The Down Payment Struggle Has Not Let Up

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Data, Mortgages

Briskly rising home prices are once again boosting the minimum down payments required to break into the housing market.

The average first-time buyer plans to spend $432,000 on their purchase, according to a BMO survey conducted by Pollara Strategic Insights. Five short years ago, that figure was just $312,700.

Here’s how that average purchase price alters mortgage costs given various down payments and financing types.

High-ratio mortgages (for those putting down the minimum 5%)

  • Minimum down payment: $21,600 (+38% in five years)
  • Mortgage amount: $426,816
    • Includes $16,416 in CMHC mortgage default insurance
  • Lowest nationally available 5-year fixed rate: 1.64%
  • Longest available amortization: 25 years
  • Lowest monthly mortgage payment: $1,734
  • Interest paid over 5-year term: $32,026

Uninsured mortgages (those putting down 20% or more)

  • Minimum down payment: $86,400 (+38% in five years)
  • Mortgage amount: $345,600
  • Lowest nationally available 5-year fixed rate: 1.84%
  • Longest available amortization: 30 years
  • Lowest monthly mortgage payment: $1,249
  • Interest paid over 5-year term: $29,666

HELOC (those putting down 35% or more)

  • Minimum down payment: $151,200 (+38% in five years)*
  • Mortgage amount: $345,600
  • Lowest nationally available HELOC rate: 2.35%
  • Longest available amortization: infinite (i.e., interest-only)
  • Lowest monthly mortgage payment: $547
  • Interest paid over 5-year term: $32,384

* This minimum is for a fully revolving 65% loan-to-value interest-only line of credit. This is not recommended for all but the most financially secure borrowers.

The down payments quoted above are, of course, moving targets. If home prices maintain their upward trajectory, they’ll continue to climb.

The Best Laid Plans

Yet another challenge for today’s first-time buyers is that down payment funds are sometimes diverted. Savings might very well become unintentional emergency funds in tough times, which has been the case for so many during this pandemic.

In fact, about 50% of first-time buyers have had to tap into their down payments to help cover unexpected costs over the last several months, according to BMO.

More COVID Effects

Evaporating down payment funds is not the only way the virus has shaped buying decisions. The survey also found:

  • 29% of first-time buyers say their house hunting has moved from within a major city to the suburbs or a rural area.
    • While prices are generally lower the farther you get from a city centre, high demand is nonetheless keeping pressure on prices in the suburbs and surrounding regions.
  • 25% have shifted their search from a condo or townhome to a detached house.
    • In condo-land, demand, and thus prices, are softening in some areas. The Toronto Regional Real Estate Board, for example, reported just a 6.6% year-over-year price gain for the condo market vs. a 14% increase for detached homes.
  • 25% said they’ll require a larger mortgage since they’ve had to use some of their down payment funds for emergency purposes.
    • The figures are a bit higher in Ontario (30%) and British Columbia (26%).
  • 40% think now is still a good time to buy a house.
    • The optimism is even higher in Alberta and the Prairies, with 60% in agreement that now is a good time to buy.
  • 19% of prospective buyers have already been pre-approved for a mortgage, while 50% are planning to get pre-approved.