If you’ve been saving to buy a house, you may already be aware of Canada Mortgage Housing Corporation mortgage loan insurance that high ratio buyers (buyers who put less than 20 per cent of their home’s purchase price down as a down payment) are required to take out on their mortgage down payment. As of March 17th, CMHC has increased these premiums, which is causing some would-be home buyers to look for alternatives to boost their down payments over the 20 per cent threshold. In some cases, these home buyers are taking advances from credit cards or lines of credit to top up. While in theory it’s a good idea to have the largest down payment available against your home purchase, using credit to do so is not a good idea.
“It may appear on the surface like a good short-term solution to take out a smaller amount of debt to save on the CMHC mortgage loan premium costs. While you are saving initially on the cost of the CMHC premiums, you are still borrowing that money, which increases your debt load and your overall interest costs,” says Jeff Schwartz, executive director, Consolidated Credit Counseling Services of Canada.
“If your goal is to avoid mortgage loan insurance premiums, accumulate your down payment in cash only. That’s the best way to avoid extra interest charges across the board,” says Schwartz.
Here are some tips on how to be strategic with your down payment so that you’ll incur less interest over time and reduce your financial vulnerability.
The purpose of the mortgage down payment
It’s important to remember why lenders require a down payment of at least five per cent and why they require mortgage loan insurance in the first place: risk. The more mortgage debt you have in relationship to the value of your home, the more vulnerable you are in the event of a rise in mortgage rates or a housing market value correction. High ratio borrowers (borrowing 20 per cent or more of their home’s value) are considered more risky because of the amount of debt that they have.
Think about it. How much risk are you subjecting yourself to with your mortgage loan? And is it worthwhile to increase that risk by adding more debt for your down payment? You can decrease your own level of risk by owning more of your home than what you owe on it.
Keep your budget; change your property
Knowing the importance of your down payment and how important it is to keep mortgage debt down, where else can you turn to boost that down payment?
Maybe the answer isn’t to increase your down payment but to reduce the amount of home you buy. That means that your down payment will go further and your mortgage debt will be less.
To accomplish this, you can change property type or look at different neighbourhoods to keep your price point down.
Change your timeline
The other way to give your down payment more purchasing power is to gather more cash. One way to do so is to give yourself more time. What if you were to defer your home buying plans for a year or two? How much more could you accumulate?
There is a certain amount of panic in some cities where housing prices are climbing quickly and home buyers suffer from the Fear of Missing Out, which means that it might seem less appealing to sit tight and save money. However, regardless of how quickly the market is moving, if you jump in before you are truly ready (e.g. have enough down payment saved up in cash) then you are unnecessarily putting yourself at financial risk.
Taking out more debt before you become a homeowner will only leave you with more debt to pay back before you own your home outright. Reduce your overall debt load first. Call us today at or visit our online debt analysis.