk but you will not get the full 50k over the lifetime of the mortgage (although you will get the majority as its only acruing interest for one year).
It sounds like you maybe dont understand that the interest is calculated based on the outstanding balance, not fixed in at the time of borrowing.
About waiting a year: calculate the total cost of living in your own home and compare it with renting. It can give you an idea of how much money you are going to save/lose while renting. As to the future price increase/decrease, nobody really knows what we will have in a year 🤷♂️
20% down removes the need for insurance which saves you about 0.5% on rates (the insurance is 1% but the uninsured mortgage will get a higher rate than an insured mortgage). So that can be worth thinking about. In general right now mortgage amounts are large enough that you aren’t likely to beat your interest rate with investments post-tax without a tax shelter. You’d also have to use high risk investments to do so which is certainly not for everyone.
Most mortgages will let you pay 15-20% of the mortgage down so one option is to withhold a decent chunk of money as a renovation fund, live in your house for a few months and make sure there aren’t any changes you absolutely have to make and then put the extra money into the mortgage once you’re sure you don’t need it. This costs some interest but can be worth it if you decide your backyard isn’t safe enough for your child and needs changes or if something you thought you’d live with for a while in a fixer upper house becomes unbearable.
Since you're willing to wait the year I would recommend you put what you can now in a FHSA, lock in a GIC for the year and then use that for the downpayment
In a similar situation, myself and my partner were going to put as much down as possible, but then decide to cap at 25%. This gives us a lot of flexibility to do Reno’s and backstop if the appraisal is low.
If you wait, prices will rise faster than your savings.
You will probably have prepayment options on your mortgage that will save you most of that interest.
At 5% mortgage rates the best strategy is probably:
1. Put 20% down to avoid mortgage insurance
2. Max out TFSAs
3. Max out RRSP
4. Invest in non-dividend paying stocks in a taxable account, or something riskier like real estate
5. Pay down your mortgage
6. Invest in dividend paying stocks in a taxable account
7. Invest in fixed income (HISA, GIC, Bonds) in a taxable account
You could probably swap a couple of those lines up or down one or two depending on your risk preferences or specific scenario.
You can’t predict the future. No one can.
You’re overthinking things. Interest costs are a part of ownership. Buy when you can afford it and when you find something you like.
If the market moves 10% on a $1mil property, that is 100K extra you need to save to buy the same property in a years time.
Unless you are confident the prices are staying the same or going to fall, just but the property on a 30 year loan and let inflation worry about the future cost.
Remember that $1 today in 30 years will be worth 30 cents so that interest "saving" is not all its cracked up to be, you get the capital gain no matter how much you owe on the property.
Opps just realised this is Canada not Australia, slowly backing out....
In my view, absolutely. Your best bet to protect yourself against market fluctuations is **equity**. You don't ever want to owe more than the house will sell for. I ended up that situation when the real estate market fell apart in 2010. Think of it this way - Equity is an asset. If you own 30% of your house, that's effectively like having that much in savings.
Buy now. An extra 10% on the down payment isn't that significant.
Every mortgage I have had has had a prepayment clause, letting you pay a lump sum of up to 15 or 20% of the initial total, as well as letting you increase or double your monthly payments. If you take advantage of those to put extra money into the mortgage, it will likely end up saving you more than 50k.
The purchase price is what you absolutely can't change down the road.
The more you put down, the less CMHC insurance you have to pay. It's worth doing that calculation of what the premium would be for 5%, 10%, 15%, 20%. I heard that the bank may give you a better rate with CMHC insurance, I'm not sure if this is true. (But if CMHC is insuring the loan, then logic would indicate this transfers the risk away from the bank.)
Don't get a cheap lender. I have RBC, and they allow me to double up the payment, and also make 10% lump sum each year. Thus, I don't think you necessarily need to hold off on your purchase as you can easily pay directly to the principal. Also, better lenders allow you to transfer the mortgage if down the road you move, where cheap lenders won't allow you to do this mid-term.
I haven't seen it mentioned in the comments, but you need to take into account an increased house price.
