First-Time Down Payments

canadian dollar houseA wide majority of first-time buyers-to-be plan to put down less than 20%, according to new data from RBC/Ipsos.

Here’s the breakdown of their expected down payments:

  • 10% or less (62% of respondents)
  • 11-20% (26% of respondents)
  • More than 20% (12% of respondents)

Over half of newbie homeowners will likely pay the maximum default insurance premium to buy their home.* That maximum ranges from $2,750-$2,900 per $100,000 of purchase price (i.e., 2.75%-2.90%), depending on the source of down payment.

If home prices rise 2% a year (a rough rule of thumb for the long-term growth rate), buyers can easily make up that insurance premium in a few years. If prices drop, it’s just one more thing that eats into their equity if they have to sell.


How long do young buyers expect to save for their first down payment?

  • 53% say “up to three years”
  • 25% say between four and six years
  • 16% say seven years or more
  • 6% say they’ll never save enough to buy a home

Mortgage-Term-SelectionProspective first-time buyer term choices:

  • 39% prefer a term over five years
    (versus 22% of all prospective buyers)
  • 38% prefer a 5-year term
  • 23% want a term less than five years.

Of Canadians in general:

  • 14% of homeowners said they should have made a bigger down payment.
  • 29% of prospective borrowers (42% of first-time buyers) are considering a hybrid mortgage (e.g. part-fixed and part variable). But far fewer (just 7% according to CAAMP) actually choose hybrid mortgages.
  • Just 5% of homeowners admit to choosing the wrong type of mortgage. (From our experience, far more complain about their financing than 5%. Many don’t realize they’ve taken an inferior mortgage until they learn of their lender’s policy on penalties, porting, blending a rate, converting a rate and so forth. Those lessons typically come after closing, when it’s too late.)

Survey details:  These findings come from an RBC/Ipsos Reid poll conducted between January 31st and February 8th, 2013 on behalf of RBC. The sample was 3,005 Canadian adults from Ipsos’ Canadian online panel.

* This is the maximum default insurance premium for fully qualifying borrowers (i.e., those who can prove their income).

Rob McLister, CMT

  1. Extrapolating the numbers given suggest that problems will be forthcoming in the next decade or less. 6% have basically given up on home ownership. 16% say it will take 7 years to save enough for a downpayment. Assuming a $500000 home today increases in value at 2% annually that same home will cost $574200 in 7 years. Instead of $25000 downpayment (at 5%) they will need $28710. Needless to say the CMHC fee would also increase over $2000.
    Will they become part of today’s 6% who see no hope? To support TDs and GDS ratios higher incomes or less debt will be required also on these higher values.
    Another troubling aspect is that home ownership not only supports equity building for the owners but it supports a secondary industry. Most folks when they first buy want to do some type of improvement to their new home or property. They head to their local Home Depot or Rhona etc and purchase goods. This creates jobs.
    There are only a couple of solutions. Interest rates have to stay low or go lower. The May 13th issue of Canadian Business magazine has a feature article where they see interest rates going as low as prime – .8% on a variable or lower. Their cover says possibly 1.9%.
    The other possibility is a drop in house prices. Certainly in large cities like Toronto and Vancouver that does not appear to be happening overall.

  2. The B of C is holding the line on interest rates so I don’t expect them to go any lower. Banks are not competing right now with low-ball variable rates because there is no profit in them. I was lucky to get a 5 year 2.35%. I am just hoping for rates to be low when I renew in a few years.
    The experts are now saying through 2015 rates will stay where they are.

  3. I see a lot of first time buyers using gifts from their parents for part or all of their down payment. I wonder if that is factored into their responses. I have a feeling it’s not.

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