This is the question that many home buyers ask themselves when preparing to purchase a home. If you were to ask 100 people their opinion, most likely half would recommend saving up the 20% and the other half would recommend to go in with what you have (minimum 5%) and purchase the property. I believe in selecting the high ratio mortgage and purchasing your home with 5% -19% down payments, instead of waiting to save 20% or more. Below is some reasoning for this option.
Based on the current market, the price of homes are not expected to increase over the next 10 years by the same amount as they did for the previous 10 years, however steady growth is still expected in the Toronto real estate market. Today property values in and around Toronto have practically doubled in value since 2003. For example, a $250,000.00 home in 2003 is now worth possibly $500,000.00. Probably sell for more in this current market. A property value increase from $250,000.00 to $500,000.00 in ten years represents a $25,000.00 increase per year or an average of 10% per year.
Let us look at a scenario where we compare a buyer investing a 5% down payment ($12,500.00) in 2003 to purchase a $250,000.00 home compared to a buyer who had 5% down payment as well but preferred to keep saving to reach 20% total down payment.
Let us assume the buyer with 5% down payment who wanted to save up the 20% would have taken 5 more years (unless they got help from parents) to save up the 20% down payment. If you also take into account that home values were increasing by 10% per year, the 20% down payment required would also be increasing based on current property values as well. Based on this example, in 5 years, the property that they could have bought in 2003 for $250,000.00 would be worth $375,000.00 and they would need $75,000.00 to get in at 20%. The buyer’s equity would be their down payment of $75,000.00. Crazy, right?
The person who invested 5% down payment back in 2003 now has a mortgage balance owing of $212,000.00 (this would have included the mortgage insurance premium based on high ratio mortgage) based on payments over 5 years. Their current equity in the home valued at $375,000.00 is $163,000.00.
I am not advocating to always put down the minimum down payment. If you have more than 5% or even 20%, by all means put down as much as you can, as it reduces your mortgage cost. However, if you do not have the larger down payment and it is going to take you a few years to save up a larger down payment then you should go with a high ratio mortgage and get into home ownership. The long term benefits can far out way the initial extra costs.
This is my opinion and I know it is not fitted for every buyer. Investing in real estate is like investing in any other investment security and your overall risk tolerance does play a factor.
Contact Robert Clancy today to see if now is the time for you to purchase while the market is hot!