tl;dr

  • We want to buy a house.
  • We've done all the pro's and con's of home ownership.
  • We have 1/2 a down payment and some highish loan payments

Would it be wiser to pay down the loans and go with a cash back mortgage at 5.29% interest, or wiser to keep saving for the full down payment while still carrying the highish loans? FYI: the biggest loan is a $30k truck loan at 9.9%


Full Version:

I'm in Canada, and our government has changed the laws a bit and we're not allowed to do zero down mortgages. I know this is a good thing, but unfortunately it puts us in a tight spot. We must have 5% down and cannot borrow it from anywhere.

Family is allowed to "give" money but that's never gunna happen for us.

Banks are allowed to "give" money, but that comes by way of additional fees that suck the lifeblood out of us... basically they give you your 5% down but make up for it in an additional 2% interest for a fixed 5 year term. Currently mortgage rates are roughly 3.25% and a "cash back mortgage" is 5.29%.

Now on to our situation.
We currently have $7k liquid cash in the bank, and the size of home we need (in our area) will cost $340k. That sets us up for a down payment of roughly $17,000.

I also carry a $565/month truck payement ($30k @ 9.9% interest) and a couple of visa's with a total balance of about $600 (no big deal there). There is a new bank willing to take my truck loan at 5.9% interest, lowering my payment to $425/month if I tack on an additional $3500 as a new down payment.

Would I be smarter lowering my overall debt ratio by kicking in the $4100 to pay down the two visa's and get the truck loan smaller, then go after a "cash back mortgage", or am I smarter keeping the cash in the back, stashing away as much as I can, and carrying the higher payments and interest?

This is such a hard decision for me, and I'm having a hard time finding a sound solution one way or the other.

One thing I'm thinking about is that there is no savings account that's going to give me 4% guaranteed, which is what I'll get if I move the truck loan. However, my savings will take a big hit and set us that much further back from our goal (If we don't go the cash back route).

I'm not here to defend my decision to buy a house vs continuing to rent, I have my reasons. I'm more just interested in the dollars and cents of it all.

Final Results: if anyone cares

We ended up needing to move out of our rental (landlord wanted to bump us to $2000/mo) into a town home with rent at $1600/mo. This was the tipping point, and we needed to buy something asap. We ended up paying off one of our vehicles using my tax return ($7000), coming up with 10% down and buying a $320,000 home at 2.89%. Leaving us with a monthly mortgage of $1440. With property tax in, we're paying $1620 / month (utilities are the same everywhere we've lived), so for an additional $20/month we're paying on a mortgage instead of rent.

  • In the US, banks used to decline mortgage applicants who were asking for mortgage loans of more than two to three times the annual income of the applicants. Then, this rule went by the wayside and people took out all kinds of loans (and are, in some cases, upside down on their mortgages now). The banks may have gone back to saner lending practices now. Since money works similarly most everywhere, you might want to inquire as to how much of a house you can afford on your current income. You don't have to ask a bank necessarily; a real-estate agent will likely know the rule of thumb used. – Dilip Sarwate Mar 2 '12 at 20:02
  • we're first time home buyers, we don't have an existing home... we rent. Also, our income can support a $340k mortgage at 3.5% interest IF we had the down payment. The problem is that rent is so high ($1700/month + $400/month in utils) that saving a substantial amount is very difficult. – Chase Florell Mar 2 '12 at 20:12
  • I put your figures into the New York Times's Rent vs. Buy Calculator; it shows buying beats renting after 11 years, not 5, assuming 3.25% mortgage. And even then, the "win" is very small for many years (even after 25 years, the average gain is only $1,333, less than one month's rent). – Chelonian Mar 2 '12 at 23:07
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    @ChaseFlorell, you mentioned that your incomes can support a $340k mortgage at 3.25% interest. One point to consider is can you afford the repayments if interest rates go up. In Australia, the banks check your ability to make repayments based on 2% above current statndard variable rates, as this provides a buffer incase interest rates start to go up. – Victor Mar 2 '12 at 23:55
  • Have you read any of Garth Turner's blog? He's definitely sensationalist, but I would think reading some of the articles he links to would be good consider with deciding on buying vs rent. greaterfool.ca – Jedidja Mar 7 '12 at 13:53

Easy answer -- pay down your debt.