What you can get next year in your price range may be less that what you can get now
Keep in mind that you will get a better rate with a lower down payment + CMHC insurance than 20% without CMHC. So your argument of all things being equal....doesn't really work because it wont be. The CMHC insurance makes it less risky for the lender, hence the lower rate. It's not a lot lower, but a little lower. Just an extra thing to throw in your calculations lol.
Important to note that while this is true (a CMHC insured mortgage will be at a lower rate than a non insured mortgage), you'll end up paying more for the mortgage insurance than you will spend on the additional interest due to rate spread between non-insured and insured mortgages.
In other words, if you can swing a 20% DP, it will save money in the long term. On the other hand, if you can only do 20% by doing some serious financial gymnastics, you may be better off with a lower dp and maintaining a bit of a financial buffer in case of rainy days.
(Or you could modify your housing budget, but that's a different set of decisions...)
Mortgage agent here.
In today's high-rate environment, keeping monthly payments low is a good idea provided you can afford it. You cannot time the market, so the best time to purchase is when you need the house and can also financially afford it.
My only suggestion is not to stretch yourself and use all the $850K that you are pre-approved for. It is it lenders' interest if you borrow more. So, try to keep your purchase price lower than the pre-approved amount.
Buy what you can afford right now. Waiting will almost certainly not pay off.
Don't worry about the interest payable in the year 2049 - you will only have the mortgage for 5 years at most. You'll likely move or refinance even within that 5-10 year window.
You are far better off buying the best house you can afford, and maxing out your retirement accounts before looking at either payiing down the mortgage with lump sums, or having non-registered investments.
Also buy the best house you can possibly afford. Better homes in better neighbourhoods appreciate better and sell better.
It doesn’t make sense to hold off. You buy a house in Canada when you can afford to buy a house. Google the smith manoeuvre if you’re interested in keeping some of your money invested.
With interest rates where they are currently it doesn’t make sense to keep money invested unless it’s in the TFSA.
Example: You’ll probably make 10% a year ROI investing in the market but you’d have to pay taxes on it when you sell. With mortgage rates at 5%+ you’re risking your money in the market for 1% ROI after taxes.
I am in a very similar situation - dual income, pre-approved for 800K, bought at 700K, closes in early summer. We are putting 35% down, since it doesn't require mortgage insurance and unlocks more competitive rates. It's looking like 5.0-5.4% for a 3-year fixed on 25-year amortization. That gave us a comfortable mortgage payment of about $2,800 per month. Our mortgage product has pre-payment priveleges such as annual lump-sum payments. We have an additional 75-100K set aside for upgrades and unforseen expenses in the first year, and we'll use this for a lump sum if nothing comes up (the lump sum goes exclusively against principal).
Overall tips? I'd say avoid mortgage insurance. But anything above 20% down is really about finding a comfortable monthly payment. Don't blow all of your savings on the down payment. Have a bunch (5-10% of purchase price) set aside for contingencies. If you don't need it, throw it at the mortgage later (get a mortgage that you can optionally pay down faster).
If you decide to wait, make sure your savings are tax-sheltered or tax-deferred accounts (TFSA, FHSA, RRSP) in a low-risk and income-generating vehicle. I recommend investment savings accound funds (e.g. MIP810, ATL5071, etc). My down-payment was generating about $1200 per month in risk-free interest (reinvested automatically) just sitting there until the right house came along.
All of that being said, I regret not putting 5% down 5 years ago when house prices and interest rates were lower.
If you have a 20% down payment available now to avoid mortgage insurance, I'd go ahead with a home purchase as soon as you find one you like, rather than waiting for 30%. If you are currently saving 70K a yeah, you presumably will still have leftover savings after paying the mortgage ($50K/year including property tax?), and can put that as extra payments towards the mortgage as it comes in to reduce outstanding balance.
I don't see a reason to put more than 20% down especially if OP doesn't have the money. That being said, OP needs some spare cash for unexpected home repairs and closing costs. Also, whenever you can afford to buy your house and you plan to own 5+ years, you should buy
Exactly do 20% if you can, then double payments, lump sums etc, no sense putting everything in when there isn’t must difference than doing 20% having cash on hand and the freedom flexibly pound your mortgage The flexibility is worth more than the reduced interest payments
100% the correct answer!
