Almost every one of our buyers asks if it would make more sense to save up more money before they make their purchase. I love to live in the grey area (as I look down at my grey sweater), so the answer is always “it depends.” Interest rates are so low right now that the single most limiting factor between most homebuyers and their new house is their down payment. This is unusual because it used to be income levels that stopped buyers from purchasing homes. Income levels are up, and interest rates are down, so most buyers that we work with can support relatively high mortgages but are held back because they don’t have enough cash.
If you buy a house for over one million dollars, you need a minimum 20% downpayment. Therefore, for every 20k you save, you can increase your budget by 100k.
If your budget is $1,000,000, that means that you have $200,000 in cash sitting in the bank, ready to be spent on a house. If you have $220,000, your budget goes up to 1.1. So, extra cash, even a little bit, can increase your spending power as long as you have the income to carry the additional $80,000 loan (roughly $350/month).
★ Check out these posts that are a must-read for anyone entering the market:
- What Home Inspections Don’t Reveal About A Property
- Buying A House With A Friend? Here’s What You Should Know
- Five Tips For Millennial Home Buyers
It seems like a no-brainer to hang tight and save up some more money before making your purchase. Maybe you can save $20,000 in six months (Well done, you!), and that will enable you to get a larger home or a house closer to your ideal neighbourhood.
The flip side, however, is that the Toronto market often outpaces your ability to save money. If you take six months to a year to save up enough money so that your budget increases by 100k, it is very likely that although your budget has increased, your purchasing power has not. You will have spent an extra year paying rent only to end up looking at the identical houses that you would have been looking at a year ago, except this time, they’re more expensive, and your mortgage payments have gone up.
In almost every case, the right time to buy a home in Toronto is as soon you can afford to do so, and the earlier, the better. Give or take a few months here or there, the market consistently increases year-over-year, and your ability to save money is likely no match for the robust housing market.
★ For more frequently asked questions, check out:
- Mortgage Broker vs. Bank: What’s the Difference?
- What’s The Best Time to Buy a House in Toronto?
- Deposit Vs Down Payment: Whats The Difference?
Let us know if you have any questions!
As always, stay safe. — Robyn Vander Vennen, The Kim Kehoe Team.
