First-Time Down Payments

A 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.

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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

Prospective 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