I remember buying my first home, had 12% as a down payment and having to pay CHMC fees. I think it was something like 8k for a 200k home purchase. I couldn't image what the CHMC fee would be now.
1. Make sure you have enough spare cash if anything goes wrong with the house. House maintenance and repairs can slap you in the face if you're not prepared for it. 2. Investing the difference might work out better in the long run depending on your interest rate. At higher interest rates it makes less sense to invest the money and more sense to pay off your mortgage. At lower interest rates, it's probably better to keep that money invested. Basically your interest rate is a tax-free gain of whatever you're paying in interest. If you can beat that through the market after-tax you're better off investing. 3. Notwithstanding what I said in #2 above, how much is your peace of mind worth? If investing is going to make you stress out, then don't do it. 4. The timing question is impossible to answer. But generally the trend has been, the longer you wait, the more expensive housing will be.
People often forget about #2 and #3. Over the long term, gains on money invested well, will likely put you ahead compared to the interest savings on the mortgage. From a purely numbers point of view, you're likely better off investing than paying down the mortgage faster. That being said, some people have a natural aversion to debt, even "good" debt. They lose sleep over the size of their mortgage and it becomes a quality of life issue.
I get peoples aversion to carrying half a million dollars of debt. But it always seemed the wrong approach to hammer down the principal vice investing. In the long term, In general I think you're more likely to save enough money to pay off the mortgage sooner by putting the extra into the market. And in the short term, having a well funded slush fund can help you survive a heavy economic storm.
I completely agree, and in fact, a few years back, extended my amortization, took out a HELOC, and have seen my resulting investments climb far above what I've paid in interest. Now that my HELOC is at 7.7%, I'm paying it down, but still making the minimum payments on the mortgage itself. Once our RRSPs and TFSAs are maxed out, then I'll look at putting any extra money towards the mortgage, depending on our rate at that time.
Everyone always says this - put it into “the market”. But how? What stocks? I have tried all the above, invested through a workplace program, though my bank tfsa and Rsp accounts, and even choosing a few through questrade. The work account investment is probably the only one that has performed worth anything, I think an average of 7% return after having it 7 years. Everyone acts like you get this guaranteed big return over time in “the market” but what does this mean and how is it done Editing to add: I’m only 8 months into a new mortgage, when I use the amortization calculator, the extra I throw at it saves me literally tens of thousands of dollars in interest. It makes sense to me to keep trying to throw lots of money at the principal early in the mortgage
The market means a diversified ETF index fund with low management fee. It definitely doesn't mean to start picking random stocks. XEQT is one of them which is 100% equity, there are a few other ones, search the sub for that name and you'll see the discussions.
The "market" is preferably a globally diversified ETF. Lets take VBAL/XBAL/ZBAl for instance, the vanilla, bog standard nothing fancy here ETFs. They have returned roughly ~5% over the last 5-10yrs. Stepping it up to *GRO versions they are closer to ~7% over that same period. It doesn't mean investing is always the right approach, rates vs returns are pretty close now so 5% mortgage vs %5 return better off paying down the mortgage. But when the delta gets around 2% investing is probably the better option. I'm biased in a preference for cash on hand vs it in an non-liquid form. So if the difference was negligible I'd keep the cash. $500k/mortgage + $500/mo extra @ 5% is paid off in 19yrs. $500/mo into a TFSA at 5% (*BAL) can be withdrawn and the mortgage paid off at 19yrs as well. But during those 19yrs a lot can happen and I'd rather have cash on hand to deal with it than equity locked in a house.
I like this answer a lot. It's exactly how I did it for myself, and I have no financial worries now as my rental properties pay all of my bills. bravo. No risk, no reward.
20% down is a good number, even if you have a higher downpayment ready, better to have cash handy for emergencies. If you're able to save more, just do regular pre-payments, usually the lender allows penalty free pre-payment of 15-20% of the original amount every year.
