To buy or not to buy?
September 2, 2018 4:47 PM   Subscribe

How do you know how much savings is ok to put into buying a home?

i am trying to learn what is a reasonable amount of income to sink into my first home. I freelance and so my income fluctuates wildly.

I am looking at a property that had an accepted offer of $230K. I have $170K in cash and that's it for assets. The bank will loan me $90K, no questions asked.

I feel like all the advice I am getting - from the real estate agents, the banks, etc - is biased, so trying to find unbiased opinions.

West coast of Canada.
posted by miles1972 to Work & Money (19 answers total) 7 users marked this as a favorite
If I were in your shoes, I'd leave enough in savings to sustain yourself for 6-9 months. What are your monthly expenses?
posted by hydra77 at 5:15 PM on September 2, 2018

Leave yourself $10k to deal with unexpected repairs you'll discover needing in the first two years...
posted by TwoStride at 5:26 PM on September 2, 2018 [3 favorites]

The advice in my family is to take as big of a mortgage as you can and feel comfortable making the monthly payment on.

There are some good financial reasons to do this but just from a practical standpoint it means that a) you have the flexibility of having your savings available and b) if the housing market crashes the bank gets the short end of the stick while you keep your savings.

Financially, in the U.S. the mortgage interest deduction is a great cash giveaway — it basically refunds about 30% of the mortgage interest you pay. Put your savings into any basic investment and I guarantee you will earn more from it than from trying to reduce your house payment.

I’ve been following this advice for 25 years now and it has worked fine for me. No complaints from my siblings either.
posted by Tell Me No Lies at 5:35 PM on September 2, 2018 [13 favorites]

We'd need more information to give you meaningful advice. I suggest you ask yourself the following:

1. Are you able to put down 20% and get a reasonable rate (say, less than 4.5%) on a mortgage for the remainder?
2. What will you have to pay monthly, and what are your anticipated expenses? Will you have enough to live on and save? What if business drops 50%?
3. If your worldly assets come to $170K and you put this into the house, what will be left for a personal and house emergency fund? What about your retirement savings?
posted by Atrahasis at 6:06 PM on September 2, 2018 [2 favorites]

A 25% down payment (about 60 grand) should get you a nice, rate-locked mortgage with a reasonable monthly payment. So take a 30 grand loan and put 30 grand savings down, that's what I might do in your situation. I'm not a lawyer or RE professional and this is not advice.
posted by vrakatar at 6:06 PM on September 2, 2018 [2 favorites]

When we bought our house we had the 20% down payment + $8k for necessary house repairs/purchases (for us it was new carpet for one room, paint, new door, light fixtures, lawnmower, which added up) + 5 months of living expenses in an emergency fund (using your new mortgage payment to calculate your expenses).
posted by gatorae at 6:19 PM on September 2, 2018 [1 favorite]

Sigh, upon rereading your question I notice you explicitly say you’re in Canada, which means the mortgage tax exemption doesn’t apply. So not quite as good a deal and you’ll need to work out what you can earn from investments vs. what paying down the mortgage would do.

My gut says it will be close to a wash and you’re still better off keeping a maximum comfortable mortgage for practical reasons.
posted by Tell Me No Lies at 7:26 PM on September 2, 2018

If you're able to get a large mortgage that doesn't penalize you for early repayments and has a redraw facility, you can use it pretty much like a savings account anyway: get the mortgage, dump the lion's share of your savings into it as a massive early repayment, then pay the remaining 90K off over time. If you need a chunk of change that you would otherwise have dipped into your savings account for, redraw it from the mortgage. Provided you're actually keeping up with the mortgage repayments, you'll retain access to your whole savings amount until the years-from-now end of the mortgage period.

If you keep savings in a separate account instead of dumping them into the mortgage loan, then your mortgage racks up interest on that amount at a higher rate than your savings account will accrue it at. The more money you set aside in savings, the worse this effect gets.

In effect, money in a savings account is money you have lent to the bank. It doesn't make a lot of sense to have a large loan from the bank at the same time you've got a large loan to the bank, if the loan from is costing you more per dollar borrowed than the savings are paying you per dollar lent. The only good reason to do that is if you've found a mortgage with no redraw facility that's so compellingly cheap as to make up for it; with savings account interest rates as low as they are right now, that's a pretty rare beast.
posted by flabdablet at 7:30 PM on September 2, 2018 [4 favorites]

Of course, if your savings are currently invested in assets that are yielding a greater rate of return than the interest rate on your mortgage, the above considerations are reversed, and the rational thing to do becomes keeping as much of your investment fund out of the mortgage as its repayment terms allow, for as long as you possibly can.

Get tax advice too.
posted by flabdablet at 7:33 PM on September 2, 2018 [1 favorite]

then your mortgage racks up interest on that amount at a higher rate than your savings account will accrue it at. The more money you set aside in savings, the worse this effect gets.

That assumes you’re keeping your money in a low-interest savings account. If you’re in some 5% bonds you’ll outstrip a 4% mortgage, and depending on how you choose to invest your savings you may do much better than that.

