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Buying A House Now If You Only Have 5% Down Payment Could Make You $1,000,000 Richer

6 min read | July 17, 2019

# DownPayment

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BACK Buying A Home

"Keep Saving Until You Have 20%!"

You likely have heard this at least once in your life from your parents or friends. The underlying reason is because if you put less than 20% down (meaning your down payment is less than 20% of the purchase price of your property), you will have to pay mortgage insurance premiums. With today's housing prices, if you don't have 20% saved up now, waiting until you meet that goal will likely take you a very long time and hurt you financially. To illustrate our point, we’d like you to meet our hypothetical couple: Andy & Anne.

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Alex Leduc, CFAMortgage expert and startup guy

  linkedin-logo Alex Leduc

About Andy & Anne

Income: Together they make $85,000 per year before tax

Rent: They are paying $2,000/month

Expenses: They together spend $2,200 per month on everything else (phone, utilities, food, nights out, etc.).

Property Value: They want to buy a $500,000 home

Current Savings: They have accumulated $25,000 in savings (5% down payment)

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What is Mortgage Insurance?

If you have good credit and your property qualifies for insurance, you pay for mortgage insurance in order to put down as little as 5%. Without mortgage insurance, your minimum down payment is 20%. You can read more about mortgage insurance and if you'd be eligible to apply for it in our Guide to Buying a Home.

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How Long Does It Take To Save 20% Down?

It would take Andy & Anne 8 years to buy a home with 20% down!

Sounds unrealistic? Let's look at the main reasons why:

  • In the first year, Andy and Anne are able to save $730/month. In later years they contribute more as their salaries grow, so over the 8 years they are saving around $1,300/month.
  • To put down 20% on a $500,000 home, they’re short $75,000 ($100,000 - $25,000 savings). If they are short $75,000 and saving an average of $1,300/month, wouldn’t it just take 4.8 years ($75,000/$1,300/12) for them to buy? Not quite! The home they want for $500,000 today is appreciating at around 8% per year. In this case, by the time they buy that same property in 8 years it will be worth around $930,000, meaning they needed $186,000 for 20% down payment.

Mortgauge Perk

Don't know when you'd be able to afford your dream home? Within your Mortgauge profile you can use our Purchase Forecaster tool to get an estimate of when you could afford to purchase a property with a specific down payment amount.

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What Is The Financial Impact Of Waiting?

By waiting 8 years to save up a 20% down payment, Andy & Anne will lose almost $1M in potential financial gains over 25 years.

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Find Out When You Can Afford To Buy

Buying your first home is not as hard as you'd think, it just takes a plan! Mortgauge recommends the following steps to get you on your way:

  1. Determine in what price range you'd ideally like to buy a home today.
  2. Within your Mortgauge profile, add a "Curious" property type and from your Dashboard you can use the Purchase Forecaster tool to estimate what your purchase date is. Play around with assumptions, add a co-applicant, etc until you find a target purchase date that makes sense for you.
  3. Revisit your profile every few months to monitor your progress towards your target purchase date.
  4. Once you're within 3-4 months of buying a home, one of our mortgage experts will go over your profile with you and get you pre-approved to confirm that you're ready to go property hunting and then get financing for your purchase.
  5. Use Mortgauge tools to determine if certain properties are a good purchase opportunity.

To learn more about the homebuying process, you can read our Guide to Buying A Home.

More About Our Assumptions

For those who want a bit more detail on the math behind the conclusions above, some key assumptions are:

  • Gross salaries increase 5%/year and they're taxed at 30%
  • Spending increases at 3%/year
  • Rent increases at 2%/year
  • Mortgage rate of 2.60% and amortization of 25 years
  • Annualized property gains of 8% (which is roughly the 10 year average in Toronto). For the property price skeptics out there, even if we assume average property gains of 3% over 25 years you're still better off by around $300,000
  • After paying taxes, expenses and their rent/mortgage, that monthly surplus is invested into their savings
  • Savings earn a 5% annualized return
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