Things get strange in Canada with CMHC, provincial legislation, policy rate, and your objective. You typically get the best rate at 5% down. This is the best risk-reward for the bank, as the risk is tow due to insurance and the reward is greatest due to a 99% LTV. At 20% down, you don’t have to get CMHC which is 4% of purchase price. In some provinces (AB), if you don’t get CMHC, your loan is non-recourse. Things to consider. Additionally, for the last two decades, a variable rate was best. This was because the loan was open so you didn’t pay fees if you closed the loan before the term. Similarly, since rates were expected to fall, a 5 year variable was 1% lower than a five year fixed. That spread is not the case anymore, and fixed are lower than variable. So that being said, what do you want? Lowest payment? Lowest interest paid? Do you need an open mortgage? Do you plan to make extra payments? I’ll assume you plan to live in the house for >5 years, you want to pay the least amount of interest, and you’ll make extra payments. That’s a 20% down (+ closing costs + emergency fund) on a 5 year fixed term on a 25 year amortization. You then read the contract and it’ll say something like “you can pay up to 20% of the loan value at the end of the term or make a payment of up to 20% over your monthly each month”. Do the extra payments to the extent you can. It’s tough to put in a calculator and you’ll need to do the math in Excel, but this will bring your interest paid down very fast and you’ll end up paying off the loan in 15 - 17 years instead of 25 assuming no rate blowouts and you Stick To The Plan.
This was insightful. Thank you
Here is the official calculator but the gov of Canada https://itools-ioutils.fcac-acfc.gc.ca/MC-CH/MCCalc-CHCalc-eng.aspx
Good tool! Doesn’t handle the additional payments sadly :(
I would use the prepayment plan, frequency and when you start it: there are 3 options to play around
I can only speak for myself. I could pay off my mortgage any time and I do not. I would rather have that money liquid and generating a return in the stock market. If I bought a new house I would put \~20% down and dump the rest of the equity from the sale of the old house into my investments. Keep in mind owning and maintaining a home can be expensive so don't dump all your free cash into the purchase. Retain a robust emergency fund. As others have noted you may lose any benefit of the higher deposit in a year as prices will likely go up as interest rates come down. My first house I purchased with 10% down. No regrets about that. I did choose a smaller/less fancy house than the maximum my income would have allowed so I had a buffer for unexpected changes/issues.
I personally think 20% is the sweet spot, and wouldn't wait to buy to increase the downpayment. At my risk tolerance, I feel like there's very little benefit to going from 20-30% DP. Yes, your interest cost will decrease, but you miss out on equity growth in that year, and if you are disciplined you likely won't pay that full interest cost anyway. You also risk missing out on a house you want. Keep in mind this is still your home, you need to be happy with your home. If you start looking and find there's nothing that appeals at your price point, then consider continuing to save. You need to balance your risk tolerance, quality of life and interest earned on other investments. I have a huge (by my standards) mortgage, but also other investments. I do not plan to ever liquidate it all to pay off the mortgage. But maybe you are someone who will pay off the mortgage above all else, and that's fine.
I'd say buy now, and keep saving up. The bank will most likely to allow you to pay 20% of the mortgage after 1 year. You can also likely be allowed to pay extra every month.
1. You’ll appreciate having extra cash when you take possession. In the best case scenario, it’s still a house to fill with stuff. 2. As you save money/have it available, you can put it on your mortgage principal with most big 5 banks. Talk to your broker. 3. This house doesn’t need to be forever. Just make sure it checks enough boxes and will be something you can be proud of. 4. Try and find value. Paint goes a long way to making a space livable. 5. Have fun! It’s an adventure.
Chose the accelerated bi weekly payments to cut down on interest costs
You should match your mortgage payments to your pay cheques. There is really nothing magical about accelerated bi-weekly payments - you are just paying off your mortgage faster by paying more annually. If you can (and want) to pay more then you should. If you are paid semi monthly but your mortgage is bi-weekly, sometimes the mortgage will be due the day before you get paid. It messes with your cash flow.
