# Is there anything I've missed when figuring out to pay a large sum for a house?



## emperor (Jul 24, 2011)

To start I must say I'm very conservative and have pretty much 0 risk tolerance. This has come from me trying a bunch of different things and them all failed. I like to plan for the worse.

I've always wanted a house and right before I was about to get one the prices went through the roof. Since then I've waited for them to come back down to reality, I'm over 40 now and I don't want to wait much longer, I'd like a house while I can still enjoy it. In the back of my head I know they will never go up like they used to and I'll probably lose money but the government just seems determined to make sure price don't go higher or lower and I'm tired of the waiting game.

Where I'm looking to buy the average place is around 360K and the average household income is 120K so it falls withing that 3X average you're looking for.

I saved lots of cash to put down a lump sum payment but now I think maybe that's the wrong plan. If I just put the minimum down it looks like I can get a Mortgage for around 3%. If I take the rest of the cash and instead put it in a HISA account getting 2.5 to 3%. On 340K Id basically pay 255K interest and I would get 215K back in 25 years. To me that now seems like a pretty good deal, only losing 40K to spread the payments over 25 years. And if the worse happens I still have the cash. I live in Alberta also so if houses completely crash I can walk away from it and if houses go up in value over 25 years I can break even or make a little.

I know I get taxed on my interest that's why most the money will be in RRSP and TFSA for my retirement.

Is there something I'm missing? Do they calculate interest different than HISA or is there something else that's a better plan? 

Thanks.


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## AltaRed (Jun 8, 2009)

First of all, if you plan on living in the house for at least 10 years, there is little risk of 'losing' money.. even in Alberta at this point. Give it 20 years and you will have capital appreciation, at least in nominal terms.

RE prices are probably still softening in AB but I think they are close to bottoming out. Any one of the oil pipeline expansions will cause the mood to brighten in AB within a few years and some cautious optimism will return to the marketplace. Population is still growing in AB despite the economic crisis and thus housing will firm up as new family formations need housing.

I would put down at least 20% to avoid the CMHC premium that has to be paid for CMHC insurance. Personally, I would go the high down payment route simply because we don't know if the non-normal slim margins banks are playing with today (between loan rates and deposit rates) will continue for the long term. If interest rates start to increase again, the banks will want to increase those margins, e.g. 4% for mortgage rates and 3.2% for deposit rates. The spread you calculated could be off by 50% or more.

And for me, I don't like having debt. The sooner I paid off the mortgage, the better I liked the freedom I felt.


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## birdman (Feb 12, 2013)

My recommendation is for you to buy the house and as AltaRed says put down a sufficient DP to avoid the CMHC fees. From there you can see how things go in regards to your savings plan. As far as interest rates go just select the term you want and use your best intuition in regards to term. Financial institutions match their maturities of mortgages and term deposits to avoid interest rate risk and the spread is normally 1 to 1.5%. In other words, the rate you pay on your mortgage will around 1.25% higher than what you could get on a term deposit. My recommendation could change if you plan to move away and sell your home, say in 10 years or less. Owning your home is nice and we have always enjoyed making improvements (decks, garden, interior renos, updates, etc) which, while costing you some $$ improve the value and add some personal gratification. Better yet, make lump sum reductions on your mortgage and try to pay it off in 10 yrs or so. Good luck.


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## fireseeker (Jul 24, 2017)

emperor said:


> I saved lots of cash to put down a lump sum payment but now I think maybe that's the wrong plan. If I just put the minimum down it looks like I can get a Mortgage for around 3%. If I take the rest of the cash and instead put it in a HISA account getting 2.5 to 3%. On 340K Id basically pay 255K interest and I would get 215K back in 25 years. To me that now seems like a pretty good deal, only losing 40K to spread the payments over 25 years. And if the worse happens I still have the cash. I live in Alberta also so if houses completely crash I can walk away from it and if houses go up in value over 25 years I can break even or make a little.


Effectively, you are borrowing to invest in a HISA. And you are doing so at a guaranteed loss. For me, that doesn't make sense.
Also, any additional money you put towards the house beyond the 20% down payment is giving you a guaranteed, after-tax return of 3%. That's a guarantee that is pretty hard to match.


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## AltaRed (Jun 8, 2009)

frase said:


> Financial institutions match their maturities of mortgages and term deposits to avoid interest rate risk and the spread is normally 1 to 1.5%. In other words, the rate you pay on your mortgage will around 1.25% higher than what you could get on a term deposit.


Just a nit about spreads. What you say, I agree with it, in terms of current spreads at the same FI. But if you obtain a mortgage from the likes of TD, and have your HISA savings in an alternate lender like EQ, the spread can be closer to zero these days, meaning, for example, a 5 year term fixed mortgage from TD at 2.6% and a 5 year GIC from EQ or Oaken for about the same, or higher, rate. That is where the OP is coming from I think, but the OP is forgetting that this is likely a short term aberration, not to be sustained for 10 or 20 years. As Fireseeker also said, where else can you get an after tax guaranteed return of, for example, 3%?

