Would you be a better fit for renting or buying? In this post, we discuss both options, and where you might fit in.
Trying to calculate the amount you need to save to buy a house can be tricky. There are so many variables and expenses, and every buyer is unique. In this post, we discuss your down payment, mortgage payments, and mortgage default insurance in detail. These are the three major costs to prepare for. You can also check out this post for more information on closing costs to expect when buying a home.
Calculating your down payment
Your down payment is the biggest expense you will need to consider when you save to buy a house. As you likely know, this is an upfront cost that provides assurance to your lender that you can support your mortgage. Once you make this payment, a good chunk of what you owe is covered. So, how much do you need to save?
Down payments have certain requirements in terms of size. If your home’s purchase price is below $500,000, your down payment can be as low as five per cent. If the home is between $500,000 and $1 million, you may pay five per cent on the first $500,000, and 10 per cent on the rest. If your home is $1 million or more, you have to pay 20 per cent on the entire purchase. For example, for a $500,000 home, a five per cent down payment is $25,000. On a $1 million home, a 20 per cent down payment equals $200,000. Down payment sizes can vary, but even the smallest down payment is a big cost.
In Halifax, the average housing price is currently around $540,000. Here is what your down payment options look like:
- Five per cent of $500,000 = $25,000 + 10 per cent of $40,000 = $4000, for a total of $29,000.
- 20 per cent of $540,000 = $108,000
Down payments below 20 per cent require the purchase of mortgage default insurance, which we will get into later.
Monthly mortgage payments
Your monthly mortgage payment will depend on the interest rate you secure on your mortgage. These days, most mortgage rates are in the five to six per cent range. For example, let’s say you have a 5.49 per cent interest rate on your mortgage, and you paid a full 20 per cent down payment on a $540,000 purchase price. This means your mortgage amount is $432,000. A monthly payment at this rate equals $2634.
Mortgage default insurance
As we mentioned, down payments below 20 per cent require the purchase of mortgage default insurance. This insurance is meant to give lenders extra assurance in exchange for their financing of a higher-risk mortgage. This is an extra amount that is often added to your mortgage payments. If you made a $29,000 down payment on a $540,000 home, the total cost of mortgage default insurance would be around $20,000. This amount is added onto your mortgage and is amortized through your payments.
How long do you need to save?
So, how long do you need to save to buy a house? The answer depends on how much your future home will cost, and how big of a down payment you plan to make. However, many sources agree that most Canadians will need to save for at least five years. In some cases, saving might take over a decade. Of course, you have some control over this, because you can determine how much you want to put aside, and how often. Many people saving for a home try to put away five to 10 per cent of their annual income each year. The important thing is to save at a pace that works for you! Don’t get yourself into trouble by trying to save more than you can afford.
How do brokers get you the best deal?
It’s a bit of a misconception that mortgage brokers solely focus on getting their clients the lowest mortgage rate. While we do aim to secure our clients a good deal, we also prioritize the mortgage product itself. It’s important for your mortgage to support your needs and your financial situation, and it’s essential that your lender is a good match for you. When we meet with clients, we work hard to find the right lender and product. Often, this also results in a mortgage rate that works well for the client. Using a broker is the best way to ensure you are making the most of your buying experience!
When people decide to save to buy a house, they are embarking on a long, but rewarding, journey. If you are preparing to buy a home, be sure to reach out to a broker! We can help you get started when you’re ready.
If you have any questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.