The Canadian housing market has been on fire to kick off 2021. Some economists have called for policy makers to step in. This looks unlikely as real estate is powering a reeling Canadian economy during the pandemic. Many Canadians may be thinking about taking the plunge into the housing market right now. Today, I want to discuss how much you should commit to a down payment.
Why you should make a big down payment
There are several advantages to make at least a 20% down payment on your home purchase. First, you avoid having to pay your home insurance premium through the Canada Mortgage and Housing Corporation (CMHC). Moreover, making a large down payment will allow you to access equity in your home much quicker. You may remortgage your home up to 80% loan-to-value, and a home equity line of credit typically runs at 65% loan-to-value.
If you have the cash available it is usually the preferred option to make the 20% minimum down payment, and above that if you are able.
Here’s why you should keep your down payment slim.
There are also arguments for making a smaller down payment. You will be forced to absorb the hit of an insurance premium, but you also avoid committing a substantial amount of cash that will be frozen up in your property. If a larger down payment will take all your cash, it may be better to commit to a smaller chunk of change.
As for the time horizon, interest rates will likely remain at historic lows for the foreseeable future. Committing to a smaller down payment can be a sound strategy for many new home buyers.
