Friday 25 September 2015

Buy now or save more down payment?

The graphic to the side below is a chart from [a Globe and Mail article] where the author demonstrates that the traditional advice to save a 20% down payment to avoid the mortgage insurance premiums is out of date for those living in active real estate markets.  They do a great job of analyzing the interest cost of a conventional (20%+ down payment) versus an insured high ratio mortgage.

However, one thing that is missing from this analysis is the equity position.  If you look at just the left column which shows what happens if you buy now with only 10% down and the worst scenario they present on the right hand column where you wait 3 years to save more down payment and prices only appreciate 2% per year, it looks like you'd be a little bit ahead on the right hand column.  Because your total interest cost for the 5 year mortgage term would be $43,923 compared to $47,681.

Something we should also keep in mind though: if you bought today at $433,367, then in three years the house would be worth $459,893 at this more tepid rate of appreciation.  So while you might save $3,758 in interest by waiting and saving more down payment, you've lost out on $26,526 worth of equity growth.  And of course, the equity loss is even greater in the two middle columns, on top of the interest cost losses.

While these are only a handful of scenarios and the market could play out in many different ways with the interest rate and prices, I think it easy to see that it's a pretty safe bet that you're better off buying now, if you can, than waiting to save the down payment.

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