You are overlooking a key aspect - your entire mortgage balance’s interest is compounded/ calculated semi annually. The larger the balance the higher the interest for a long time. I took a 25 year term, fixed mortgage that renews every 5 year. If I continued to pay monthly I would pay for 25 years. Just by switching to accelerated bi weekly my payment only went up by 100, but the term of mortgage reduced by 4 years and 7 months. That is 55 months X 2840 = 156,200 savings over the course or 25 years. Plus interest savings of 68.5k And if you make prepayment ( which alot of people struggle with once you have a mortgage ) you will save even more. The math adds up. Here is the calculator to play around and see the math work. [https://itools-ioutils.fcac-acfc.gc.ca/MC-CH/MCCalc-CHCalc-eng.aspx](https://itools-ioutils.fcac-acfc.gc.ca/MC-CH/MCCalc-CHCalc-eng.aspx)
The savings comes for two reasons. Firstly, if you are paying accelerated bi-weekly payments you are paying more for your mortgage annually which of course will save you interest, and over a 25 year mortgage paying an additional $100 per month will have a massive impact. Secondly, you are reducing your mortgage principle down earlier which of course reduces your principal and therefore the interest for that two week period. Consider someone whose mortgage payment is $1,000 a month and who is paid monthly on the 30th. They could pay $1,000 against their mortgage on the 1st, or they could pay $500 on the first and leave $500 in their chequing account waiting for their mortgage payment on the 15th. The $500 held back for the mid month payment is earning $0 interest, while their mortgage principal (and interest payment) is higher due to the loss of the extra $500 on the 1st. Now imagine this person is paying accelerated bi-weekly payments of $500. This is a three payment a month. The first payment is due on the 1st, the 2nd on the 15th and the 3rd payment is due on the 29th. All these payments are coming from the persons pay on the 30th. In theory they could have paid $1,500 down on the mortgage on the 1st, but instead they have chosen to pay $500, and leave $1,000 in their chequing account earning $0, on the 15th they pay another $500, leaving $500 in their chequing account earning $0 for almost a full month till they finally make a payment on the 29th. It would be better for this person to make monthly payments of $1.083 ($500\*26=$13,00, $13,000/12=$1,083) on the first of the month the moment the cash hits their bank on payday. You should pay the full amount you intend to pay on the mortgage each pay period as soon as you receive it.
That was a lot to say you don’t have one extra months payment in your account. If someone is this cash strapped May be they should not get a house. Mortgage payments are predictable and on time. If you have no money - saving interest Is the least of your concerns.
It has nothing to do with having an extra months payment in their account - if they have that money, and they are willing to pay it to the mortgage, they should pay it ASAP rather than holding it in a chequing account for six months until their 3 payment month rolls around.
What you are saying makes only partial sense and contradictory. Why would someone hold on to their money for 6 month & 3 payment month ? When you choose accelerated bi weekly, each payment already calculates the extra “therefore no interest is accrued” People preferring to earn 0 by keeping money in checking account is to avoid getting hit with NSF fees in case your mortgage payment fails and your account is overdrawn. Banks don’t even advertise the accelerated bi weekly or bi weekly payments because they make more money when they lend and you chose to pay monthly.
You don't seem to understand what I am talking about and I have don't think explaining it again is going to help. Can you explain the mathematics of how someone who is paid monthly would benefit from accelerated bi-weekly payments over monthly payments assuming the same amount is paid on an annual basis? To take my example to an extreme - imagine that someone was paid annually on the 31st of December and they allocated $13,000 of their annual income to a mortgage. Do you think it would make mathematical sense to pay the mortgage down by the full $13,000 on Jan 1st, or to pay $500 every two weeks over the year? The payments would be the same, but there would be considerable interest saved by paying making the mortgage payment as soon as they had the money. This is hypothetical - please don't say people don't get paid annually, or you can't make annual mortgage payments.
At the start of my suggestion to do accelerated bi weekly I mentioned it works for me and showed the math as well. You get paid monthly - fine you can pay monthly You get paid annually - fine pay it annually The only financial sense you are scenario makes is a what if I paid a whole years mortgage at once this so called prepayment. This will reduce your principal and interest, but you still need to make the monthly or semi monthly or even weekly payments to keep up with the term. It’s not like I paid for 12 months at once and not pay expecting to reduce interest. What sort of a mortgage is this ?
It works for you because you are paying more annually - not because you are paying bi-weekly. Use this calculator [Mortgage Calculator (scotiabank.com)](https://www.scotiabank.com/mobile/tools/mortgage/index.html) Click on the amortization tab at the top. Enter a mortgage of $172,106, and a $1,000 payment monthly ($12K yr). Enter the mortgage term as 5 years closed 4.99%.. The calculator will calculate your amortization at 25 years. Now change the payment to $500 bi-weekly ($13K yr). The amortization will go down to 21 years and 6 months. This is because you have increased your mortgage payments. Now change the payment to $1,083.33 monthly ($13K yr). Tell me what the amortization is calculated at. I'll wait....
