5 tips to boost that down payment and avoid insurance fees
With the recent raise in insurance fees by the CMHC, incentive is up to find more money to put down on property
When Cris Lam bought her pre-construction Toronto condo in 2014, she was in the enviable position of having a big enough down payment to avoid mortgage default insurance fees.
Why would she want to avoid insurance, you ask?
The simple answer: because mortgage default insurance is really intended to protect the lender, not the homeowner.
It ensures that if you default on your loan, the bank, trust company or other lender will get its money anyway.
Avoiding the insurance — sold by either Canada Mortgage and Housing Corp (CMHC) or Genworth — can save the average homeowner a significant amount of cash over time.
Fees rose in March for the third time in the last few years, as part of new regulatory requirements that stipulated CMHC and Genworth had to hold more capital to offset risks in the country’s redhot real estate market.
Given that the average price of a house in Toronto last year was $730,472, according to the CMHC’s premium calcula- tor, if you make the minimum $48,048 down payment on that home and opt to have the CMHC premiums added to your mortgage, you’ll pay more than $27,000 over the life of your mortgage. That’s nothing to sniff at. You can avoid those fees and cut down on your interest payments as well by building up your down payment. Here’s how:
Visit the Bank of Mom and Dad Lam’s secret weapon was her parents. In 2013, they sold the family home, giving Lam, her sister and her brother $200,000 each to purchase a home of their own.
They even sweetened the pot, boosting Lam’s share by $30,000 so she could live on the eighth floor of her condo building — “Chinese lucky number 8.” Lam says she and all of her siblings are so grateful for the support. “I know it’s not trendy, but why not ask your parents — who may be downsizing in the future — to start thinking of what can happen if you get your pre-inheritance now to purchase your future home?” she suggests.
Note that mortgage lenders may ask for a signed ‘gift letter’ indicating the money doesn’t have to be repaid and specifying the amount, as well as who is offering the cash and their relationship to the recipient.
Take a systematic approach to savings
Even with her parents’ contribution, Lam needed a financial planner’s help to ensure she was debt-free and had spare cash to cover all the additional costs of home ownership. She met with Victor Godinho, a financial planner with Pangea Personal Financial Planning, who delivered some hard truths. “Do you realize you’re blowing $800 a month on food?” he asked her.
Lam, who is single, was flabbergasted. “I was caught up in the downtown lifestyle,” she says. “It was all about the food apps. Everything is so convenient — you just press a button and the food is at your door.”
Instead, she invested in a couple of cooking classes and now designates Sunday as prep day for the entire week. “I learned how to prepare meals and I budget for what I want to spend each month,” she says. “I eat healthier and my budget is more like $300 a month for food.”
Lam also replaced twice-daily dogwalking fees ($20 each) with a doggy daycare at $30 per day to save money, and she reserved her credit cards for gas, groceries and emergencies.
Avoid lifestyle inflation
You know what I mean — you get a raise and you immediately decide you can afford to go out for dinner three nights a week instead of one night. Personal finance blogger Barry Choi (moneywehave.com) developed a goal-oriented budget with his (then) fiancée Carla Salvosa immediately following their engagement.
Initially, they focused on saving for the big day. “After the wedding, that money that was being saved for the wedding was now being saved for a home down payment,” Choi says. “As we got raises, we budgeted a little more for travel, but otherwise we just saved all the extra income.”
Supplement your day
job Can’t seem to scrape together enough with your regular gig? Take on a side business or a part-time job, Choi says.
He started a personal finance blog in 2014, to “help people avoid making the same money mistakes I made,” he says. Then, attracted by his blog, a company contacted Choi to offer him a freelance writing job.
Within the first two years of its launch, Choi generated an extra $5,000 toward the down payment on his Toronto condo and continues to earn a regular income from it through writing, creating sponsored content, blog consulting and acting as a brand ambassador.
Go car free
Godinho urged Lam to get rid of her leased car. The reason? According to the Canadian Automobile Association (CAA), the average annual cost to own and operate a mid-size vehicle is $10,372 a year in Canada. That’s a big chunk of change.
Instead, he suggested relying on public transit and making use of a car share service such as Zip Car and Car2Go when necessary. You’ll pay $70 per year (or $7 per month) in membership fees to join Zip Car and driving rates will set you back $8 to $10 an hour. But that includes insurance and gas, so the savings are big.
Ultimately, Lam opted not to go that route and economize in other areas.
“I don’t always work 9 to 5,” she says. “I work a little later, so I don’t feel comfortable taking TTC. You have to make choices that work for you,” she says.
Cris Lam received help from her parents to purchase a condo of her own.
CMHC CEO Evan Siddall addresses the Greater Vancouver Board of Trade last November. The CMHC raised mortgage insurance rates in March.