# 15% or 20% down payment



## tavogl (Oct 1, 2014)

Hi,

We bought a pre sale a while back, should be ready by the end of August and we have been talking to our mortgage broker, he's recommending that we use our line of credit (@ 7% interest) to complete the 20% downpayment as we have onlysaved 15%, i'll paste his email here. Please share your thoughts.

The option of with a down payment of $80,000 would look as follows:

Purchase of $534,870 (including GST)
- Down Payment of 15% ($80,230.50)
+ CMHC Premium of 2.80% ($12,729.91)
————
Mortgage of $467,369.41

With a 5 year fixed mortgage at a rate of 2.74% your monthly payments would be $2,153.63




With 20% down payment your numbers would look as follows:

Purchase of $534,870 (including GST)
- Down Payment of 15% ($80,230.50)
- Line of Credit of 5% ($24,691.50)
————
Mortgage of $427,896


With a 5 year fixed mortgage at a rate of 2.89% your monthly payments would be $1,744.58 (30 year amortization) or $1,971.74 (25 year amortization).



The main level of comparison would be the difference in rate & CMHC premium.
CMHC premium is $12,729.91
Difference in rate on $24,691 would be ~4% per year - assuming it will take you two years to pay this off in full it will add up to ~$1,000 in interest
Difference in rate on $427,896 would be 0.75% (0.15% per year) - this would be $3,209.22

Overall you will be ahead by ~$8,520 if you go with conventional option while utilizing a line of credit for the down payment.

////////

Thanks!


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## AltaRed (Jun 8, 2009)

To me, a 20% down payment is the way to go. Why would you want to saddle yourself with the costs of CMHC insurance?


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## tavogl (Oct 1, 2014)

Well, I would still have to pay that 7% for the 25k i'd take out of the line of credit. Plus, can't banks come at me and ask me to pay the line of credit all of the sudden? I've read banks can ask for line of credit payments for several reasons.


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## AltaRed (Jun 8, 2009)

I guess it ultimately depends on how much 'waste' you are willing to put up with by having to purchase that CHMC insurance. It ultimately becomes a fee or tax just like land transfer taxes. 

FWIW, I've not heard of a bank calling in a LOC if the account is in good standing but I have no basis to comment either way.


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## sags (May 15, 2010)

Bear in mind that a line of credit is a debt the lender takes into account when calculating the debt to income ratios to qualify people for mortgages. 

I believe they calculate it as if it was a personal loan with steady payments. It could hamper some people's ability to qualify.

Also, the CMHC is coming out with a new program regarding "shared" down payments to avoid CMHC insurance fees. (first time homebuyers and a cap on price)

They will pay up to 15% of the 20% required down payment in exchange for a % of the profit/loss in the event of the home being sold at a later date.

The Liberals will be talking about this program as an election policy.


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## Emjay85 (Nov 9, 2014)

How long realistically to pay off the 25k of credit line? if 2 years, paying the 7% is still much cheaper than 12k for cmhc insurance, which is added and amortized on the mortgage. 

Sounds like pretty sound advice in my opinion. I personally wouldn't be worried about the bank recalling the LOC.


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## peterk (May 16, 2010)

Related question - so I'll post it here :

Is the "preferred rate" of the high ratio CMHC mortgage getter a one time deal for the first mortgage contract only? So say you get a 5 year mortgage @ 2.74% with your 15% down (vs 2.89% with 20% down) after 5 years when you renew, *all else being equal*, will you get offered the special discount again? or will be paying the "regular" 2.89% rate for next 20 years (remainder of the amortization) ?

If the latter, then when one is playing around on bank mortgage calculator sites and looking at the "interest paid" column of the entire amortization, it would be deceptively giving you the false impression that the discounted rate for the high ratio mortgage holder is saving you more interest than you actually are, over the 25 years, and may lead some to conclude that the CMHC fee isn't so bad...


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## tavogl (Oct 1, 2014)

sags said:


> Bear in mind that a line of credit is a debt the lender takes into account when calculating the debt to income ratios to qualify people for mortgages.
> 
> I believe they calculate it as if it was a personal loan with steady payments. It could hamper some people's ability to qualify.
> 
> ...


I'd never let government own any % of my home.

Our broker said with our incomes we'd qualify with the 25k LOC no problem, he also said it narrows possible lenders as not all of them accept loans as downpayments, he's leaning towards scotiabank right now.


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## tavogl (Oct 1, 2014)

Emjay85 said:


> How long realistically to pay off the 25k of credit line? if 2 years, paying the 7% is still much cheaper than 12k for cmhc insurance, which is added and amortized on the mortgage.
> 
> Sounds like pretty sound advice in my opinion. I personally wouldn't be worried about the bank recalling the LOC.


