Buy a home for 5% down. What you need to know.

Sunday Jun 16th, 2019

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Buy a home with only 5% Down?

CMHC

Any home purchased with less than 20% paid as a downpayment is dinged with mortgage insurance by the Canadian Mortgage and Housing Corporation (CMHC). This protects the bank, not you. This is there for the banks in case you default on your mortgage. Let's be honest. Banks and other lending institutions are handing out mortgages to people who probably shouldn't have qualified for what they were given. There's also a difference here to be called out. What someone qualifies for doesn't necessarily translate into what they should be house shopping for.

At the end of the day, a minimum of 20% down is always going to be the best case scenario (finacially). BUT, don't stress over it. People must do what they have to do in order to provide for their families. The minimum 5% rule exists for a reason, to help homebuyers.

Costs

Let's take a look at a house that costs $500,000 with only 5%, 10% and 15% down, and what amount of insurance would be owed in each scenario:

  • 5% down ($25,000): $19,000 
  • 10% down ($50,000): $13,950
  • 15% down ($75,000): $11,900

These insurance costs can be paid in two ways. Either upfront, or rolled up into your mortgage and amortized over the years. Let's look at the the upfront scenario. If you pay the $19,000 up front with your $25,000 downpayment, making a total of 8.8% or $44,000 down, you would still owe $18,240 in insurance. That extra $19,000 only saved you $760. Does this seem worth it to you? Think long term. When you consider the savings by paying the CMHC up front on a month-to-month basis over a 20-30 year mortgage, it will definitely add up. 

Another way to look at it is that if you buy your home for $500,000 and pay the 5% or $25,000 down, you're still borrowing $494,000 as a mortgage for that home. We can safely say this is a bad value, or even a terrible return on investment. Look at it this way: $25,000 = $6,000. TERRIBLE!!

Here's another cost breakdown of monthly costs with the mortgage insurance paid upfront versus rolled up into your overall mortgage :

  • 5% down, monthly mortgage is $2,310 with insurance paid monthly, $2,222 with insurance paid upfront. Savings are $88/month
  • 10% down, monthly mortgage is $2,170 with insurance paid monthly, $2,084 with insurance paid upfront. Savings are $86/month
  • 15% down, monthly mortgage is $2,043 with insurance paid monthly, $1,990 with insurance paid upfront. Savings are $53/month
  • 20% down, monthly mortgage is $1,870, no insurance costs

Other costs

Let's say you agree with any of the above scenarios where 5% down still makes sense for you. Keep in mind there are still other costs associated with homeownership and the real estate purchasing process. Other costs to consider are Land Transfer Tax (municipal and provincial), lawyer fees, property taxes, utilities, and regular property maintenance.

Your lifestyle might change as a result of all homeownership. So you might say goodbye to a few nights out, less dining out at restaurants, and watching your monthly spending more closely.

I'm scared now. Do I wait to buy?

This will always be subjective and unique to each person's needs, wants, and lifestyle. There is undoubtedly outside pressure that may influence you to buy now. Think carefully, though. Renting isn't a bad option. It first and foremost will depend on what you financial capabilities are in the present time.

If you want to talk more about your options, give me a call. Contact me through the various contact methods through my site. I look forward to helping you soon.


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