Most homebuyers strive to save 20% down when looking to purchase. Why? Because they can avoid the mandatory insurance premium when you put down less than 20%. However, we are seeing more and more why this may not be the best choice for everyone. How is that possible? If I can get away with not paying insurance, why wouldn't that be the best bet for me? Well, here are a couple of reasons why:
Rate: Better rates are offered to 'high ratio' (purchases that have less than 20% down) clients. At first glance, this is seemingly unfair - if I've saved enough money to put 20%, and need to borrow less, why are you penalizing me? Well, look at it this way - your two friend Jim and Bob approach you and ask to borrow $1000; Jim is employed, and Bob is looking for work - whom would you feel more comfortable lending the money to? Obviously, Jim, because you know he can pay you back. When a high ratio client borrows from a lender, the mortgage must be insured, therefore there is no risk to the lender - whatever happens, they will get their money. The client who has put 20% down is a greater risk to the lender than the one who puts less, so, in turn, they offer higher rates to mitigate that risk.
Property: When a mortgage is insured, the insurer (CMHC, Genworth or CG) not only assesses the applicant, but the property as well. They are by far more stringent than the lender. So, if you and your property are okay with the insurer, chances are, you are okay with the lender. But, in the instance where you are putting 20% down, and are not insured, this property assessment is not done. This doesn't mean that the lender doesn't do this, it just means that the bill for this gets turned over to you. Appraisals are practically mandatory when buying with 20% down, and this usually comes up to about $300-$400. Not a huge amount, but extra nonetheless.
Debt: People often save 20% down, but still have balances on their credit cards or lines of credit. I had a client the other day, who had saved $80,000 to buy a $400,000 home. She had a loan that amounted to $15,000 and was paying $450/month for it. When we did the math, it turned out that she was better off putting 15% down ($60,000), paying off her loan, and simply paying the small insurance premium. We calculated the interest she was paying on her loan, and that amounted to more than the insurance premium. Plus, it made more sense for her monthly budget as well.
This doesn't mean that you should never put 20% down - every situation is different. However, look into your options thoroughly before you decide. It's kind of the lesser of two evils and the greater of two goods.
