Ontario real estate: what's the best downpayment percentage?

April 24, 2017 3:49 PM

Buying our first house. Should our downpayment be large or small?

My common-law partner and I are looking into buying a multi-unit house in Toronto. We'd like to live in one unit and have 1-2 rental units.

I have steady gross income in the $80-90k range, and $60K in recent student debt that I am paying off really responsibly.
Partner works freelance, makes $20-60K, and has zero debt and 180k in savings. We both have excellent credit.

House price will be $600-625K, and rental income will be about $1000-1500 / month. It will need minor renovations, under $10K.
We're both first-time homebuyers. We have previous superintendent experience, so we're confident about making the rental income.

Would we be better off to
(a) Make a 5% downpayment and pay the penalties?
(b) Make a 10% or even 20% down payment to reduce our mortgage/penalties as much as possible?

Anything else we should consider? Thank you!

posted by anonymous to Work & Money (11 answers total)

Your downpayment should be as small as possible to avoid penalties and extra fees, assuming you can handle the cash flow.

You can always pay down the mortgage later with the extra savings if you want to (depending on prepayment penalties).

Avoiding fees/insurance/penalties saves you money. After that it's just a question of asset allocation.
posted by GuyZero at 3:51 PM on April 24, 2017

I agree with the larger downpayment, which can also sometimes get you a better rate on top of avoiding insurance and penalties.
posted by saucysault at 4:11 PM on April 24, 2017

Guy has it backwards above - a general rule of thumb is to make your payment as large as you possibly can - the faster you can pay off the "Front end" of a mortgage (assuming principal plus interest loan), the faster the proportion of interest you pay is. It's very hard to beat the savings by putting the money anywhere else.

Having to pay penalties and god forbid mortgage insurance is a total waste of money you will never get back.
posted by smoke at 4:11 PM on April 24, 2017 [2 favorites]

In addition to avoiding having to pay CMHC insurance you should check to see what your mortgage requirements will be with respect to the down payment. Some lenders will require a higher down payment if the property will be a rental.
posted by any portmanteau in a storm at 4:24 PM on April 24, 2017 [1 favorite]

Your downpayment should be as small as possible to avoid penalties and extra fees, assuming you can handle the cash flow.

I take this to mean, "as small as you possibly can without having to pay extra to CMHC." That means 20%.
posted by monkeymonkey at 4:33 PM on April 24, 2017 [1 favorite]

So much depends on individual goals and risk tolerance. I'd crunch the numbers factoring in mortgage insurance, how much you expect your investment to net vs your eligible mortgage rate, keeping an emergency fund especially for home repairs, paying off higher interest debt first, etc. Also when I went to renew my provider was offering a lower rate for a five-year term to borrowers looking for a high-ratio mortgage.
posted by alusru at 5:04 PM on April 24, 2017

I would put down 20% and invest the rest. Mortgage rates are so low that the money is better used earning a return somewhere else. Plus you'll want to set aside a nice chunk for those renos and repairs and miscellaneous costs.
posted by The Hyacinth Girl at 4:14 AM on April 25, 2017

I think you will be hard pressed indeed to find a reasonable risk investment that pays more in interest than the bank will exact, hyacinth girl.
posted by smoke at 5:08 AM on April 25, 2017

Additionally, because P and I loans are so heavily front loaded, it's not just the interest this year that competes with a hypothetical investment, missing chances to make early payments means that the life of your loan is extended, often by years, and interest rates could be very different by then.

I'm not speaking idly; we've been lucky enough to take over a decade off our thirty year loan by front loading. When interest rates do go up, we won't be paying anywhere near so much interest as a result - something that will save us tens of thousands of dollars.
posted by smoke at 5:13 AM on April 25, 2017

True, smoke. I guess I've been lucky and have a good financial advisor who understands my risk tolerance. For me the trade off was worth it, but it may vary.
posted by The Hyacinth Girl at 5:54 AM on April 25, 2017 [1 favorite]

GuyZero's advice on minimizing down payment makes more sense in the U.S. because mortgage interest is deductible and the government is effectively subsidizing your debt. This is not the case in Canada so a lower debt is advisable.

As he says, you should make a down payment large enough to avoid penalties or fees. At the same time you don't want to house rich and cash poor. You need to keep enough of a cash cushion to handle unexpected emergencies. You don't want to ever be in a cash squeeze situation where you have to default on mortgage payments because of a major repair or a tenant moves out unexpectedly.

You would have to post more detailed information on the exact interest rates, penalties and fees for your alternatives to get a better answer.
posted by JackFlash at 3:36 PM on April 25, 2017 [1 favorite]