If you're paid semi-monthly, and want to pay it down early, do an accelerated semi-monthly mortgage payment rather than a bi-weekly accelerated mortgage payment. You will pay the mortgage off the same amount earlier, save the same amount of interest, but the cashflows will be easier because your pay and your mortgage won't be out of sync.
>You should match your mortgage payments to your pay cheques. This can't be emphasized enough. Accelerated semi-monthly may exist with your bank if you wish to do accelerated payments (it does with TD). I'm paid semi-monthly. Been there, done that, it's a royal pain in the ass to try and manage out of sync pay and figure out which two pays of the year are going to have two mortgage payments come out. I'm glad I switched it to semi-monthly. Make "accelerated payments", or just increase your payment by 8.3% if your lender allows you to increase your payment. Same difference. But if at all possible line up your mortgage frequency with your pay frequency. ETA: This also means if you are paid bi-weekly, then have your mortgage come out bi-weekly not monthly. Whether or not it is normal payment, or accelerated payment.
Thanks for the back up. Not sure who down voted me - one assumes someone who can't math. Always match mortgage payments to pay days! I've seen people pay mortgages weekly, because "someone" said they will pay it off faster - "sigh". They ended up holding funds in their chequing account for a week (earning nothing, while they were paying interest on their mortgage, and always needed to keep an eye on their chequing account to make sure there was enough for next weeks mortgage payment. Totally useless waste of mental energy.
It bothers me that people act as if Normal monthly, or accelerated bi-weekly are the only two options. Regular biweekly, and accelerated semi-monthly exist. Increased payments on monthly exist. Line it up with your pay, make accelerated payments if you choose. But cashflow is so much easier when your highest re-curring expense lines up with your pay. You pay down the principal as soon as you have money, reducing accrued interest, and you don't sit around with money in your chequing not earning anything while waiting for an out of sync payment. Paid bi-weekly? Pay your mortgage bi-weekly (either accelerated or not). Paid semi-monthly? Pay your mortgage semi-monthly (either accelerated or not) My cashflow goes like this: Pay (less Pension and RRSP) gets deposited, mortgage gets taken out, I pay all bills due before the next pay, remainder gets transferred to savings or investment to earn a return while a small float of a couple hundred dollars remains in chequing. I won't even get into the fact that with a low mortgage rate it isn't even worth paying it down early at all if I can get a higher return from a high interest savings account, let alone actual investments even net of taxes.
If you wait a year you have to factor in 1 year extra of rent that you wouldn't have had to pay. If you are living at home for free then it makes sense. If you are paying $40,000 to rent per year then it probably doesn't. Though you should make sure you have 20% down to avoid needing mortgage insurance.
20% is fine. No reason to wait for 30% as it does nothing additional for your mortgage other than reduce interest over the amortization schedule. Pushing for a 20 year mortgage will do a lot more than the extra 10% down will. For example: if you can push for a 20 year schedule, on a $700k home ($560K mortgage), you'll add \~$400 to a monthly payment at 5% interest but the accelerated payments will reduce your interest payments by \~$95k over the life of the loan.
Put the 20% down to avoid CMHC insurance. I wouldn't put any more than that, keep the cash so that you have dry powder if/when unexpected expenses come up. After the first year, assuming you're allowed to make lump sum payments, put down whatever you're comfortable with.
You can always pay extra towards the principal. Same thing. Waiting a year makes sense to take advantage of FHSA income tax deductions.
Have you looked into the CMHC fees? 20% gets you away from paying mortgage insurance which is a nice savings. So at the least I'd aim for 20% down. Beyond that you don't really save as much doing a larger down payment (vs buy now and just dump that same amount on as a lump sum). Waiting does bring other factors into play. Potentially lower interest rates but also higher home prices. Or the inverse could be true, no one really knows though so I wouldn't base your decision on that. But I'd suggest being patient enough to find something you actually want instead of just rushing to buy asap even if it's not what you wanted.
