Saving For A Down Payment On A Home? Less May Be Better

Saving For A Down Payment On A Home? Sometimes Less Is Better

I give my own children this advice as they are saving for down payment: don’t wait until you have saved up a nice big juicy down payment before buying a house. Get into a home as early as possible.

Why not save up more and wait? Isn’t it better to have less debt? Not in the case of home ownership.

Think about this. Let’s say you have been saving for a down payment and you have saved up $20K.

Person A Continues To Rent And Wait

Person A decides to wait and save an additional $20K over the next 2 years because his parents always taught him to stay out of debt. In 2 years from now, person A has been paying $1800/mth in rent and has saved up $40K. Wow!

Person B Buys Now

Now let’s consider person B. He decided to buy a home with the $20K and stop saving for a down payment. He needed 5% down so he bought a $400K home. He took out a $380K mortgage (actually slightly higher due to CMHC but let’s keep it simple). Fast forward 2 years. The home is now worth $432K assuming an appreciation rate of 4% per year. Over the past 2 years, the mortgage payments have been similar to rent at $1800/mth. The mortgage has been paid down by about $20K. That means person B now has a $432K home with a $360K mortgage. He’s worth $72K now. Since person A was able to save $20K in those 2 years, and since person B was making similar monthly payments, we might assume that person B was ALSO able to save $20K. But let’s be conservative and say that person B was only able to save up $10K during that period due to property taxes and other home ownership expenses that person A who was renting didn’t have.

Person A: has $40K in the bank after 2 years

Person B: has $72K of equity + $10K in the bank = $82K after 2 years

Who came out on top?

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