We are thinking 2 to 3 years to repay the 25k LOC.


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## Mortgage u/w (Feb 6, 2014)

If you know you can pay off the LOC in 2-3 years, then it worth going the extra 5% to avoid the premium. 

Other things to consider - are you a first time home-owner? If yes, you can use your RRSP as DP. Just ensure you pay it off in the same timeframe you intended with your LOC.

Also, are you considering the LOC only because your broker is recommending it? Do you have additional savings? TFSA? Etc?


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## off.by.10 (Mar 16, 2014)

peterk said:


> Is the "preferred rate" of the high ratio CMHC mortgage getter a one time deal for the first mortgage contract only? So say you get a 5 year mortgage @ 2.74% with your 15% down (vs 2.89% with 20% down) after 5 years when you renew, *all else being equal*, will you get offered the special discount again? or will be paying the "regular" 2.89% rate for next 20 years (remainder of the amortization) ?


Very much this. There's more to it than a single 5 year term. A quick search turned up this where near the end they mention:


> As a general rule of thumb, here’s roughly how rates shake out for each type of mortgage:
> 
> Insured mortgages: lowest rates of all
> Insurable mortgages: add the following to the best insured rates you see:
> ...


As I read it, there should be some benefit to having paid the insurance premium over most of the loan duration. So you may not come out as far ahead as the broker's calculation shows. Perhaps not at all, I haven't done the proper math. It also depends how long you actually take to finish paying the loan.

Also, you have to come up with a significant amount of money to repay that LOC over two years. Only you can tell how realistic that is. Myself, I would not do it.


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## tavogl (Oct 1, 2014)

Mortgage u/w said:


> If you know you can pay off the LOC in 2-3 years, then it worth going the extra 5% to avoid the premium.
> 
> Other things to consider - are you a first time home-owner? If yes, you can use your RRSP as DP. Just ensure you pay it off in the same timeframe you intended with your LOC.
> 
> Also, are you considering the LOC only because your broker is recommending it? Do you have additional savings? TFSA? Etc?


I hadn't considered using my RRSP, I guess I don't like the idea of touching that but I will take another look at this. Additional savings are small, 8k USD and minimal TFSA, 4k. (I know most people will recommend against buying a house without other savings in order... it is a conscious decision) we are newish to the Canada and only had a stable good paying job (good paying in my opinion) for the last 3 years, which is when we started saving. I was recently promoted and my wife besides having a government full time job, she recently opened her own private practice which should help our cash flow.

Anyways, I am also reading about my wifes MPP (Municipal Pension Plan) and figuring out if she can actually take any money out of there?, her pension plan is very generous and she has some decent savings she has accumulated in the last 6 years with VCH.

Thanks


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## tavogl (Oct 1, 2014)

off.by.10 said:


> Very much this. There's more to it than a single 5 year term. A quick search turned up this where near the end they mention:
> 
> As I read it, there should be some benefit to having paid the insurance premium over most of the loan duration. So you may not come out as far ahead as the broker's calculation shows. Perhaps not at all, I haven't done the proper math. It also depends how long you actually take to finish paying the loan.
> 
> Also, you have to come up with a significant amount of money to repay that LOC over two years. Only you can tell how realistic that is. Myself, I would not do it.


Good info here, thanks. I will try do to the math on this.... it might take a while, lol.

We plan on paying the LOC in 3 years tops, we've done the math and it's doable. If we use an LOC to complete the 20%DP we can finance the mortgage over 30 years instead of 25, so after paying the LOC the first 2-3 years this would help our cash flow. We would of course be making lump sum payments as much as we can to kill the mortgage ASAP, but I like the idea of a smaller monthly payment after 2-3 years of paying that LOC and the OPTION of lump sum payments.


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## Mortgage u/w (Feb 6, 2014)

tavogl said:


> I hadn't considered using my RRSP, I guess I don't like the idea of touching that but I will take another look at this. Additional savings are small, 8k USD and minimal TFSA, 4k. (I know most people will recommend against buying a house without other savings in order... it is a conscious decision) we are newish to the Canada and only had a stable good paying job (good paying in my opinion) for the last 3 years, which is when we started saving. I was recently promoted and my wife besides having a government full time job, she recently opened her own private practice which should help our cash flow.
> 
> Anyways, I am also reading about my wifes MPP (Municipal Pension Plan) and figuring out if she can actually take any money out of there?, her pension plan is very generous and she has some decent savings she has accumulated in the last 6 years with VCH.
> 
> Thanks


Although I am against the HBP, in your case it might be the best solution. I would rather borrow from myself for free than from an LOC at 7%. Again, this is assuming you pay yourself back in 2 years.


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