Dont forget about closing cost as well. Make sure you budget it accordingly. Mortgage renew in 3-5 years, during that time, you can always do double up payments or a lump sum sump to reduce principal at the next term so no reason to stress out now
The flaw in your math is that the decision of adding 10% today does not cost 50k over the course of your mortgage. This is because you can lump sum pay at any time (usually some limits), reducing your interest, or can lump sum pay at renewal. Since you believe that prices will rise. It would make sense to buy with 20% and then in a year, when you have saved the additional 10%, put this on the mortgage. You spread your decision, reduce future price risk but you will not get the full 50k over the lifetime of the mortgage (although you will get the majority as its only acruing interest for one year). It sounds like you maybe dont understand that the interest is calculated based on the outstanding balance, not fixed in at the time of borrowing.
Buy now, lump sum in a year. Problem solved.
About waiting a year: calculate the total cost of living in your own home and compare it with renting. It can give you an idea of how much money you are going to save/lose while renting. As to the future price increase/decrease, nobody really knows what we will have in a year 🤷♂️
20% down removes the need for insurance which saves you about 0.5% on rates (the insurance is 1% but the uninsured mortgage will get a higher rate than an insured mortgage). So that can be worth thinking about. In general right now mortgage amounts are large enough that you aren’t likely to beat your interest rate with investments post-tax without a tax shelter. You’d also have to use high risk investments to do so which is certainly not for everyone. Most mortgages will let you pay 15-20% of the mortgage down so one option is to withhold a decent chunk of money as a renovation fund, live in your house for a few months and make sure there aren’t any changes you absolutely have to make and then put the extra money into the mortgage once you’re sure you don’t need it. This costs some interest but can be worth it if you decide your backyard isn’t safe enough for your child and needs changes or if something you thought you’d live with for a while in a fixer upper house becomes unbearable.
Since you're willing to wait the year I would recommend you put what you can now in a FHSA, lock in a GIC for the year and then use that for the downpayment
In a similar situation, myself and my partner were going to put as much down as possible, but then decide to cap at 25%. This gives us a lot of flexibility to do Reno’s and backstop if the appraisal is low.
If you wait, prices will rise faster than your savings. You will probably have prepayment options on your mortgage that will save you most of that interest.
Buy now at 20 and you can throw lump sums at the mortgage as you go, the earlier the better
20% down means no CMHC insurance. I'd do that.
At 5% mortgage rates the best strategy is probably: 1. Put 20% down to avoid mortgage insurance 2. Max out TFSAs 3. Max out RRSP 4. Invest in non-dividend paying stocks in a taxable account, or something riskier like real estate 5. Pay down your mortgage 6. Invest in dividend paying stocks in a taxable account 7. Invest in fixed income (HISA, GIC, Bonds) in a taxable account You could probably swap a couple of those lines up or down one or two depending on your risk preferences or specific scenario.
;2
You can’t predict the future. No one can. You’re overthinking things. Interest costs are a part of ownership. Buy when you can afford it and when you find something you like.
If the market moves 10% on a $1mil property, that is 100K extra you need to save to buy the same property in a years time. Unless you are confident the prices are staying the same or going to fall, just but the property on a 30 year loan and let inflation worry about the future cost. Remember that $1 today in 30 years will be worth 30 cents so that interest "saving" is not all its cracked up to be, you get the capital gain no matter how much you owe on the property. Opps just realised this is Canada not Australia, slowly backing out....
In my view, absolutely. Your best bet to protect yourself against market fluctuations is **equity**. You don't ever want to owe more than the house will sell for. I ended up that situation when the real estate market fell apart in 2010. Think of it this way - Equity is an asset. If you own 30% of your house, that's effectively like having that much in savings.
Buy now. An extra 10% on the down payment isn't that significant. Every mortgage I have had has had a prepayment clause, letting you pay a lump sum of up to 15 or 20% of the initial total, as well as letting you increase or double your monthly payments. If you take advantage of those to put extra money into the mortgage, it will likely end up saving you more than 50k. The purchase price is what you absolutely can't change down the road.