The "conservative" OP is actually playing a dangerous game of mathematical assumptions that are not sustainable long term.


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## Longtimeago (Aug 8, 2018)

There is this little thing called inflation. Where is that in your calculations?

If you buy an item today for $100, at the end of a year it's value will depend on its resale value. For a TV or toaster for example, it would always be less than what you pay to buy it. But for a house of course the value could be down or up. Over the longer term however capital put into a house today is almost sure to increase in dollar value. 

If you invest $100 today with a guaranteed return of say 2%, at the end of a year it's value will be $102 MINUS inflation as the buying power of the $102 you will have in your hand will have gone down by the amount of inflation. So going back to your calculation, when you say you would 'get back $215k', that is a number you are calculating that does not account for inflation. Using an average of 3.0% (I have manipulated this number to make the math simpler) inflation over 25 years, what $100 will BUY today will take $209 dollars in 2045 for example. So your $215K example would buy you only as much as around $100k today will. That means your calculation of 'only losing $40k' is totally out to lunch. You will have lost $100k in buying power between today and 2045.

Now back to if you put the money into the house today, the only question is whether the house has appreciated over 25 years at a higher rate than inflation. If you look at historical numbers you will see that in fact house prices have pretty much mirrored inflation. In other words, the price of a house today is basically the same as the price of a house 25 years ago IF you allow for inflation. 
https://www.supermoney.com/inflation-adjusted-home-prices/

So what you should be able to see is that money put into a house has historically held value in terms of buying power. You don't lose and you don't GAIN even though that will perhaps shock some people to realize. It is only over the short term with house prices rising rapidly that actual gains are made. 

Now go back to you saying you are very conservative with zero risk tolerance. Which one has less risk of LOSS over 25 years?


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## My Own Advisor (Sep 24, 2012)

Agreed....my thoughts...

1. Put down at least 20% (avoid CHMC insurance).
2. I would personally consider a variable rate right now (3-year or 5-year). Rates _are not anticipated to climb_ for some time and even if they do, a small 0.25% bump should really not change your payment strategy. If you are worried about a 0.25% increase let alone a 2-3% increase you shouldn't be buying a home.
3. Given #2, who knows what your situation will be 5-10 years from now, another reason to go variable and keep your IRD/cost of breaking your mortgage low.
4. Leave some cashflow available to make lump sum payments.
5. Leave some cashflow for house upgrades. No home or condo is perfect and things need to be replaced and/or at least maintained.

Otherwise, make the plunge. Life is full of adventures and home ownership can be rewarding.

Good luck


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## Plugging Along (Jan 3, 2011)

OP... I believe you have been pondering the questions for at least the last 4-5 years on this board. I won't run numbers or provide more scenarios, As an ultra conservative person, you have already done all the analysis, and I believe perhaps over thinking/analyzing which is leading you to not to take any actions. Some thoughts: 
- you have losing money on inflation
- Real estate is meant to be long term. It can both up and down, but generally it has paces inflation over the decades. It shouldn't matter, as you only make money or lose money when you are selling. So if you can hold it long enough, it will be more than what you paid. No one knows how long that is. One should be able to hold their real estate infinitely if they have not over extended themselves, and can cover the payments, and operating costs.
- If you would have purchased your home 4-5 years ago, you would have had that much less on your mortgage. I would even guess you would have been close to paying off your mortgage as your other posts indicate you are a savers.
- I am all for My Own Advisors strategy. Put enough down so you don't pay CHMC insurance. Have a some extra reserve until you figure out the new budget and have a cashflow, then make the lump sum payments as much as possible. For an ultra conservative person, having a home fully paid off brings a wonderful sense of security. 

Stop trying to do any more calculations, they are estimates full of assumptions at best. The advice I was given, when I started to get cold feet, which is almost every property I have bought was. Can we afford it? can we afford it if things get worse (layoff, downturn, ect) ? Are we willing to hang on as long as we need to? 

If your rrsp and tsfa are primarily cash vehicles, you may as well take a chance on the house.


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## emperor (Jul 24, 2011)

Thanks for the help. I put a bid on a home and won. I'm going through the process of a mortgage now. So I have a 350K house and 350K savings. I was going to put 70K down and go with tangerine mortgage which is 2.74 % for a 5 year fixed. With EQ I get 2.3% interest on my remaining 

My idea behind this was if interest rates drop I'm going to lose and I'd probably put some cash in the stock market. If interest rates go up I'll save money because even last year I got 3.1% on some GIC's, if the economy picks up again I could end up even farther ahead. My big concern was what if there is hyper inflation or something else really bad happen all my cash would be tied up in the property. 

