Is It Better To Put 20% Or 15% Down?

When purchasing a home, most people try to reach the 20% down payment mark to avoid the CMHC charge. That seems intuitive but let’s looks at the numbers.

Let’s take a $500K purchase price as an example and let’s say that you have saved up $100K to put as a down payment.

Purchase Price: $500K

Savings: $100K

Table 1: Comparing the costs involved of putting 15% vs. 20% down payment on the purchase of a home.

What does this table mean?

It means that if you only put 15% down, you will have a whopping $13,400 insurance fee, that the monthly payments will be about $140/mth higher and that you will pay about $2000 extra interest over the 5 year term of the mortgage.

Conclusion?

So the conclusion is that it is better to put 20% down because you will pay less interest right? Not necessarily!

Take A Second Look!

You may be paying $2K less in interest, but you have an extra $23,500 in your pocket that you could potentially invest elsewhere.

It comes back to the same (very personal) question we get asked almost on a daily basis. Is it better pay down my mortgage quickly if I have the extra money? It depends on your goals and what else you can or would do with that extra money. If you are going to blow it on a weekend at the casino, maybe it’s better to put it on the mortgage. If your goal is to become mortgage-free because it will give you peace of mind or you are worried about rates, then it might be better for you to put it on the mortgage. BUT, if you have the mindset of a(n) (real estate) investor, you may be able to invest that money elsewhere. As long as the return on that investment makes you more than the mortgage costs you, then maybe it’s better to redirect it to an investment.

Back to the example above. Yes, you paid about $2K more in interest over the 5 years. But, you also kept about $23,500 in your pocket ($25K – $1500 taxes on the insurance). Could you have used that $23,500 to make more than $2K over the 5 year period? That’s about $400/yr or 1.7%. In other words, if you put $75K down instead of $100K down, and you took that difference and invested it to make a return of more than 1.7% annually, you would actually be further ahead! The 0.3% reduction on the interest rate by insuring it actually pays off in this case.