The most significant purchase you make in your lifetime will likely be your home. Navigating the rules of home purchasing are complex and there is much to consider regarding down payment amounts, mortgage insurance, cash flow and resale. Read on for clarity on the home buying process.
- First, you need to consider an affordable down payment. The reason this matters is because if your down payment is lower, the greater the amount you’ll need to borrow and the greater your monthly payment is will be. You need to make sure that you have a cash flow plan; a budget created that considers all of the ancillary costs over and above the actual mortgage payment. These include property taxes, maintenance and utilities all while making sure you still have enough money left over for discretionary spending. The bottom line is that you don’t want to be house rich and cash poor so you need to determine the amount of your down payment in order to manage the monthly payment for the duration of your mortgage.
- Second, you must consider the impact of putting less than 20% down on a house in Canada for there are mortgage insurance premiums if you don’t. One of the providers of mortgage insurance is the Canadian Mortgage and Housing Corporation (CMHC) and they charge a fee on the amount you borrow as an insurance premium. This is a sliding scale; if you put 5% down versus 10% down, there’s a greater loan amount that needs to be insured and a greater percentage of the total mortgage that is added on to your mortgage payment. This could amount to tens of thousands of dollars over the duration of your mortgage so there is huge incentive to put 20% down on your purchase. Also, consider the affordability of your purchase. Instead of putting only 5% down on the highest purchase amount you qualify for, it’s likely better to buy a reasonably priced house with 20% down and then upgrade later as you build equity.
- The third factor is to make sure that you have enough cash on hand. You don’t want to be house poor or stretched for cash and you also want to have some liquid savings in the bank. For security, you want to have cash that will cover you for 3-6 months’ worth of payments if you were to lose your income or experience an unforeseen event. In addition, if every dollar of savings is going towards your house, you’re missing other tools that help grow your overall wealth. Though your home is often your biggest asset, to protect your financial picture, you want to be building a diversified portfolio. This can include TFSA’s as well as investments in the stock market & mutual funds, so consider diversification when determining the overall amount of your down payment.
It’s important to consider these three points when taking the plunge into the multifaceted world of borrowing and financing. If you’d like to chat about how to plan for your home purchase, please fill out the questionnaire below, and we’ll be happy to connect with you about your long-term goals.
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