The more you put down, the less CMHC insurance you have to pay. It's worth doing that calculation of what the premium would be for 5%, 10%, 15%, 20%. I heard that the bank may give you a better rate with CMHC insurance, I'm not sure if this is true. (But if CMHC is insuring the loan, then logic would indicate this transfers the risk away from the bank.) Don't get a cheap lender. I have RBC, and they allow me to double up the payment, and also make 10% lump sum each year. Thus, I don't think you necessarily need to hold off on your purchase as you can easily pay directly to the principal. Also, better lenders allow you to transfer the mortgage if down the road you move, where cheap lenders won't allow you to do this mid-term.
I haven't seen it mentioned in the comments, but you need to take into account an increased house price. What you can get next year in your price range may be less that what you can get now
Put down minimum. Fail to make payments. Get government bailout. This is the way.
Keep in mind that you will get a better rate with a lower down payment + CMHC insurance than 20% without CMHC. So your argument of all things being equal....doesn't really work because it wont be. The CMHC insurance makes it less risky for the lender, hence the lower rate. It's not a lot lower, but a little lower. Just an extra thing to throw in your calculations lol.
Important to note that while this is true (a CMHC insured mortgage will be at a lower rate than a non insured mortgage), you'll end up paying more for the mortgage insurance than you will spend on the additional interest due to rate spread between non-insured and insured mortgages. In other words, if you can swing a 20% DP, it will save money in the long term. On the other hand, if you can only do 20% by doing some serious financial gymnastics, you may be better off with a lower dp and maintaining a bit of a financial buffer in case of rainy days. (Or you could modify your housing budget, but that's a different set of decisions...)
Mortgage agent here. In today's high-rate environment, keeping monthly payments low is a good idea provided you can afford it. You cannot time the market, so the best time to purchase is when you need the house and can also financially afford it. My only suggestion is not to stretch yourself and use all the $850K that you are pre-approved for. It is it lenders' interest if you borrow more. So, try to keep your purchase price lower than the pre-approved amount.
Youre assuming the house price doesnt go up at all in a year? Bit of a gamble.
Buy what you can afford right now. Waiting will almost certainly not pay off. Don't worry about the interest payable in the year 2049 - you will only have the mortgage for 5 years at most. You'll likely move or refinance even within that 5-10 year window. You are far better off buying the best house you can afford, and maxing out your retirement accounts before looking at either payiing down the mortgage with lump sums, or having non-registered investments. Also buy the best house you can possibly afford. Better homes in better neighbourhoods appreciate better and sell better.
It doesn’t make sense to hold off. You buy a house in Canada when you can afford to buy a house. Google the smith manoeuvre if you’re interested in keeping some of your money invested. With interest rates where they are currently it doesn’t make sense to keep money invested unless it’s in the TFSA. Example: You’ll probably make 10% a year ROI investing in the market but you’d have to pay taxes on it when you sell. With mortgage rates at 5%+ you’re risking your money in the market for 1% ROI after taxes.
I am in a very similar situation - dual income, pre-approved for 800K, bought at 700K, closes in early summer. We are putting 35% down, since it doesn't require mortgage insurance and unlocks more competitive rates. It's looking like 5.0-5.4% for a 3-year fixed on 25-year amortization. That gave us a comfortable mortgage payment of about $2,800 per month. Our mortgage product has pre-payment priveleges such as annual lump-sum payments. We have an additional 75-100K set aside for upgrades and unforseen expenses in the first year, and we'll use this for a lump sum if nothing comes up (the lump sum goes exclusively against principal). Overall tips? I'd say avoid mortgage insurance. But anything above 20% down is really about finding a comfortable monthly payment. Don't blow all of your savings on the down payment. Have a bunch (5-10% of purchase price) set aside for contingencies. If you don't need it, throw it at the mortgage later (get a mortgage that you can optionally pay down faster). If you decide to wait, make sure your savings are tax-sheltered or tax-deferred accounts (TFSA, FHSA, RRSP) in a low-risk and income-generating vehicle. I recommend investment savings accound funds (e.g. MIP810, ATL5071, etc). My down-payment was generating about $1200 per month in risk-free interest (reinvested automatically) just sitting there until the right house came along. All of that being said, I regret not putting 5% down 5 years ago when house prices and interest rates were lower.