pay down debtSo you have been diligent for the past 5 years and saved up 20% to put towards a down payment on a home. Good job! But not so fast!  It may seem counterintuitive but it may actually be better to use a portion of that money to pay down debt instead. It is true that if you put less than 20% down and pay down debt, then you will need to pay the CMHC insurance premium (government mandated). This insurance premium is added to the mortgage. Although it would be nice to avoid it, sometimes the benefits when you pay down debt outweigh the costs of the insurance.

    Consider the following scenario:

    You are purchasing a $400,000 home and you want to put 20% down to avoid those pesky insurance premiums.

    1. Mortgage amount – $320,000 @ 3.39% for a conventional 5-year fixed term (with a monthly payment $1,579.14)
    2. Let’s say your credit card debt is – $8,500 @ 5%(making monthly payments of $255)
    3. Let’s say your other loans are (Car, Person loan, etc.) – $20,000 @ 0% (making monthly payments of $275)

    This means your Total Monthly Payments = $2,109.14 after the mortgage funds.

    Now consider what would happen if you paid off your debt & put less money down (under 20%) incurring a Mortgage Insurance Premium. In this scenario, the insurance premium would be $10,803.50. One big difference is that you would only have one payment versus three if you had put 20% down. Now check your savings!

    1. New Mortgage is now – $359,303.50 @ 3.24% for a 5-year insured fixed term (with a monthly payment of $1,744.94). Why is the rate lower? Mainly because it is insured and there is less risk for the bank.

    Total Monthly Payment Now – $1,744.94

    Monthly Cash Flow Savings – $364.20/m or $21,852 for the term of the new mortgage.

    Interest Savings – $6,271.11

    In this case, it makes more sense for you to pay down debt with those savings rather than allocated it towards a downpayment.

    For information on estimated debt loads in your province click on the below link.


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