As many as 60 out of 100 home buyers would say no if you ask them whether they were satisfied by the size of their down payment. TD Canada Trust found this out during a recent survey of first time home buyers.
This revelation is hardly surprising: Bigger down payment translates into bigger equity buffer if home prices slide, lower mortgage insurance fees, easier refinancing, and less interest paid.
The challenge is about saving a sizeable deposit in a world of towering home prices, skimpy investment returns, and record high debt ratios. Some new buyers, frustrated by the slow, long process, would rather accept the loss in savings to get the keys to their new home faster. The reality is that 55% of first-time buyers, whom TD surveyed, stated that they would purchase sooner if they had the opportunity to do it all over again.
The problem is that it takes time to save up a down payment
Currently, the minimum admission price to home ownership for financing a deposit is set at five percent. This is not inclusive of 100% financing, also known as cash-back down payment mortgages, as they might not be around for long and are usually ill-advised.
Respondents of the TD poll estimated that saving a five percent down payment takes about two years or less, and saving 10 to 20 percent down payment takes one to four years.
You are not the sole person who finds this as optimistic
Saving a down payment is not as easy for today’s highly leveraged customers as it was in the early 1980s when personal savings rates surpassed 20 percent.
Based on a May estimate from mortgage insurer Genworth Financial Canada, the average national purchase price for a first-time buyer has soared to approximately $295,000. This implies that the typical first time, to cover the minimum five percent closing and down payment costs would have to save more than $16,000.
How much time do young people take to gather that sum of money?
According to Doug Porter, deputy chief economist at BMO Capital Markets, the median family income is slightly less than $70,000, and the rate of savings has been fluctuating near four percent. He also adds that by this measure, the median family would be saving roughly $2,800 per year.
According to CMC, the annual cash savings of first time purchasers, who are on an average 34 years of age, would be slightly less than that of the median family. Obviously, taking away a good chunk would be tougher for a single individual.
Mr. Porter stated that he suspected that on a median basis, it would take about four to five years of saving, just to get a toehold in the housing market, with five percent down payment. He also stated that first time buyers are facing a stiff challenge accumulating a down payment.
According to him, that might be one of the reasons why the government has not hiked the minimum down payment.
None of the above is intended to discourage people from saving for a real estate deposit. Saving for a longer duration provides you a bigger cushion in the scenario that the home prices fall and you need to sell. Nobody wants to owe more than their home is worth.
It also provides you with a better entry price in case the market sells before you purchase. A price correction over in the next couple of few years is the most likely scenario, according to surveys of housing forecasters.
Regarding mortgage costs, purchasing with 10 percent equity versus the five percent minimum can save up to $80 per month in payments for the typical entry-level purchasers, as well as nearly $2,400 in default insurance premiums. However, an increase in home values can easily overshadow these savings. Purchasing today also allows you to lock in abnormally low fixed mortgage rates for up to ten years.
However, as a first-time buyer, you have got to consider other things, including:
• Your rental costs: Are they lower or higher than your probable ownership costs?
• Optional uses for your down payment money: Will you be able to obtain better returns by investing down payment funds somewhere else?
• Your emergency fund’s price: Home ownership is bundled with a huge list of unexpected expenses.
• Your economic stability as well as your future earning capability
There are several methods to stitch together a bigger down payment.
• Cut down on your spending: According to Mr. Porter, individuals saving for a house should be slightly more aggressive than the typical saver.
• Tap into the bank of dad and mom. A lot of young people get started as homeowners with the gift received from their parents.
• Take advantage of the Home Buyers’ Plan to borrow from your RRSP
• Apply for bonuses and tax returns
• Owners of two cars should get rid of one car
• Defer a vacation for a minimum of 18 months
• When applicable, use municipal grants for first time home buyers (such as this one in Saskatoon, this one in Surrey BC, or this one in Winnipeg).
Marie Slay, director of mortgage advice at Deposit Financing says that individuals have to pay some shelter costs, either in the form of rent or mortgage. “As long as people ask themselves whether their job is stable, what type of money is coming in, if their income will decrease or increase, looking at their financial prowess, as well as saving money for potential increases in interest rates,” then the decision of purchasing a house sooner makes a lot of sense. Click here for more information on Marie’s points.
TD advises that first-timers should aim for 20% down payment for real estate financing. However, it could take a decade for individuals to save such a sum. Unfortunately, most young people cannot wait that long.