Why is it better to pay large down payment?
When deciding to enter into the world of home ownership there is an incredible amount of factors that need to be taken into consideration. One of the most important, and the one that will affect you the most down the road, is how much of a down payment you should put on your home. While it is not always possible to make a larger down payment, taking that extra bit of time to save or going with a home that is not at the top of your budget can make a staggering difference in the short-term and long-term.
When you pay a smaller down payment on your home it means that you are borrowing a larger amount of money. By keeping borrowing to a minimum you may also have a lower interest rate. Lenders feel more comfortable giving mortgages to people who pay a larger down payment because they can more easily get their money back if you default on your loan. The smaller the risk, the less they charge, which is money in your pocket.
A Large down payment on your home you end up reducing your monthly costs. Most mortgages are 30-year mortgages, though it is worth mentioning that you can have smaller mortgages, as short as 15 years, and larger mortgages, as long as 40 years. Putting down a larger down payment, however, will mean that your monthly payment, regardless of how long your mortgage is, will be lower. This can protect you if your liquid assets shrink due to job loss or other unexpected difficulties.
When you put down a larger down payment it means that usually, you can borrow against what you purchased. If you suddenly need to do renovations or purchase a car you can borrow against your home, which also helps consolidate your debt. If you put down the absolute minimum, however, then you will most likely not be permitted to borrow against your home, which could put you in a financial bind.
The regulation in Canada regarding mortgages have changed as of January 1st, 2018. In the past, it has usually been that the smaller your down payment, the higher the chance is that you will have to purchase private mortgage insurance. The new mortgage stress test introduced in Canada will put more people into this category than before, and so it is more important than ever to have a larger down payment.
With a larger down payment you will owe less money over time. Here is a simple example. Let’s say that the home you purchased is worth $350,000 and that you put $70,000 down (20%). If you get a 30 year mortgage, with an interest rate of 4% you will pay $11,200 in interest. If you instead put a down payment of $105,000 (30%) with the same 30 year mortgage and 4% interest rate you will pay $9,800 in interest.
When you have a higher down payment, you can sometimes boost your chances of getting the home you want when you are in a multi-offer situation. When someone is selling their home they want to select a deal that has a high likelihood of closing. With a small down payment, there is a higher chance that there will be a failure to obtain proper financing, causing the deal to fall through. Having a larger down payment gives the seller a sense of ease that the deal will be successful, and can help you get the house you want.
Purchasing a home for the first time can be daunting, and having a larger down payment than needed can make everything go smoother. Sometimes this may mean having a smaller overall budget, limiting yourself to a $500,000 home rather than a $600,000 home, but the benefits exceed the negatives when it comes to making the biggest and most significant purchase of your life. If you need to refinance your mortgage or any other mortgage needs, feel free to browse our website OR, give contact us.
