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The Down Payment Dilemma

22 August 2012

Save up for a down payment on your home that’s at least 10 per cent of the home’s value. That’s the standard first piece of advice given to anyone that wants to buy a home. And it makes sense. The more of a down payment you have, the lower your overall loan amount will be, and the more you’ll save in interest over the years. But what about when saving up for a down payment is just no longer feasible? That’s the dilemma that buyers, mostly young buyers, are faced with today.

According to mortgage insurer Genworth Financial Canada, the average price of a home in Canada today is $295,000 (and if you’re looking at mortgages in Toronto or Vancouver, you can expect to pay twice that much.)

With numbers like that it means that buyers would need $16,000 just to make a down payment of 5 per cent – the lowest a buyer can make today. If the buyer wanted a 10 per cent down payment, that would be $31,000. And of course, a 20 per cent down payment would translate into a whopping $59,000 – a year’s salary or more for many people. And let’s not forget that in that year, not every penny will go to the down payment account either. After all, there are still those pesky conveniences like food, gas, and clothing that we must buy.

$59,000! With the exception of a huge inheritance coming at the most opportunistic time, is it really feasible that people can save that much money?

Doug Porter, deputy chief economist at BMO Capital Markets, says that while it may be feasible for some, it’s an extremely hard task saving up that much money.

“The median family would, by this measure, be saving about $2,800 annually,” he says. That measure is the fact that the rate of savings right now sits at a measly 4 per cent – thanks to those super low interest rates we want hanging around for as long as possible.

Mr. Porter continues on to say, “I would suspect that on a median basis, just to get into the housing market with 5 per cent down would take about four to five years of saving. Cobbling together a down payment is a big challenge for first-time homebuyers.”

A challenge, indeed. It could take some homebuyers 10 – 20 years to come up with almost $60,000 (if they wanted to make the full 20 per cent down payment,) and even half that time to come up with a 5 per cent down payment is simply too long to wait to buy a home for most people.

So what’s the answer? Unfortunately, there isn’t an easy one. With rising home prices today, it’s only going to get harder for people to scrape up the cash for their down payment. But harder doesn’t mean impossible. In our next post, we’ll cover five different ways that will help you save up for a bigger down payment; and that might help you buy that home of your dreams within the next decade.

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