10 May The Pros and Cons of Borrowing Money for A Down Payment
Borrowing money to make a down payment on a property isn’t necessarily a bad idea, and in some cases, it can actually save you a lot of money.
However, it’s important to note that this only happens under certain circumstances.
Read on to discover some of the advantages and disadvantages of borrowing money for a down payment:
Pros
You can get onto the market faster
Sometimes, borrowing money can help you swiftly get on to the market while house prices are still close to an all-time high.
Rent money is no longer wasted
Gone for good each time you pay it to your landlord or lady, your monthly rent cheque is a big chunk of your money. When you borrow money for a down payment on your own home, you can kiss goodbye to wasted money, and start earning in the form of equity.
Build your wealth in the long term
Despite the pandemic, home prices in Canada have continued to rise, and getting into the housing market now, could help you build up your wealth over time.
Make savings on mortgage default insurance
Buying a home with less than a 20% down payment means that you must pay mortgage default insurance (CMHC insurance), and the premium you pay depends on the size of your down payment. Once you go past the 10, 15 and 20% mark, rates drop significantly.
Cons
Costly repayments
When you borrow money from a financial institution such as a bank, it’s highly likely that your interest rate will be much higher than that of your mortgage. If you then opt to cover your down payment with a cash back mortgage, the rate could be even higher, and you could end up paying a higher rate on the whole balance of your mortgage.
There are risk increases with lower equity
Cushioning you in the event of unexpected repairs or loss of a job, for example, additional monthly debt repayments can be helpful. However, since you need a minimum of 20% equity in your home to be approved for a home equity line of credit, you might find yourself with fewer options available if you’re not able to cover your costs with savings.
Additional debt can impact your debt service ratio
Lenders determine your mortgage affordability by examining your debt service ratio, and if you take a loan to cover your down payment, this will undoubtedly not go in your favor. In many cases, the amount you can borrow for your mortgage may be significantly reduced due to the cost of paying back your borrowed down payment.
Think carefully about whether borrowing money to pay for a down payment will have more pros than cons for you, and if you’re in any doubt, you can talk to a financial advisor. For more detailed advice about the current housing market, talk to an experienced, local mortgage broker.