With prices hovering in the $500’s for an average 1 bedroom condo in Toronto, it can be tough to come up with a 20% down payment. No matter how much you stash away, to save up that amount of money requires a lot of sacrifice, time and effort. But what if you’ve been able to save enough for a 5% deposit? Should you still consider buying a condo?
The answer is Yes and No. The most glaring disadvantage of purchasing a condo when you only have 5% down is that you will be required to pay mortgage default insurance, otherwise known as Canada Mortgage and Housing Corporation insurance. Insurance premium rates range from 1.80% to 4.00% of your mortgage amount. Federal regulations on CMHC insurance include the following:
- CMHC insurance must be purchased for all homes with less than 20% down payment.
- Homes purchased for more than $1 million are not eligible for CMHC insurance, therefore requiring homeowners to put more than 20% down.
- The maximum amortization period on CMHC insured mortgages is 25 years.
- Homes sold over $500,000 can no longer be purchased with a 5% down payment. The new minimum down payment is 5% of the first $500,000, and 10% of any amount over $500,000.
The CMHC insurance premium is added to your mortgage amount and is paid off over your amortization period through monthly mortgage payments.
SO IF I ONLY HAVE 5% SHOULD I STILL BUY A CONDO?
If you can only afford to put the bare minimum of 5% down, then expect your monthly payments to be higher, but perhaps that might not necessarily be a bad thing. Let me explain…
First-time buyers are often caught in a cycle of “Should I buy?” or “Shouldn’t I buy?” and the indecision is almost always related to down payments. On one hand, if you wait to save up more money, condo prices could increase to a point that you will eventually be priced out of the market, but if you decide to purchase a condo today with what you currently have, then you might end up paying considerably more per month. The thing you have to determine is if you decide to buy now, will your mortgage payment be comparable to what you would be paying in rent? If so, and your smaller down payment is able to get you into the market sooner, then you might as well start building equity now vs. later. I’ll show you later how having to pay the extra mortgage default insurance might not be such a bad thing.
First, let’s look at an example to see the difference between someone who has put down 5% vs. a buyer who has put down 20%.
Let’s assume a sales price of $500,000 and both buyers have qualified for a 25-year fixed-rate mortgage at the current rate of 3.24% (January 2019). After 5 years, their payments would look like this:
5% DOWN PAYMENT
| Down Payment | $25,000 |
| Mortgage Insurance | $19,000 |
| Total Mortgage Required | $494,000 |
| Monthly Mortgage Payment (3.24%) | $2,399 |
| Principal Paid Over 5 Years | $69,826 |
| Interest Paid Over 5 Years | $74,119 |
| Balance of Mortgage After 5 Years | $424,174 |
20% DOWN PAYMENT
| Down Payment | $100,000 |
| Mortgage Insurance | $0 |
| Total Mortgage Required | $400,000 |
| Monthly Mortgage Payment (3.24%) | $1,943 |
| Principal Paid Over 5 Years | $56,540 |
| Interest Paid Over 5 Years | $60,015 |
| Balance of Mortgage After 5 Years | $343,460 |
When comparing the two, the biggest thing that stands out is that with 5% down, your monthly mortgage is $2,399, compared to the monthly mortgage of $1,943 with 20% down. If you consider Toronto’s average monthly rental prices, a mortgage payment of $2,399 is right on par or even slightly lower. The difference is, you will be paying that amount monthly towards your own home, vs. paying off someone else’s mortgage! As you make your monthly payments, at least you can feel good that you are building equity at the same time. That’s where the real advantage is.
ANOTHER ADVANTAGE – LONG TERM GAIN
If you decide to purchase a condo with 5% down, you must always look at it as a long-term investment. The longer you hold onto the property, the better chance you will have at earning a long term gain. Consider the following statistic. Toronto condos have experienced, on average, a 5% increase in value per year all the way back since 1982. Don’t get me wrong, there have also been years of steep decline, but lately, we have been seeing years of steep incline as well. If we just go with the 5% average market growth, here is an example of what you can expect in equity gains at the end of your first 5-year term.
EQUITY GAIN WITH 5% DOWN AT END OF 5 YEAR TERM
| Down Payment | $25,000 |
| Total Principal Paid | $69,826 |
| Market Gains (5%/year) | $125,000 |
| Total Equity | $200,826 |
After your initial 5 year term, at the average 5% market growth, your equity has grown to $200,826 for a condo that you purchased with only an initial 5% down payment and $19,000 in mortgage default insurance. Having to pay that insurance up front isn’t such a bad thing after all, is it? If you waited until you were able to save 20% before purchasing a condo, you would have missed the opportunity to realize that 5 year gain!
Of course, this is all just speculation and the true test for a buyer will be the ability to qualify for a mortgage with only a 5% down payment. Mortgage lenders will review your income and debts and they will still put you through a stress test before you can even think about owning a condo! Talk to a qualified mortgage broker who can get you pre-approved and go over the many options available to you. If you don’t know one, just ask me and I can give you a few options.
If you have any questions about condo buying call, text, or email me anytime!