Why easy? Because you can't afford the house. The other posters mentioned it; I'll tackle it too:

Your $1445/month mortgage payment estimation is just that - mortgage only. Why haven't you included home insurance or taxes? According to that last graphic, those are $1930 and $1910 per year. That adds $320 to your monthly cost. $1445 + $320 = $1765/month. More than what you're paying in rent, and you say you have little enough left over after that.

And that's not counting CMHC insurance like Chris W. Rea mentioned, or maintenance, which is something renters always underestimate. I know I did.

And don't even get me started on the fact that the (currently super low) interest rate is fixed for only 5 years.

I know you really, really want to buy a house, and you really want to stay in that expensive area you live in. And you're trying hard to make the numbers work. But the fact is, you're setting yourself up for bankruptcy.

Realistically, you have these options:
1) stay in the area, forget buying for the foreseeable future, continue renting, pay down debt and then save for a proper down payment
2) stay in the area, but make a smaller, cheaper place work
3) move to a cheaper location
4) figure out how to make more money.

That's it. Sorry to be blunt; this is the reality.

  • I hear what you're saying, but some options aren't options. I live in Calgary... high market, but secure job... moving further away isn't an option because well, the commute to work would be insane. $340k really is rock bottom prices for a family of 6 in this area. I'm not concerned about hitting $1800 or $1900 / month... the additional $200/month that I would be "saving" will still take forever to save the downpayment, and by that time the interest rates will be much higher than the 5.29% – Chase Florell Mar 3 '12 at 1:56
  • +1 I will however say that your one-liner at the top is the closest thing to an answer to the actual question that I've seen here. – Chase Florell Mar 3 '12 at 1:57
  • @5.29% you'll be paying $1885 + $320 = $2205/month. Plus that CMHC insurance. Can you afford that every month? Also, is that cash-back mortgage locked in for 30 years, or does it reset after 5 years too? – Patches Mar 3 '12 at 2:11
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    @ChaseFlorell Yea, that's where a little delayed gratification may be the best path. Bear in mind, that even if you're not able to save too much at the moment, that truck will still be paid off eventually. At that point, you have an extra $500+ free in your cash flow, and that makes all the difference in the world in being able to afford the house. – Patches Mar 3 '12 at 3:38
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    "...that truck will still be paid off eventually. At that point, you have an extra $500+ free in your cash flow.." Since the truck will be paid off in seven years, it is quite possible that a "new" truck will be needed by then and a new loan will be in place for that purchase, that is, little difference in cash flow. – Dilip Sarwate Mar 4 '12 at 13:42

I second DJClayworth's suggestion to wait and save a larger down-payment. I'll also add:

It looks like you neglected to consider CMHC insurance in your calculation. When you buy your first home with less than 20% down, the bank will require you to insure the mortgage. CMHC insurance protects the bank if you default – it does not protect you. But such insurance does make a bank feel better about lending money to people it otherwise wouldn't take a chance on.

The kicker is you would be responsible for paying the CMHC insurance that's protecting the bank. The premium is usually added on to the amount borrowed, since a buyer requiring CMHC insurance doesn't, by definition, have enough money up front. The standard CMHC premium for a mortgage with 5% down, or as they would say a "95% Loan-to-Value ratio" is 2.75%. Refer to CMHC's table of premiums here.

So, if you had a down-payment of $17,000 to borrow a remaining $323,000 from the bank to buy a $340,000 property, the money you owe the bank would be $331,883 due to the added 2.75% CMHC insurance premium. This added $8883, plus interest, obviously makes the case for buying less compelling. Then, are there other closing costs that haven't been fully considered?

One more thing I ought to mention:

Have you considered saving a larger down-payment by using an RRSP? There's a significant advantage doing it that way: You can save pre-tax dollars for your down-payment. When it comes time to buy, you'd take advantage of the Home Buyer's Plan (HBP) and get a tax-free loan of your own money from your RRSP. You'd have 15 years to put the money back into your RRSP.

Last, after saving a larger downpayment, if you're lucky you may find houses not as expensive when you're ready to buy. I acknowledge this is a speculative statement, and there's a chance houses may actually be more expensive, but there is mounting evidence and opinion that real estate is currently over-valued in Canada. Read here, here, and here.

