Should You Only Put The Minimum Down Payment On A New Home?
Mortgage choice is not solely about interest rates.
The size of a down payment is driven by a number of factors including income, financial obligations and lifestyle. A buyer has to sensibly know what he or she can afford and not over extend themselves.
A larger down payment…
- Reduces the amount of your monthly principal and interest payment
- Reduces the total amount of interest you pay over the life of your mortgage
5% is the minimum down payment when you buy and finance a new home but anything under 20% will require an insurance premium. This extra cost can be added to the loan but will increase the monthly payments. One way for first time buyers to increase the funds available is to use part of a Retirement Savings Plan (RSP) towards the down payment. The federal government’s Home Buyers’ Plan (HBP) allows first-time buyers and their partners to borrow up to $25,000 ($50,000 for couples) from their RSP tax-free, provided the money is repaid to the plan over the next 15 years.
As well as interest rates a buyer should also consider the type of mortgage, payment structure, terms and flexibility. All these factors will affect your day to day life and also how much the loan eventually costs:
- Variable vs. fixed rates. A variable rate mortgage fluctuates with the Prime rate, which allows you to take advantage of changing interest rates. When rates go down, more of your payment goes to pay the principal and less to interest, enabling you to pay off your mortgage sooner. When rates go up, the reverse happens: less of your payment goes toward the principal and more to interest, extending the time it takes to pay off your mortgage. A fixed rate mortgage locks in your interest rate for the term of your mortgage, which can provide the peace of mind of knowing exactly how much principal and interest you’ll pay for the entire term, as well as what your mortgage balance will be at the end of term.
- Payment schedule. Making more frequent payments is one of the ways you can pay off your mortgage sooner and save on interest costs. You can normally make weekly, biweekly, semi-monthly or monthly payments.
- Amortization. The amortization period is the number of years it will take to pay off your mortgage in full. Amortization periods can range from five to 35 years. The typical, and most recommended, is 25 years. Remember, the shorter the amortization period, the higher the mortgage payment, but the more you’ll save in interest costs over time. So, while an amortization period of 30 or 35 years can make a home more affordable by keeping monthly payments lower, it can increase your interest costs by as much as 50% over the life of your mortgage compared to a 25-year amortization. You can re-evaluate your amortization period each time you renew your mortgage.
- Payment options. Most lenders offer flexible payments options to allow for changes in personal circumstances.
Choosing the right mortgage option and terms depends on your housing needs, financial situation and lifestyle goals. Please do contact me for further advice. Make the correct decision and feel secure about your future.