If you need a chunk of change that you would otherwise have dipped into your savings account for, redraw it from the mortgage.

Keep in mind that withdrawing money from a mortgage can take weeks if not months. For me, when I’ve really needed to dip into savings, time was a factor.
posted by Tell Me No Lies at 7:39 PM on September 2, 2018 [1 favorite]

Whups, should have previewed,
posted by Tell Me No Lies at 7:41 PM on September 2, 2018 [1 favorite]

withdrawing money from a mortgage can take weeks if not months

With my bank (which was still a credit union at the time I got my mortgage from them) I could do it instantly using their online banking facility. There was a $20 redraw fee if I recall correctly, but no time lag.

Shop around.
posted by flabdablet at 7:46 PM on September 2, 2018

Consider a 20% down 15 year mortgage (instead of 30 year). If you can swing the payments, you'll save a ton of interest.
posted by H21 at 8:13 PM on September 2, 2018 [2 favorites]

The banks should be loaning you more than 90k. You should put down 20% ish. Please don't spend it all in the house. There are better investments.
posted by Kalmya at 8:34 PM on September 2, 2018 [1 favorite]

Canada advice: minimum 20% down to save on CMHC mortgage insurance. Assuming you’re in BC, you’ll have to pay a land transfer tax, so find out the amount. I’d probably put more money down, but talk to a bank/ mortgage broker and look at the amortization schedule on the mortgage. Paying half the monthly payment biweekly bets you an extra payment per year, which saves on interest. Good luck!
posted by Valancy Rachel at 8:37 PM on September 2, 2018 [1 favorite]

Canada advice: minimum 20% down to save on CMHC mortgage insurance

Because CMHC insurance protects the bank it is possible to get a better interest rate if you put less than 20% down. Compare total cost of borrowing (interest rates + CMHC premiums) at different downpayments.

With fluctuating income you will want to keep a sizeable amount of savings to take you through lean times.
posted by saucysault at 11:45 PM on September 2, 2018

Without your income it’s hard to say what you should spend. Do you have a fairly consistent annual income or does that fluctuate too? The conventional wisdom is to spend up to 28% of your gross (pre-tax) income on a mortgage or rent. You’ll need to include home insurance and taxes into your number, but let’s say you put down $140K and take a loan for the $90K, you’ll be paying about $500-700 a month depending on the mortgage type (looks like Canadian mortgages are 25 year, adjustable rate).

Personally I would put down a bit less in order to have a robust emergency fund, so I would suggest looking up a mortgage calculator and seeing what monthly payment feels comfortable to you. Your realtor should be able to help with estimated taxes and insurance. Things will break the first year in your house, so more cash is better.
posted by rainydayfilms at 4:25 AM on September 3, 2018

You're asking two interrelated but distinct questions here. One is about income, and the other is about your savings/net worth.

1. Do I have enough bucks to buy this house? There are several rent/buy calculators out there, and the NYT one is the most detailed. Generally, you need to be earning a minimum of enough bucks to service the mortgage and feed yourself, with a generous margin of error in there for life to happen. You haven't mentioned what your income is, so it's impossible to comment in more detail. But another sign is -- if a bank is not willing to lend you at least 80% of the value of the house, they're basically saying you're not a good bet. That sounds like it might be the case here. You should strongly consider their reasoning.

2. How much of a down payment should I provide? Again, this is a judgement call, but as a lot of answers above have hinted at, liquidity of your funds is a big deal. If you have 90% of your net worth invested in a non-liquid asset like a house, it's not hard to get into a bad bind. And that bad bind may put your non-liquid asset at risk too (eg, you have to sell at a not-great price that you wouldn't ordinarily accept, just to access/raise -some- cash). If your income is variable, you need more of a savings buffer.

It also depends on the interest rate you're offered by the bank. The lower the interest rate, the more you want to borrow, because you can then use your own money to invest and "beat" the interest rate you're paying, with what you earn. If you got a mortgage at 3% and the market is returning 5% (this was common in the past several years), by all means, borrow a lot and invest the rest! But if your mortgage is 8% and the market is returning 5%, you will end up net paying, so borrow less.

In your specific case, with fluctuating income, I'd borrow as much as the lower bound of your income will safely allow, and then work on prepaying or recasting the mortgage when bigger chunks of income arrive.

And you are absolutely correct that the advice you get from most people -- mortgage agents, real estate agents -- is biased strongly in the direction that gets them paid: they want you to buy. Even banks -- many of them resell your mortgage (not sure if that's true in Canada?), so they'll tease you with a number that is not truly affordable, just so they get a piece of the (your) pie by originating the loan, then passing it on. There is a great deal of forwards inertia when you start thinking about buying. Resist!
posted by Dashy at 11:49 AM on September 3, 2018

We need to know more:is this a

1) apartment part of a complex with maintenance taken care of or
2) an apartment
3) a house
4) a very old house

because the amount you need to have liquid in case of problems (e.g. in a house, 20k-100k for a new roof, anyone?) goes 1<2<<3<4
posted by lalochezia at 2:36 PM on September 3, 2018

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