4

In Australia, even after the global financial crisis, it's still common to only have 5-10% and some people even use other assets as collateral to borrow all 100%. I hear historically this has not been the case, it's only been the last decade of so during the housing boom.

In terms of avoiding risk and stuff, what do you think is a sensible percentage? Or is that even a relevant measure? Should people be looking at say, income?

5

The typical down-payment was expected to be 20%. The idea being that if one could not save 1/5 of the cost of a house, they were not responsible enough to ensure repayment of the loan.

It is hard to say whether this is truly a relevant measure. However, in the absence of other data points, it is pretty decent. It typically requires a fair amount of time to amass that much money and it does demonstrate some restraint. (e.g. it is easily the cost of a decent new car or some other shiny "toy.")

Income is not necessarily a good measure, on its own. I am certainly more responsible with my spending when I have less money to spend. (Lately, I have been feeling like my father, scrutinizing every single purchase down to the penny.)

  • If you got a loan with 0% down, you can still lose your job and just default on the entire balance. If you got a loan with 20% down and a good income, you're taking on some risk of your own and putting some skin in the game, and hopefully you've thought about it more... so the bank is going to be happier with your incentives. – fennec Dec 5 '10 at 18:16
  • @fennec A great point. A sizable down-payment certainly demonstrates a greater commitment on the borrower's part. – George Marian Dec 5 '10 at 23:51
  • In some parts of the US, at least, the standard contract given out to Realtors shows what of the purchase price is down payment and what is borrowed (and the MLS reflects it after the sale). You can bet your bottom dollar that sellers look at how much you are putting down as a measure of how serious you are. – justkt Dec 7 '10 at 13:19
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In Australia, you will typically be required to pay for mortgage insurance if you borrow more than 80% of the value of the property. Basically this means another ~1% on top of the regular interest rate. So it's in your interests to save until you can at least reach that point.

If you can't rent and save at the same time, it suggests your finances may be too stretched for buying now to be a good idea.

  • I believe that this is also generally the case in the US. – George Marian Dec 5 '10 at 23:53
3

A bigger down payment is good, because it insulates you from the swings in the real estate market.

If you get FHA loan with 3% down and end up being forced to move during a down market, you'll be in a real bind, as you'll need to scrape up some cash or borrow funds to get out of your mortgage.

  • 1
    This is why we have so many short sales currently in the U. S. – justkt Dec 7 '10 at 13:19
1

Well hindsight tells us now that by and large, doing 100% borrowing was not the best policy we could have taken. It gets nitpicky, but in the US the traditional 20% is the answer I presently feel comfortable with.

It could be a reactionary judgement I am making to the current mess (in which I have formed the opinion that all parties are responsible) and arm-chair quarterbacking "if we had only stuck with the 20% rule, we wouldn't be here right now.

The truth is probably much more gray than that, but like all things personal finance it is really up to you. If the law allows 100% financing ask yourself if it really makes sense that a bank would just loan you hundreds of thousands of dollars to live somewhere.

1

I think anything from 10% on demonstrates a reasonable ability to save. I would consider ongoing debt level a better indicator than the size of the down payment. It's been my experience that, without exception, there is a direct correlation between a persons use of revolving credit and their ability to manage their money & control their spending.

Living in Seattle, I only put 10% down on my first house, but not only have we never missed a payment we have always paid extra and now have about 50% equity after 10 years with a family. Yet it would have taken me another year to save the other 10% during which time I would have burned that amount and 1/2 again in useless rent.

  • 5
    "Burning money" on "useless rent" isn't that different than "burning money" on interest payments on your mortgage debt... to say nothing of the reduced exposure to the fun and exciting cough cough housing markets. But, either way, whatever. :) – fennec Dec 5 '10 at 18:20
  • @fennec: I have to disagree. Taking a mortgage also effectively locks down your payment. Apart from the fact that I own a good percentage of it, I could not rent our house today for our mortgage payment plus maintenance costs. And that's after the market bubble burst. – Lawrence Dol Jan 5 '11 at 20:49
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    That's perfectly true. Buying and renting have different risk profiles; homeowners worry about falling house prices and renters worry about rising ones. My main point, though, was that you're not going to "save" all the money you're spending on rent by getting a mortgage, even if J Random Real Estate agent tells you it will. – fennec Jan 11 '11 at 20:14
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    @Fennec: I never said nor implied you would "save" money by paying a mortgage instead of paying rent. I said I would have had to continue paying rent while saving a significant amount besides for the larger down-payment. – Lawrence Dol Jan 11 '11 at 20:28
0

I am currently in the process of purchasing a house. I am only putting 5% down. I see that some are saying that the traditional 20% down is the way to go. I am a first time homebuyer, and unfortunately we no longer live in the world where 20% down is mandatory, which is part of the reason why housing prices are so high. I feel it is more important that you are comfortable with what your monthly payments are as well as being informed on how interest rates can change how much you owe each month. Right now interest rates are pretty low, and it would almost be silly to put 20% down on your home. It might make more sense to put money in different vehicle right now, if you have extra, as the global economy will likely pick up and until it does, interest rates will likely stay low. Just my 2 cents worth.

EDIT:

I thought it would not be responsible of me not to mention that you should always have extra's saved for closing costs. They can be pricey, and if you are not informed of what they are, they can creep up on you.

  • This was something that infuriated my back in 2001 when I bought my first house. I live in a small state capital, so 80% of the population makes the same amount of money. Anyone who could stand upright got approved for a loan instantly, and the feeding frenzy for houses in the $120k-200k range was intense... if you didn't have an offer on the table the day the house was listed, you weren't buying a house. I bought a house for $130k that sold for $50k 7 years earlier. – duffbeer703 Dec 6 '10 at 4:16
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    while you make some excellent points, it is quite possible as a first time homebuyer to put down 20% and even more. In areas where housing costs are high it's pretty necessary to put a lot down if you don't want your mortgage to be sky high. It is never silly to put 20% down on your home, even with low interest rates. Yes, that money could be in the stock market instead I guess, but other than that you aren't going to find any investments making great returns right now and the stock market is pretty volatile. – justkt Dec 7 '10 at 13:16
  • @justkit, I agree the stock market is still pretty volatile... but the stock market is risky in general.However, there are other ways to invest. In Canada, we have RRSP’s which are great for shielding your income against tax’s, allowing you to have more present cash to invest.... I do not know what programs other countries have, but I suggest that while saving for a house you think a bit broader then just what down payment is needed. With some thought you can come up with a proper investment plan for you. I would also suggest going to see a financial advisor if you haven’t already done so. – Rick Dec 7 '10 at 14:04

protected by Chris W. Rea Mar 23 '17 at 11:50

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