Personal Finance

Should I put more than 20 percent down as a downpayment?

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  • Apr 17th, 2011 1:17 pm
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[OP]
Newbie
Jul 25, 2008
10 posts
1 upvote
Ottawa

Should I put more than 20 percent down as a downpayment?

I have 50% of my purchase price in savings to buy my first home. Would it be a good idea to put all of this into a down payment (reserving extra for closing costs, emergency funds, etc, of course) or should I keep some in other investments instead?
12 replies
Deal Fanatic
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Mar 24, 2004
8682 posts
559 upvotes
Toronto
Depends on your cost of borrowing.

I'd put 20% down then do Smith ^_^

http://www.milliondollarjourney.com/the ... part-1.htm
http://canadianfinanceblog.com/the-basi ... manoeuvre/

And that giant thread around here..

//edit: just to clarify - put 50% down, and do the smith maoeuvre. So you'd have to find a readvancable mortgage like RBC's Homeline Plan, and use a portion (however big you feel comfortable with) of the HELOC portion to invest. I'd go heavy into equity index (Canadian, US, Int'l) if you have a long time horizon.
Deal Addict
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Mar 23, 2011
1041 posts
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The more you put down, the less your mortgage the less you pay. Simple math I know but some people still don't get it.
If you have 50% to put down, why not put say 40% down and then keep the rest as a rainy day fund or a fix what's wrong with the house fund. If you put all 50% down, depending on your income, you could become cash poor.
Alex
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Aug 18, 2005
15909 posts
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GTA West
I would pay down the max but save an extra $5000 for furniture and other unexpected items.

You save vast amounts of interest over the period of the mortgage for every dollar you prepay.
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Deal Addict
Oct 1, 2006
1459 posts
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Montreal
Jucius Maximus wrote:
Apr 16th, 2011 12:53 pm
I would pay down the max but save an extra $5000 for furniture and other unexpected items.

You save vast amounts of interest over the period of the mortgage for every dollar you prepay.

+1 I agree with Jucius
Deal Guru
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Nov 2, 2003
14544 posts
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Scarborough
This is the classic question that we've seen over and over again on this forum. It comes down to your comfortability with debt-leveraging.

During these times of low interest rates, mortgage rates especially, are ridiculously low. In my opinion, this is the perfect time to carry some debt and try to beat or keep up with the market while the cost of money is low.

On the other hand, some people on here are extremely fearful/hateful of debt and will do anything to eliminate it right away. So it really comes down to where you sit on that spectrum.

For me, I would put 20% down (the minimum before extra fees like CMHC kicks in) and use the remaining 30% to build a portfolio, aiming to earn about 7-8% per year. This will more than offset the mortgage/interest rates at ~3%. If in a few years time, you find that you're only getting 5% return, and by then mortgage rates have increased to 5%, then I would do the opposite and pay down as much of your mortgage as possible, while still maintaining SOME balance in diversification.

I believe in moderation. Too much of one thing is never good, and that is also the case with putting all your money in one basket, i.e. your mortgage.

Lastly, as someone already mentioned, if you're really comfortable with debt leveraging and investing, the smith maneuvre will offer some great savings in the long run by way of interest deductions and tax savings, while helping you build a portfolio at the same time as you pay down your mortgage.
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Deal Fanatic
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Nov 23, 2005
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actng wrote:
Apr 16th, 2011 2:19 pm
This is the classic question that we've seen over and over again on this forum. It comes down to your comfortability with debt-leveraging.


+1


Everyone's comfort level is different. While I might be comfortable putting down the full 50%, someone might only be willing to put down 40%, while someone else might even do less. Point being, this is something you have to decide on our own given your situation and looking in the future as well. While putting everything down would be ideal, it does not mean it is the right thing for you.
Deal Addict
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Sep 30, 2003
3900 posts
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Toronto
We're in a similar boat. We have about 40% of our DP available however we opted to only apply 20% and invest the remaining 20%. However, as a hedge, we are able to over-pay our mortgage and will be doing that by significant amounts.
I figure, at ~2.2%, it's possible to get a "relatively" safe return that'll still beat the mortgage post-taxes.
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Jul 1, 2007
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Sylvestre wrote:
Apr 16th, 2011 2:58 pm
We're in a similar boat. We have about 40% of our DP available however we opted to only apply 20% and invest the remaining 20%. However, as a hedge, we are able to over-pay our mortgage and will be doing that by significant amounts.
I figure, at ~2.2%, it's possible to get a "relatively" safe return that'll still beat the mortgage post-taxes.
That's smart. I'd do the same knowing I can easily get over 2.2% in safe investments. But if you don't know the market well, pay as much as you can off (and put money aside - people often underestimate how expensive a house can get - maintenance, furniture, etc.)
Jr. Member
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Feb 24, 2009
198 posts
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put 'down' the max you can.
at the same time, have your bank register a line of credit on your house to help you when times come that you need that emergency cash for a short period of time

registered lines of credit can be had for below prime
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Feb 4, 2008
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tdeem1 wrote:
Apr 16th, 2011 5:04 pm
put 'down' the max you can.
at the same time, have your bank register a line of credit on your house to help you when times come that you need that emergency cash for a short period of time

registered lines of credit can be had for below prime
Where are you getting a secured line of credit below prime?

I would definitely look at a readvancable mortgage. When people have enough equity that is the only way to go. It give you so much flexibility. You must have the discipline not to abuse it though and if you have a 50% down payment I would think you have that discipline.

Check out this list:

http://www.myvirtualmortgagebroker.com/ ... euver.html

Good luck
www.mortgagecalculatortoolkit.com (cut and paste it)

Do your mortgage math correctly!
Deal Guru
Mar 23, 2009
12479 posts
1741 upvotes
Toronto
As a balance, I recommend:

Put down a significant amount (eg. 40%+) and leave yourself a little leeway on top of the reserve fund, fees, taxes, TFSA, RRSP, etc. for stuff like furniture, fixtures, and unforeseen expenses. If after a few months you realize you still have lots left over you can apply that to the mortgage as a lump sum payment.

And forget about a big Smith unless you like lots of risk.
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Nov 3, 2002
1312 posts
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Ottawa
why don't you compare the interest you would save on your mortgage with the interest you would gain from investing that money. If you're not an investing type and would just leave it in a savings account, then yes it probably makes sense to put more of it down. If you're going to invest and you have a low mortgage rate, it probably doesn't make sense to put more than 20% down. if you do end up putting only 20%, just make sure the mortgage you obtain allows you to make lump sum payments that are to your satisfaction so you will be able to transfer money from your investments to your mortgage when your rate goes up.
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