  • So at the end of the day, your recommendation is to save the $7k and continue to build it and also pay the higher interest rate? I guess I'm thinking that the 9.9% interest on the truck is costing me more in the long run than the 1% interest I'm getting on the $7k in a savings account. – Chase Florell Mar 3 '12 at 0:24
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    I didn't consider your truck debt in my answer .. I only added two more points to consider not mentioned in the other answer. On the subject of the truck debt specifically, I'd try to pay it off as soon as I could. I wouldn't want to carry debt at such a high rate, either. – Chris W. Rea Mar 3 '12 at 0:29
  • +1 for RRSP Home buyers plan, and for remembering the CMHC insurance. – DJClayworth Mar 3 '12 at 16:01
  • We bought a condo a couple years ago with a 15 year fixed mortgage, putting ~12% down. In addition to a truly awe-inspiringly low interest rate, the local credit union we got the mortgage through, gave us a PMI of only 25 dollars a month. We asked them to run the numbers again manually, that looked so low, but nope - it was correct. So basically, when you're shopping around, if you're putting less than 20% down, just include checking the PMI when shopping. (And don't forget, when you hit 20%, make sure they stop charging you the PMI.) – neminem Jun 10 '15 at 15:56

Let's look at basics. Your 340K mortgage amortized over 25 years at 3.5% is going to cost you $1700 in payments - almost exactly your rent. You won't be paying out less. You will in fact be paying out more, because you are now liable for more insurance, and any repairs will have to be paid for by you, not the landlord. So don't do this to save money. Figures from here.

Don't forget that it is extremely likely that interest rates will go up in the next few years. 7% is not unlikely. Can you afford it if your payments double? You can get a fixed rate mortgage, but they are going to cost you much more than 3.5% for more than a couple of years.

Don't be fooled by the 'pay yourself' argument for getting a mortgage. in the first few years almost all of your payments is interest, not paying down the principal. You are just switching from paying a landlord to paying a bank.

There are huge advantages to waiting until you have a good down payment before buying a house. People with a big down payment get better interest rates, and don't need to pay as much CMHC insurance. You will be less at risk if the price of your house drops. Also ask yourself if you are sure you will be in your house for five years - if not, even real estate agents would usually admit you shouldn't buy.

The truck payment shouldn't be an issue, as long as you are sure you can service both truck and mortgage payments. Nor is $600 in credit card debt significant in the big scheme. I would probably put any spare cash towards a down payment. It reduces your interest rate (possibly), some expenses with regard to your mortgage, and your risk if you have to sell and your house value has dropped.

You might like to look at the government of Canada website "Rent or buy". It's down right now so I can't give you a link. I'll edit it in when it's back up. EDIT:Turns out it's offline for 'updating'. Here's the link.

  • Thanks @DJClayworth, these are all things I've taken into account. I've done the rent/buy calculator for a 5 year term and added it to my original question. It looks as though buying is a better option overall... just wondering about getting the approach right. – Chase Florell Mar 2 '12 at 20:36
  • Noticed your edit. Truck is paid off in 7 years. Also, the 3.25% rate is a fixed 5 year rate. – Chase Florell Mar 2 '12 at 20:38
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    You haven't factored in repairs, or said what you will do if you have to move in 2 years and your house value has dropped by 5%. Also remember that if you sell a house you will have to pay 5% of its value in agent fees. My actual answer to your question remains - if you have any spare money, put it towards a down payment rather than the truck debt. 1) It should lower your interest rate still further 2) it reduces your risk if you have to sell. – DJClayworth Mar 2 '12 at 20:50
  • Just re-read your answer. I'm confused by the contradictory statements "Don't forget that it is extremely likely that interest rates will go up in the next few years. 7% is not unlikely" or "There are huge advantages to waiting until you have a good down payment before buying a house. Interest rates will be lower"... Which one is it? 7% later is higher than 5.29% with cash back now. – Chase Florell Mar 3 '12 at 1:21
  • At the same time and with everything else the same, a person with a bigger down payment will be able to get a lower interest rate. Waiting won't bring a lower interest rate - having a bigger down payment will bring a lower interest rate. Changes in interest rate over time are a separate issue. – DJClayworth Mar 3 '12 at 15:59

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