The Illusive 0% Down
0% Downpayment!? Seems too good to be true doesn't it?
Well in some ways it is. Technically, 0% down isn’t really possible because the minimum down payment amount required is at least 5%, but over the past couple of years, rules have changed to allow the 5% to be borrowed… thus, creating your 0% down opportunity. If you have steady income and good credit but haven’t been the greatest on the saving, some banks will be more than happy to help you to buy with nothing down. 
What happens is that they will lend you the entire purchase amount with 95% of it being a mortgage and the 5% being a cash back which simply gets tacked on to the mortgage amount. Here’s the catch – if you go for this option, you’ll have to take your mortgage at the bank’s posted rate and you will not be able to take advantage of mortgage discounting.
In today's market, the posted rate for a 5year fixed mortgage for most of the major banks is around 6.45%.
With an inside track on the market, I’ve come across mortgage discounts of up to 1.66% * off the posted rate – that’s quite a significant difference! To give you a sense in dollars and cents, over a 5 year term on a $200,000 mortgage paid monthly, we yield the following results:
|
|
Posted Rate
|
Discounted Rate
|
Total Difference
|
|
Rate
|
6.45%
|
4.79%
|
1.66%
|
|
Monthly Payment
(CMHC premium excluded)
|
$1,333.59
|
$1,139.42
|
$194.16
|
|
Total Interest Over 5 Year Term
|
$60,805.55
|
$44,790.27
|
$16,016.18
|
|
Total Interest Over 25 Years
|
$200,077
|
$141,824.12
|
$58,252.88
|
The Big Picture on Down Payments
It's clear that the more you put down, the more money you will save in the end.
However, it is also important to note that if you don’t take advantage of today’s market and you wait to save money for a larger down payment, prices and mortgage rates will still move without you. With housing prices growing at a consistent healthy average of around 4.87%** per year for the last decade and with interest rates climbing up slowly from record lows, by waiting, you may be missing out on significant appreciation, equity growth and/or end up paying higher interest costs.For example, if you were to wait to buy a home valued at $200,000 today (not taking into account changes in interest rates), in the next year with growth of 4.87%, you would have to save $9,740 to offset the change in the appreciated price and in 5 years, that amount would be $53,680!
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for more information or a no obligation analisis of your personal situation.
*Current discount rate - subject to change at any time without notice
**Source: Toronto Real Estate Board Market Watch, January 2006 Edition