WHEN SAVING
FOR A DOWN
PAYMENT
IS BIGGER
BETTER?
I am a huge fan of getting on the real estate
ladder as soon as possible. There is a
reason it is called a ladder, hinting you will
be getting higher and higher, slowly one step
at a time. But, let’s have a closer look at a
young family: Mary and Bob. They are newly
married professionals, currently renting a nice
apartment for $1,200. They have been saving
for a down payment and have $15,000 at their
disposal.
OPTION 1 They find a cute start home for
300,000. With their down payment and
Mortgage Default Insurance factored in,
they have a total mortgage of 296,400
and a monthly payment of 1,254 (25 year
amortization at 1.99% interest).
Typically, in Canada, property will increase in
value by about 5% annually. In three years, the
property could be worth $347,284. Principal
payments over those 3 years will have also
built equity in the home of about $27,504 for a
total home equity of over 74,000!
OPTION 2 They decide to wait and save a
20% down payment in order to avoid paying
the Mortgage Default Insurance. They hope to
save an additional 45,000 over the next three
years. During those three years, the couple
will still need to pay rent while they continue to
save so their budget will be tight.
Based on the Canadian average increase used
above, that 300,000 property could be selling
for $347,284. Meaning that while the couple
has saved an extra 45,000 down payment,
they will have to spend an extra $47,284 to buy
that same property instead of having enjoyed
the equity that has been built in the home over
those years had they purchased earlier! They
will also need an extra $9,000 in order to have
a full 20% down payment!
With their 20% down payment and increase
property value factored in, they have a total
mortgage of $277,827 and a monthly payment
of $1,175 (25 year amortization at 1.99%
interest). After three hard years of skimping
and saving for a down payment, their monthly
mortgage is only $79 less than it would have
been three years earlier.
For me, it’s pretty obvious that the first option is
financially more sound. The key here is to get
an affordable property and I would like to refer
you back to the term “real estate ladder,” which
also alludes to one step at a time. Start with a
small property, upgrade every 5 years and you
will be amazed with the growth of your equity
over the years. - Tamara Tkachuk, www.bayviewfs.com