Are you on the road to becoming a first-time homeowner in Calgary? Here's how to determine how much your mortgage down payment should be.
Owning a home is a huge investment and while it comes with many benefits, such as increased control over your living space, limited financial risk, and increased investment power, it also comes with many associated costs, including:
- mortgage down payment
- mortgage life insurance
- utilities
- maintenance fees
- property tax
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What is a Mortgage Down Payment?
A down payment is the amount of money you are able to spend upfront to buy a home. It’s typically combined with a mortgage to fulfill the total purchase price of the house. How much of a loan you can qualify for will depend on a number of factors including your:
- Down payment amount
- Credit score
- Credit history
- Total debt
- Annual income
How does a mortgage down payment work?
The size of your mortgage down payment will impact your loan amount, interest payments, and mortgage life insurance costs.
- A larger down payment means that you’ll have to spend more of your savings, but it will allow you to take out a smaller loan amount, leading to lower overall costs.
- A smaller down payment will be more affordable at the time of your purchase, but it can lead to more costly monthly mortgage payments.
How Much Should I Spend on My Down Payment?
As a homeowner, you can often choose just how large of a down payment to make, but the decision is not always easy. Some people believe that bigger is always better, while others prefer to keep the payment as small as possible.
Here are the pros and cons of each to help you make the right decision for you and your family.
Pros & Cons of a Big Down Payment
If you can afford it, a bigger down payment helps minimize borrowing because the more you pay up front, the smaller your loan. In addition, a big down payment will:
- Allow you to qualify for a lower interest rate. A big down payment will lower your lender’s risk and potentially reduce your interest charges.
- Give you a smaller monthly burden. A big down payment leads to lower monthly payments and this can make your life easier, especially if your income changes (eg. due to job loss).
- Give you future borrowing power. Lower monthly payments due to a big down payment can make it easier for you to qualify for additional loans in the future because lenders like to see you have more than enough income to meet your monthly obligations.
Keep in Mind
While there are many benefits of making a large down payment, it does mean that a huge chunk of your money will be tied up in your home. This can be problematic if:
- You are suddenly facing an unexpected expense (eg. medical bills) and you don’t have an emergency fund to deal with it.
- Your home is foreclosed, because you will have lost that money.
- You sell your home for less than you paid.
Pros & Cons of a Smaller Down Payment
A smaller down payment is appealing to many people, for several reasons, including:
- You can buy your home sooner. Saving a big amount (25-30%) for a home purchase can take many years and for some people, they would rather pay less upfront and get a house sooner.
- You’ll have enough money to build an emergency reserve. When you spend less on a down payment, some of your money can go into an emergency reserve to deal with issues such as illness, or a car breaking down.
- You can make home improvements. For some new homeowners, they would rather spend less on a down payment and keep some cash on hand for the inevitable improvements and repairs in the years to come.
- You can use the money for something else. By spending less on an upfront home payment, you can save your money for other purposes such as retirement savings or growing your business.
However, it’s important to note that a smaller down payment will mean you’ll face highly monthly mortgage payments and your loan is likely to come with a higher interest rate.
Call Today
To find out more about our flexible and affordable mortgage life insurance policies and how we can help you protect your most important investment, contact us at 1-844-974-2020 or fill in our online contact form.
