# 20% down or 5% down and investing the rest



## Bear2Bull (Nov 11, 2013)

I will be in the market to buy a home in a year and want to get peoples thoughts on which option is better. Lets assume for arguments sake that I can get a 6% rate of return.

House: 500K
20% DP: 100K
5% DP: 25K
Interest: 3.6%
5 year term
25 year amortization


If I put a 5% downpayment and put the rest into my hypothetical investment and get 6% return..

- I would get $4500/yr ($3735 after tax)
- Pay CHMC fees of ~14,250 amortized over 25 years = 570 yr
- Amortized interest payments of $28,760/yr 

If I put a 20% downpayment.
- Amortized interest payment of $25 732/ yr

With these assumptions, wouldn't a 5% downpayment make more sense because the 6% return on $75000 more than covers the difference in interest and CHMC fees from a liquidity perspective?


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## none (Jan 15, 2013)

I don't agree with dividing the $14,250 over 25 years in your analysis. You are paying that immediately and there is no guarantee (although intentioned) that you will live there for 25 years. You pay that amount whether you live there the average of 5 or your estimates of 25 - it doesn't matter. YOU PAY!

I'm all for holding a mortgage and having investments but I do not agree with taking on a CMHC charge just to invest. No way.

And really there it is highly improbable that the interest on that charge will average out at 3.6 % over 25 years. The average is probably closer to 5% which tanks any benefit your investment strategy may have. 

TL;DR: DO NOT DO THIS, IT'S DUMB.


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## Just a Guy (Mar 27, 2012)

You could pay down your mortgage 20%, save the CMHC fees (on which you'll pay interest on for 25 years) then get a heloc on your property, borrow the investment money and write off the interest on the money you invest.


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## Charlie (May 20, 2011)

I calculate your break-even at about 8 years assuming no tax. (Future value of $89,250 debt at 3.6% vs Future value of $75,000 portfolio at 6%).

Too risky for me and likely better sources for debt. HELOC makes more sense if you're a leverage junkie.


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## none (Jan 15, 2013)

Also if you want to play probabilities take a variable rate mortgage and invest the $200 a month.


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## OurBigFatWallet (Jan 20, 2014)

I'd probably do 20% down for the simple fact that you save the CMHC fees and it would increase your cash flows that could then be used to invest


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## Rusty O'Toole (Feb 1, 2012)

It would be even cheaper to rent the house and invest the whole works. Houses in that price bracket usually rent for way under the carrying cost. Add up the potential return on your down payment, as you have done, plus the monthly payment, taxes, insurance, maintenance, and you will find your landlord is subsidizing you to the tune of hundreds of dollars a month, possibly over $1000 a month.


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## Taraz (Nov 24, 2013)

Rusty O'Toole said:


> It would be even cheaper to rent the house and invest the whole works. Houses in that price bracket usually rent for way under the carrying cost. Add up the potential return on your down payment, as you have done, plus the monthly payment, taxes, insurance, maintenance, and you will find your landlord is subsidizing you to the tune of hundreds of dollars a month, possibly over $1000 a month.


^Yes! This. The higher-end you go in the rental market, the more bang you get for your buck (in general). While slum-lording can be highly profitable, high-end properties generally aren't. In fact, your landlord will probably be subsidizing your rent.

You'd be paying $2400/month with your scenario above. Add your taxes (probably about $300/month). Add 2% of the house price per year (conservatively) for maintenance, or about $833 per month. http://www.theglobeandmail.com/glob...enance-costs-crush-your-budget/article618105/

Now look for a rental that costs about the same ($3833/month). You could easily rent something gorgeous, then invest your down payment in the stock market instead (which typically has better returns than a primary residence). I'm not sure where you are living, but here are a few examples in that price range:

Calgary:
http://www.kijiji.ca/v-house-rental/calgary/executive-4-bedroom-altadore-marda-inner-city/558316198
http://www.kijiji.ca/v-house-rental...use/559165428?enableSearchNavigationFlag=true
http://www.kijiji.ca/v-house-rental...ome/553395914?enableSearchNavigationFlag=true

Toronto:
http://toronto.kijiji.ca/c-real-estate-house-rental-5000-SQFT-5BR-HOME-W0QQAdIdZ565573546
http://toronto.kijiji.ca/c-real-est...nthouse-St-Lawrence-Market-W0QQAdIdZ565519014
http://toronto.kijiji.ca/c-real-est...room-Townhome-in-the-Beach-W0QQAdIdZ564812905
http://toronto.kijiji.ca/c-real-est...Work-Unit-With-3-Bathrooms-W0QQAdIdZ549692117

Also, you don't have to worry about selling if you find a better job offer someplace else.


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## amitdi (May 31, 2012)

Just a Guy said:


> You could pay down your mortgage 20%, save the CMHC fees (on which you'll pay interest on for 25 years) then get a heloc on your property, borrow the investment money and write off the interest on the money you invest.


+1, If you are an investor. Just go for HELOC, better than the 2 options in your question...


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## getliquid (Mar 2, 2014)

amitdi said:


> +1, If you are an investor. Just go for HELOC, better than the 2 options in your question...


since the LTV ratio is 80%, and he only put 20% down that means he won't be able to pull anything out of the HELOC until the house goes up in value?


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## Just a Guy (Mar 27, 2012)

Two different lending criteria as far as the bank is concerned...doesn't mean they will approve it, but it is very possible. In fact, you can get larger helocs now than he official limit if you lock in a portion. I think the government capped helocs at 65%, but if you lock in 15% at a fixed rate, you can get 80% LTV. Banks always figure out ways to circumvent the rules.


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

As a mortgage analyst, I do not recommend putting 5% down and investing the rest. First, you need to ensure the investment return is constant. Second, you will never recuperate through savings the premium you will pay for the loan insurance + the amortized interest you're paying on it. You're only looking at the payment differences when you should be looking at the overall picture instead. Calculate just the loan insurance premium should you invest it instead....after 25 years, you would forfeit $21,375 if your return is a steady 6%. Add the compounding effect and the difference is clear.

Maximize your DP to avoid a premium, maximize your loan payment and maximize a monthly savings contributions!


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