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

Toronto Star - - MORTGAGES - CAMILLA COR­NELL SPE­CIAL TO THE STAR

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.

PEYMAN SOHEILI FOR THE TORONTO STAR

Cris Lam re­ceived help from her par­ents to pur­chase a condo of her own.

DAR­RYL DYCK/THE CANA­DIAN PRESS FILE PHOTO

CMHC CEO Evan Sid­dall ad­dresses the Greater Van­cou­ver Board of Trade last Novem­ber. The CMHC raised mort­gage in­sur­ance rates in March.

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