Down Payments : Why 10% down on a house worked for me
Last year when I started my house hunt, I had almost $55,000 earmarked for a down payment. I was able to come up with this amount after five years of saving, and using the Home Buyer’s Plan. This gave me the 20 per cent I needed to put down on my $259,900 home in order to avoid CMHC fees.
After careful consideration, I chose to only put down 10 per cent and rolled the CMHC insurance premium of $5,128 into my mortgage. I used the rest of the money for closing costs, to repay a car loan and do some small move-in renovations. The decision was a tough one, but I believe the right one.
Lower monthly debt payments
I owed $17,500 on a car loan, which I was paying $270 bi-weekly at zero per cent interest. My minimum mortgage payment is $1,098, so when I added the two together, my monthly repayment was $1,638 per month, or about 24 per cent of my gross monthly income.
Even though I was fortunate to have a zero per cent interest loan on my car, I thought it was best to just focus on my mortgage payments.
I could have handled the car payments and mortgage at the same time and I had a $10,000 emergency fund in the bank, and I knew only putting down 10 per cent meant I would be paying much more interest in the long run. But as a single income homeowner in an unstable job market, I felt more comfortable with a lower monthly debt obligation.
Accelerated mortgage payments
I increased my mortgage payments to an accelerated bi-weekly schedule, and added an additional 20 per cent on top of each payment made. My plan is to contribute a lump sum payment every year on the anniversary and put any ‘found’ money towards the mortgage as well.
By being diligent with extra payments, I will be able to significantly soften the blow of having to pay the insurance premium.
When it comes to personal finance, sometimes the most logical approach isn’t necessarily the best approach for your situation. For example, many people put money into an emergency fund, or an RRSP when they still have a balance on their credit card. They will end up paying more interest by not putting all of their available resources towards their debt, but having a small cushion of money in the bank might be worth it to some people.
Another example is the popular snowball method of getting out of debt. By utilizing this strategy, the smallest debt amount is paid off first, instead of the debt with the highest interest rate. Mathematically, it doesn’t make any sense, but it works for millions of people because they get to see the results of their hard work sooner, and that gives them the motivation to keep going.
I have no regrets. With more money freed up in my budget, I can aggressively pay down my mortgage, travel, and save for retirement.
By: Krystal Yee