I’ll be the first to admit that it’s a totally personal, deeply contentious topic, especially for us millennials – and I’m just talking about outside of the Vancouver-and-Toronto insanity.
But I jumped right into the middle of it when I wrote about whether or not I can afford the average Ottawa house, with this line.
“Now, would I ever buy a house with only 5% down? Not a chance, but that’s an opinion for another post. ”
Well friends, this is that other post. Let’s talk down payments.
Why I Don’t Believe in Putting 5% Down
Two reasons: numbers and risk.
The first is the big one: numbers. If you’re putting down 5%, more than half of that money just vanishes thanks to the CMHC premiums you have to pay to protect them if you can’t handle your mortgage. Right now, that premium is 3.6% of your house’s value, so you’re left with 1.4% equity in your house.
That’s where the risk comes in. Every rent vs. buy calculator in the world will show you that the longer you stay in a house, the cheaper it gets, because your switching costs – everything from realtor fees to renting a moving truck to alllll the closing costs – are averaged out over a longer time period. If you’re paying those switching costs every two years? Not a good scene, and renting will be the better option, hands down.
What does this have to do with putting 5% down on a house? Well, you might not be planning to move in the next ten years, but if you do, you’ll be paying switching costs all over again – and people move for all sorts of unforeseeable reasons, like an amazing job opportunity or a less-amazing change in family situations.
If you do end up moving, and you started from 1.4% equity in your house, switching costs will eat a big chunk of that equity. It might not happen, and you might be in that house until a ripe old age, but like… it’s possible that you might have to move.
Don’t even get me started on the fact that house prices are bonkers right now, and if you have to move once they cool down a bit? Egad.
For someone who’s all “bring on the risk!” with my investments, I’m surprisingly conservative with my day-to-day money, and a house will always be the biggest chunk of that for me. The risk of putting down 5% is just a bit too high for my liking.
So if I’m so anti-5% downpayments, you might assume I’m going to patiently wait until I can afford to put down 20% on a house, right?
Why I’m OK with Under-20% Down Payments
The short answer? I’m only so patient, friends, and the down-payment sizes these days are nothing to sneeze at. If you saw my take on affording the average house in Ottawa, even a 5% downpayment on a $403,603 house will set you back $20,180.15.
The longer answer actually breaks down into two things, but yes, one of them really is that I’m just not that patient. I’ve been saving – pretty aggressively – for a house downpayment for about a year now, and if all goes as planned, we’re still two years away from buying a place.
By the time we buy a place, if all goes as planned, I’ll have been saving the equivalent of my rent payment for three whole years, and honestly, I’d rather just buy a place and funnel that savings into other goals already. I’m excited to use that money for other things, which yes, will include increased housing costs – but will also be used to bump up my retirement savings.
The second reason I’m not entirely opposed to putting down less than a 20% downpayment (if it’s an option, aka you’re not buying a million-dollar home) is closing costs. Ask anyone who has ever bought a house and they’ll tell you – the closing-cost struggle is real. This guy underestimated his closing costs by 50%, and that’s not an uncommon occurrence, no matter how prepared you are.
Never mind the non-closing-cost line items, like new furniture or appliances. I’ve seen some older-than-I-am washers and dryers at open houses, let’s just put it that way.
If we were in a position to juuuuust barely hit that 20% downpayment number, but it would seriously deplete all of our other savings accounts, would I pay the CMHC premiums in order to keep a solid cushion of savings in my account?
Let’s say the CMHC premiums came to $5,000 that gets rolled into my mortgage. I’d rather pay off that $5,000 at the 2.34% interest rate that we’re averaging right now for mortgage payments, than to rack up the same amount of debt on a line of credit charging 6% interest because we had literally no emergency fund savings left and an emergency popped up.
Because hi, that is exactly when an emergency would actually happen, and you know it’s true. You know The Dog would totally eat a sock that afternoon.
My Goldilocks Downpayment Goal
Not too big, not too small – see? Goldilocks. (Yeah I think I’m super funny, OK?)
Once all is said and done, and if everything goes as planned, I’ll be looking at putting down between 10% and 15% on a house once I’m in a position to buy. That’ll mean I’ll be on the hook for some CMHC payments, yes, but they’ll be between 2.4% and 1.8%, depending on where I fall in that range.
If I do put down 10%, and pay the 2.4% premium, it leaves me with 7.6% equity in the house, which is way more palatable than 1.4%. If I hit the 15% number, I’ll be paying 1.8% to CMHC, leaving me with a cool 13.2% equity.
In an ideal world, yes, I’d aim for 20%, and if you can get there, go for it!
For the rest of us, my challenge to you is this: pretend like 10% is the minimum downpayment on any house, not just the minimum payment on the part of the house that’s above and beyond $500,000.
Unless you’re in Toronto or Vancouver, of course, because your markets terrify me and I’d never presume to know what it’s like to be trying to buy there right now. Sending hugs.
What do you think – would you put 5% down on a house? Are you way more patient than I am and are planning to save up the full 20% before diving in? I’d love to hear about it – especially if you’ve already bought a place!