If you’ve been reading my blog over the past year or so, you’re no stranger to the fact that I’m currently saving $40,000 for a down payment on a home. My ideal goal is to buy a home worth around $300,000 with a $35,000 down payment and $5,000 set aside for closing costs, hence the goal of $40,000.
While this is my maximum price point and my maximum savings goal, I’ve written many blog posts where I theorize the financial ramifications of purchasing various properties with various amenities at various price points with various down payment sizes.
In these blog posts, I always try to show my work and demonstrate how buying a home will affect my finances.
But, inevitably in the comments somewhere, someone will ask why I don’t “just save 20%.” So I’m going to address the 20% down issue once and for all.
Why a 20% Down Payment is Best in Canada
First of all, putting 20% down on a home in Canada is an excellent idea. If your down payment is smaller than 20%, your mortgage is considered “high-ratio” and you have to buy insurance to protect your lender in the event of default.
You typically buy this insurance from the Canadian Mortgage and Housing Corporation (CMHC), and it’s a percentage of your home’s value. The bigger your down payment, the smaller the percentage, until you get to 20%, and then you don’t have any at all. As an example, if I were to buy a home for $269,000, here’s how much CMHC insurance I would have to buy with different down payment amounts:
- 5% ($13,450 down) – $9,200 in insurance
- 10% ($26,900 down) – $5,810 in insurance
- 15% ($40,350 down) – $4,166 in insurance
- 20% (53,800 down) – $0 in insurance
Whatever the amount, the CMHC insurance you buy up front is rolled into your overall mortgage amount. Adding this amount to your mortgage is bad because a) it eats into your home equity and b) you’re paying interest on it for 25 years.
Why I’m Not Saving for a 20% Down Payment
Even though putting 20% down on a home makes financial sense, I’m not going to do it.
Typically, if someone asks me why I’m not going to put 20% down on my home purchase I respond one of two ways:
Because I’m not made of money.
Because I’m not a robot.
Snarky, I know. This is a perfectly reasonable question to ask, but I’ve gotten it so many times that my well thought-out and reasoned answers are slowly getting shorter and less informative. So here is the long version, which I will link to when people ask this question in the future.
Because I’m Not Made of Money
Saving money takes time. The more money you save, the longer it takes. I’ve been saving for a home since March 2015, but my actual journey towards home ownership started long before that.
It started four years ago when I began aggressively paying down my debt. Then I had to build an emergency fund, start saving for retirement and then a big move to my new city, before finally, finally getting to the point where I could save for a house.
At my current rate of savings, I should have $35,000 saved by the end of this year. That means I’ll hit the $40,000 next Spring. From start to finish, that will equal six years of getting my financial house in order so that I can buy a home. That is long enough for me.
If I wanted to wait until I had 20% down for my maximum budget of $300,000, I would need to save $65,000. At my current savings rate, I wouldn’t be able to start house hunting until March 2018, a whole year later, which brings me to my next point:
Because I’m Not a Robot
If I were a robot with no emotions, I’d be totally cool with waiting that extra year. It makes logical sense to avoid paying CMHC fees. My monthly carrying costs would be lower, and I’d have more equity in my home.
But you’re leaving out the human element of that equation, and the human part of me says I don’t want to wait that long to buy a home. Sorry, I just don’t. I’m over living in an apartment, I’m over not buying furniture or putting stuff on my walls because we’re just going to move again, I’m over not having a yard or any sense of permanence.
I don’t want to live here for two more years. I just don’t. I am fully aware that this is a want and not a need. I don’t need to buy a home, and I don’t have to move out of this apartment. I want to.
Call me an emotional millennial if you want. Maybe I am, but I would rather hear you guys tell me how foolish I’m being than hide this fact from you.
I’ll Be Fine with a $40,000 Down Payment
While I certainly want to buy a home sooner rather than later, I’m not prepared to ruin my financial future in pursuit of homeownership. I will be fine with a $40,000 down payment.
With my goal of saving $40,000, I’ll have enough of a down payment to be very comfortable up to my maximum price point of $300,000. My monthly carrying costs will be less than 35% of my net income (actually around 30% with freelance), I’ll start out with some equity, and I’ll only pay around $5,000 for CMHC insurance. I’ll also have plenty of money left over in my budget to save for retirement, save for a car in cash, and renovate my new place.
In fact, I’m planning on increasing how much I save for retirement post house purchase, how new homeowners can say that?
I May Even Buy Before I Hit My Goal
My goal of saving $40,000 for a down payment isn’t a hard rule. My real rules are the criteria I listed above:
- save enough that I can put 10% down on a home
- minimize my CMHC insurance costs
- have some decent equity starting out
- pay less than 35% of my net income towards housing costs
- have plenty of money left over for other goals
If a home came on the market tomorrow that was perfect and satisfied those conditions with my current down payment amount, I would buy it. $40,000 is just an ideal number, not a hard rule.
So that’s why I’m not saving for a 20% down payment: I don’t need to, and I don’t want to.
How much did you put down on your first home? Would you put down more or less if you could make that choice again? I want to know!
Photo Credit: Kevin Morris