Purchase a home with 20% or more down

Your mortgage can represent more than 80% of the value of the home (referred to as LTV within the industry); this ratio is called loan to value.  If the mortgage exceeds 80% LTV, then the lender is required to obtain mortgage default insurance provided by one of three Canadian companies AIG, Genworth and CMHC (with the latter being the most commonly known company).  When the lender obtains this mortgage default insurance then the purchasers (or borrowers) are usually stuck with paying the bill which can represent a sizeable amount since the amount is based on a percentage of the mortgage amount.

For this reason many people don’t want to put less than 20% down when purchasing a home.  The problem arises when people scrape up every last cent that they have to close the transaction, this almost always translates into additional consumer debt.  The reason being, when buying a home and putting all your money into the purchase you no longer have any money for incidentals like un-expected costs, cleaning costs (e.g. carpets) or things like minor renovations or upgrades.  As a result these things are put on credit cards and/or lines of credit which carry a much higher interest rate and can cost much more than a small CMHC premium.

A better option when buying a home is for the purchaser to maximize the down payment while keeping a reserve available for these extra costs.  By doing this, the new home owners will be able to move into the property and make the adjustments that they would like to make without going into additional debt.  In many cases, after calculating everyting and factoring in any possible extra expenses, the purchasers will still have enough money to put down to avoid paying the mortgage default insurance.  However, if it means that you have to put less than 20% down, then this is something that you should consider to ensure furture financial well being.

So, if you are wanting to purchase a home and you have the money to put down then think carefully about how much you are going to need once you get into the property.  Putting all your money into the purchase transaction can result in unfavourable financial results.  Buying a home can be a dream come true, don’t make a decision that makes you think that you made a terrible mistake.

About the Author Jim Thornton

I have been a mortgage broker for more than a decade. Experiencing all types of markets, I am very knowledgeable on how to "get deals done". When I work with my clients, I leave no stone unturned when it comes to getting deals approved.

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