I'm not sure about the negatives though. What if I Have to pay it off earlier to leave? I've heard stuff like most your first payments are interest. Other people said if you break a mortgage you get big fees. Is that if you break the 5 year fix or the 25 year one?

To me losing .4% interest for staying liquid with cash is a good precaution but maybe I'm missing something.


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## Topo (Aug 31, 2019)

Congratulations on you new home! The good thing about owning a house is that, even if the price appreciation is muted during your time frame, at least you got to enjoy living there.


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## Plugging Along (Jan 3, 2011)

emperor said:


> Thanks for the help. I put a bid on a home and won. I'm going through the process of a mortgage now.
> 
> QUOTE]
> 
> ...


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## AltaRed (Jun 8, 2009)

Plugging Along said:


> Just remember the rates won't always stay the same, that is your GIC in an RRSP/TFSA? You have to compare pre-tax vs after tax dollars. the 2.7% is gaurenteed after tax. The chances of hyperinflation over the next 5 years in Canada is pretty slim.
> 
> I personally would not be paying 2.74% and getting 2.3% interest. I would put a much larger down payment, maybe $200K down, mortgage $150K with $150K in the bank. $150K float is more than enough. My logic is that you based on your previous posts, you are extremely conservative in your investing. You have been in cash/GIC's over the years. I don't see that changing in the future. If the market all of a sudden when down, and crashed, I think someone who isn't comfortable outside of GIC, won't invest at that time anyways. Even if you do invest, what is the likelihood you would feel comfortable putting $250K+ in the markets in a short period of time. I could be wrong, but I find psychology and risk comfort levels don't change much over someones investing lifetime with out a catalyst.
> 
> I think you are better off getting the guaranteed 2.74% savings off your mortgage and keep a lower cash amount.


Ditto in spades. I'd even go further. Put down $250k, take out a $100k mortgage with a 10-15 year amortization, and hold the residual $100k in TFSA, etc. as one's emergency fund, GIC investments and even an equity ETF. My bet is that after a year or two, the OP will look for ways to accelerate the buy down of the mortgage even further and by the end of the 5 year term of the mortgage have it fully paid off.


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## edip (Jun 3, 2017)

I was in a similar situation last year... I put down $600k and took a mortgage for $100k... I felt more comfortable to have $300k in shares and cash than $200k... return in the last year was 10% vs.3% mortgage... I paid a bit more into the mortgage than the rate in the first year... I might pay it in 4 years but it depends on the interest rate.... Not sure if this is the right thing to do but this is what I did...


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## AltaRed (Jun 8, 2009)

edip said:


> I was in a similar situation last year... I put down $600k and took a mortgage for $100k... I felt more comfortable to have $300k in shares and cash than $200k... return in the last year was 10% vs.3% mortgage... I paid a bit more into the mortgage than the rate in the first year... I might pay it in 4 years but it depends on the interest rate.... Not sure if this is the right thing to do but this is what I did...


Until your portfolio return is negative for a few years and one would have wished they'd put the money to the mortgage instead. Your 'win' odds are just slightly better than 50-50 in any given year, and it's only better because over the long term, market trend is to the northeast.


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## Plugging Along (Jan 3, 2011)

edip said:


> I was in a similar situation last year... I put down $600k and took a mortgage for $100k... I felt more comfortable to have $300k in shares and cash than $200k... return in the last year was 10% vs.3% mortgage... I paid a bit more into the mortgage than the rate in the first year... I might pay it in 4 years but it depends on the interest rate.... Not sure if this is the right thing to do but this is what I did...


Nothing wrong with your strategy, but unless I have misread, the OP is very conservative and all of the investments are in cash and GICS at 2.4% which is below mortgage rate. One has to look at what the person is going to do with the money. If they are stashing in a bank account or under their mattress, then paying off the mortgage will be the best option.


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## emperor (Jul 24, 2011)

So my deal with my house was 25 yr, 5 year fixed at 2.69% 1,500 cash back. I put 20% down . Most my money is locked into GIC's getting 3.10% Normal bank rate is 2.3% at EQ.

I decided this route because it enables me to see what happens. If there is a complete collapse of housing I live in Alberta and can walk away from the mortgage. If interest rates go up I can get a higher % for GIC while paying lower on a mortgage. Depending on the spread when I get closer to 5 years I can pay off most the mortgage if needed.

If fiat currency looses value I'm not all in cash, I have some assets. Overall I'm just a lot more flexible but I'll probably loose 4-8K over 5 years for doing it this way. There is just something about governments constantly borrowing money and printing money that just doesn't make sense to me. I keep thinking it can't go on forever.


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