Graham Ogden

B Comm and Realtor®

Direct: 1 780 908-1224 |

Reaching for 10% Down...What Will It Really Save You?

I understand that for many people, reaching the minimum 5% down payment is already very tough.  But if you are in a position to put down more, the structure of mortgage default insurance premiums definitely gives you a reason to do it.  If you have less than 20% down payment when you purchase a home you will need to pay a mortgage default insurance premium.  This protects your mortgage lender if you default on your mortgage. In June of this year, mortgage default insurance premiums were increased for 5% down payment mortgages from 3.15% to 3.6%.  The increase was meant to better align costs of premiums to risk level; if you have more down payment you are less likely to default.  The impact of this increase is that those with 5% down payment have significantly higher transaction costs, providing more incentive to reach 10% down payment. 


The Difference in Premiums for 5% Down Payment vs. 10% Down Payment

On a $400,000 purchase, here is how the fees differ:

5% Down Payment: 

$400,000 mortgage - $20,000 down payment = $380,000 mortgage

$380,000 x 3.6% premium = $13,680 premium

Total loan amount is $393,680.


 10% Down Payment:

$400,000 mortgage - $40,000 down payment = $360,000 mortgage

$360,000 x 2.4% premium = $8,640 premium

Total loan amount is $368,640.


25% Return!

These premiums are rolled into your mortgage so it is easy to overlook the significance of these transaction costs. In our example above, if you come up with $20,000 more down payment it saves you $5,040 in insurance premiums. That kind of return on your funds would be pretty hard to beat if those funds were invested instead.   

Other Benefits of More Down Payment

  • Better equity position to weather value changes - You will also benefit from having a higher equity position in your home should the values of homes decrease.  With 5% down payment, you have roughly a 1.6% equity position the day you move in.  With a 10% down payment you have roughly an 8% equity position the day you move in.
  • Lowers your interest costs - You have a smaller mortgage loan, lowering the interest you will pay over the life of your mortgage.
  • Lower mortgage payments - By decreasing your loan amount your monthly mortgage payments will also drop.

Managing your transaction costs is another important part of looking at the overall cost of your mortgage.

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Today’s Bank of Canada rate hold announcement marks almost four straight years that the key benchmark rate has remained unchanged, since September 8, 2010. Great news if you have a variable-rate mortgage or home equity line of credit; the prime rate stays at 3%.

 

The announcement noted that “the risks to the outlook for inflation remain roughly balanced, while the risks associated with household imbalances have not diminished.” With these considerations, the Bank is maintaining its monetary policy stimulus, and remains neutral with respect to the timing and direction of the next change.

 

The next rate-setting day is October 22nd.

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Data is deemed reliable but is not guaranteed accurate by the REALTORS® Association of Edmonton.