Think that a 5 percent down payment is enough to secure a great mortgage rate? Think again. Pulling together the minimum 5 percent down payment, while a good start, is just that – a start. If you’re a first time home buyer looking to move up the property ladder, don’t skimp on your down payment. If you’re having trouble pulling together the 5 percent minimum, you’re setting yourself up for a hard, long haul.
Why the Minimum isn’t Enough
Housing prices are extremely high in many Canadian urban markets these days, but what consumers don’t understand is just how high this price climb is in respect to personal disposable income. If you look at metrics, like the ratio of home prices to disposable incomes, the national average in 1980 was roughly an eight. Today, this same metric sits at a 12. In a hot market like Vancouver, that metric is actually closer to a 25 (Toronto has broke 15 in recent months).
Numbers don’t lie, and what they’re telling us is pretty problematic. Housing prices have grown significantly faster than personal disposable incomes over the past three decades, creating a financial environment that’s increasingly difficult to sustain. As more and more homebuyers sacrifice to save the minimal down payment on a Canadian property, industry professionals can’t help by feel anxious. Eventually, something will have to give. The question is, what?
Evaluating Options
A continual rise in house prices while personal incomes remain stagnate is likely to lead to a major market shift. As such, there are really only three ways the market can go:
- If prices are to continue rising, incomes will have to shoot up dramatically (unlikely).
- Housing prices will need to fall.
- A period of protracted stagnation in the housing market will occur as incomes slowly increase and the economy bounces back.
Should I Buy Now?
Historically low interest rates are the driving force behind home ownership at this time. However, first time home buyers need to be careful before signing on the dotted lines. While TD mortgage rates and RBC mortgage rates are low, there’s a very good chance that these rates will be significantly higher in just a few short years. If you’re having trouble pulling together a down payment now, imagine how difficult it will be to handle your monthly mortgage payment when it’s 2 or 3 percent higher than current rates? Many people have a tendency to live precisely at their means, rather than within them, a fact that is becoming more and more evident based on the current market.
Why You Need to Beef Up Your Down Payment
If you’re anxious to get into the market now, while prices are low, it’s important that you take the time to secure a sizeable down payment. Don’t just settle for the minimum – aim for the standard 20 percent. If that sounds crazy, it’s likely because your income can’t support the home you’re dreaming off. Remember, the higher your down payment, the smaller your mortgage requirements and the lower your interest payments will be in the long run.
Think about it: if the market corrects itself and prices begin to fall, the down payment you’ve been saving will become even more powerful. If the market continues to climb, at least you’ll be better prepared for the financial commitments of homeownership.