Buying your first home in British Columbia is a major milestone and a significant financial decision. One of the critical questions first-time homebuyers often face is how much to put down as a down payment. In Canada, a down payment of less than 20% triggers additional costs, such as the requirement for mortgage insurance through the Canada Mortgage and Housing Corporation (CMHC). However, putting down more than 20% can have benefits and trade-offs, especially when considering interest rates, monthly payments, and long-term financial impact. Here’s a closer look at the pros and cons of having a down payment of less than or more than 20% and how CMHC insurance fits into the equation. Speak with one of our Okanagan Real Estate Agents to see which situation might benefit you best.
Why the 20% Down Payment Matters
In Canada, a down payment of less than 20% of the home’s purchase price requires mortgage default insurance through the CMHC. This insurance protects lenders if a borrower defaults, making it easier for buyers to qualify for a mortgage even if they don’t have a full 20% down. However, it also adds an extra cost for the borrower, which can impact the total cost of the mortgage over time.
Pros of a Down Payment Less Than 20%
- Lower Initial Cost
- One of the most immediate benefits of putting down less than 20% is that it allows buyers to enter the market sooner with a smaller upfront cash requirement. This is particularly advantageous in high-cost markets like Vancouver, where home prices can be prohibitive for buyers waiting to save up 20%.
- Opportunity to Invest Elsewhere
- A smaller down payment can free up funds for other investments or financial goals, such as retirement savings or education funds, which could potentially offer a higher return than the equity built in the home.
- Access to Potentially Lower Rates for Insured Mortgages
- Many lenders may offer slightly lower interest rates for mortgages insured by CMHC because they are considered lower risk. The insurance protects the lender, making it possible for them to offer a small rate discount compared to conventional mortgages (those with a 20% or greater down payment).
Cons of a Down Payment Less Than 20%
- CMHC Mortgage Insurance Premiums
- The primary drawback of a smaller down payment is the cost of mortgage insurance premiums. For a down payment between 5-19.99%, the CMHC charges a premium that ranges from 2.8% to 4% of the mortgage amount, depending on the down payment size. These premiums can add thousands to your total mortgage cost, although they can be added to the mortgage balance rather than paid upfront.
- Higher Total Cost Over Time
- While insurance fees are manageable, they increase the total cost of the mortgage, which means you’ll ultimately be paying interest on a higher amount than if you had put down 20% or more.
- Impact on Home Equity
- With a smaller down payment, you’ll have less equity in your home at the outset, making it harder to access additional financing through home equity loans or lines of credit in the future.
Pros of a Down Payment of 20% or More
- No CMHC Insurance Premiums
- When you put down 20% or more, mortgage insurance is not required, which can result in significant savings. For a $500,000 mortgage, the CMHC insurance savings alone can amount to $14,000–$20,000 or more, depending on the specific down payment percentage.
- Lower Monthly Payments
- With a larger down payment, your loan balance is smaller, resulting in lower monthly payments. This can free up cash flow for other expenses or savings goals, which is particularly valuable for first-time buyers managing a new set of homeowner responsibilities.
- Immediate Home Equity
- A larger down payment increases the equity you own in the home, which can be beneficial if you ever want to borrow against it for future investments or emergencies.
Cons of a Down Payment of 20% or More
- Higher Upfront Cost
- Saving up 20% or more can be challenging, especially in high-cost areas of BC. For a $600,000 home, that’s a $120,000 upfront investment, which can delay homeownership for many buyers.
- Less Flexibility for Other Financial Goals
- Putting down a large down payment may reduce the funds available for other important financial objectives, such as retirement savings, investment opportunities, or even emergency funds.
The Cost-Benefit Analysis: CMHC Insurance Premiums vs. Interest Rate Savings
When considering the cost of CMHC insurance, it’s essential to weigh it against potential interest rate savings. Here’s a breakdown of how CMHC premiums compare to interest savings:
- CMHC Insurance Cost: For a $500,000 mortgage with a 10% down payment, the CMHC premium would be approximately 3.1%, or $15,500, added to the mortgage amount. This premium allows you to enter the market sooner with less saved.
- Potential Interest Rate Savings: For insured mortgages, lenders may offer a small interest rate discount, usually around 0.1% to 0.25% lower than conventional mortgage rates. For a $500,000 loan over a 25-year term, a 0.25% rate reduction could save around $8,500 in interest over the first five years. While this won’t completely offset the CMHC premium, it does help reduce the overall impact.
Which Option is Right for You?
When deciding between a down payment of less or more than 20%, it’s essential to consider your financial goals, market conditions, and your ability to manage monthly payments comfortably.
- If you prioritize getting into the market sooner and can manage the added cost of CMHC insurance: A lower down payment might be the best option, particularly if you can invest the saved funds elsewhere for a potentially higher return.
- If you prefer lower monthly payments and want to avoid CMHC premiums: A down payment of 20% or more may be more advantageous in the long run, especially if your goal is to build equity quickly and reduce the mortgage interest paid over time.
Final Thoughts
Both options have their unique benefits and drawbacks. For first-time buyers in BC, the decision to put down 20% or less should align with personal financial goals, budgeting flexibility, and comfort level with debt. While CMHC insurance fees add to the cost of a smaller down payment, the potential interest rate discount and quicker market entry can be compelling benefits.
Working with a financial advisor or mortgage broker can provide tailored insights based on your circumstances, helping you determine which down payment strategy best fits your path to homeownership in BC.
