7 Reasons Why You Should Never Borrow Money For a Down-Payment

66 Comments

Last week, a friend tagged me in a Facebook post requesting my personal finance wizardry skills regarding borrowing to make a down-payment on a home, and I was happy to oblige. Unfortunately, when I saw what the authors of the post were advocating, I couldn’t help but give my heated two-cents. The authors of the post did not take well to my voice of reason and my comments were deleted and I was promptly banned from the Facebook page.

The post I was responding to was by a local mortgage broker encouraging people to take out a line of credit in order to make a down-payment on a home. They touted low interest rates and stable house prices a reasons to take advantage of the opportunity, then drove the point home that doing so would put you ahead of renting using some really manipulative math.

You can view the original post here, but the gist of it was that paying your mortgage and making interest-only payments on a line of credit worked out to the same out-of-pocket costs as renting, and therefore owning, at whatever the cost, was preferable.

There is so much wrong with this thinking, I hardly knew where to start.

Before we go on, I just want to ask you to please share this post with a friend or family member who is house hunting. Many people look at loans, lines of credit, or even credit cards as possible sources to top-up, or even fund their entire down-payments. This is a dangerous way of thinking, and traps people into a debt-spiral and a home they cannot actually afford. Remember, when it comes to making major decisions with your money, patience pays. Taking an extra few months or years to buy a home the right way will spare you financial anguish for the next 25 years, whereas rushing into home ownership without your financial ducks in a row will cripple your wealth accumulation for the rest of your life.

Below are 7 problems with borrowing for a down-payment!

Problem #1: a 5% down-payment gives you only 1.6% of equity in your home and leaves you underwater on your mortgage from day one

Most people erroneously assume that 5% down translates to 5% direct ownership in their home, but this is not the case. In Canada, if you are putting down less than 20% of your home, you must pay mortgage insurance on the difference, which essentially reduces how much your down-payment is worth. Rob Carrick of the Globe & Mail shared the math in this chart:

never borrow for downpayment

In the case of the example used by the mortgage broker in the Facebook post I’m harping on, putting only $15,000 down on a $300,000 requires you to get $10,260 of CMHC insurance as per RateHub’s mortgage payment calculator — effectively reducing the value of your down payment to a paltry $4,740 when you buy. As a result, you end up a $295,260 mortgage and a $15,000 line of credit, and no hope of seeing a positive net worth anytime in the next year.

$295,260 mortgage + $15,000 line of credit debt = $310,260 total debt, or 103% of the home’s total value.

In related, unsurprising news: Canadians now owe $171 for every $100 they earn. Probably because they also have cars, student loans, and credit cards on top of the 103% they owe for their house.

Problem #2: utility bills and property taxes are a real thing

At first glance, it might seem like the annual costs of renting or paying a mortgage are equivalent, but they’re not. Renting has its privileges, not the least of which is zero property taxes and very low utility bills. Many rental properties even include utilities in the rental price, reducing the out-of-pocket costs for heat and water (and sometimes cable, internet and telephone) to zero for the renter. A homeowner can easily pay $300+ for power and water. The larger their home, the more expensive it is to keep warm and cozy.

RateHub.ca gives me an estimate of $148 per month in property taxes on a $300,000 home, or nearly $1,800 per year. That’s a big bill for someone who couldn’t even scrape together a down-payment! Additionally, you should expect to pay approximately 1% to 3% of your home’s value in maintenance and upkeep each year. Some people who buy a new house think they avoid this, but if you have to do things like buy a lawn mower to keep your new square of grass, you’re spending on home maintenance. You will never own a home with no maintenance costs.

I did a quick calculation of the out-of-pocket annual costs of a renter vs. a buyer that borrows on a line of credit for a down-payment. Here is the summary below:

never borrow for down-payment

Numbers used were from this example by the Collin Bruce Mortgage Team on Facebook

As you can see, the borrower is actually worse off than the renter to the tune of nearly $8,000. EIGHT THOUSAND! The high cost of home utilities, maintenance and upkeep, plus property taxes make owning a home more expensive than renting.

The longer I rent, the more I like it — and the more I face naysayers. But the truth is, banking the monthly cash difference between renting and owning can more than make up for the absence of equity in home ownership. In fact, in this market, you’re probably better off.

Problem #3: don’t forget about closing costs such as home inspection, home appraisal, and lawyer fees

If you’re borrowing for a down-payment, chances are your probably don’t have an extra couple thousand dollars kicking around for closing costs. A home inspection will cost $300 to $500, and then you’ll spend an extra $1,000 on lawyer fees plus $300 on title insurance. In other provinces, transfer taxes and fees can eat up even more cash. To say the least, there’s far more costs associated with buying a home than simply slapping down a wad of bills for the down-payment. I did a quick calculation comparing the change in net worth of a renter vs. a borrower at the end of one year, and this is the result:

dont borrow for downpayment 2

The above assumes the renter does not bank the difference between home ownership and renting. As you can see in the first table, the renter should actually have almost $6,000 in disposable income form not paying property tax, utilities, or maintenance that they can save and invest. This would give them a positive net worth change of +$6,000 and further exacerbate the difference in favor of the renter to the tune of over $18,000 higher net worth than the homeowner.

Thanks to extra costs that either need to come out of savings or be paid for with more debt, the borrower will lower their net worth by over $12,000 right off the bat when they buy the house. They’ll make up about $8,000 through mortgage payments during the year, but because they’re also paying an extra $9,000 in annual costs including line of credit interest, utilities, home maintenance, and property taxes, they will likely never catch up. Assuming home values rise, so will their property taxes, so unless they aggressively pay down the line of credit and/or their mortgage, they will be on a hamster wheel trying to “build equity through home ownership” for the next quarter century.

Always keep a few extra thousand dollars on hand for closing costs and fees when purchasing a home, otherwise these will catch you by surprise.

Problem #4: the housing market in Alberta is in decline

I cannot say this enough times to make anyone hear it. It seems most 20- and 30-somethings are so eager for home ownership, they’re neglecting the stark reality that real estate is going down, not up, in our province. Those that purchased their homes in 2014 and 2015 are in flat-out denial that their homes have decreased in value because this reality is so painful to acknowledge. There’s a good chance that if you purchased a home in Alberta with less than 10% down anytime in the past 24 months, you are now underwater on your mortgage. I have yet to see anyone admit this to themselves, but the Calgary Real Estate Board and Edmonton Real Estate Board statistics are public for all to see. You gambled and lost, you would have been better off waiting.

If a $300,000 house drops in value by 2% to $294,000, the borrowing buyer is still on the hook for their $295,260 mortgage and $15,000 line of credit. Which means, they will now owe 106% of their home’s value.

As a general rule of thumb, when it comes to wealth-building, I strongly discourage people from investing in assets that are declining in value.

Problem #5: if you make interest-only payments on a line of credit, you will never get out of a debt

Someone that borrows $15,000 for a down-payment is way, way, way worse of than a renter — to the tune of $15,000 plus interest. I have no idea why this ludicrous Facebook post didn’t acknowledge the fact that when you take out a loan for a down-payment, you end up with a loan. While it’s possible you might be able to make interest-only payments on this debt so long as you live, why would you want to?

A home-buyer that funds their down-payment with a $15,000 line of credit debt has $15,000 more debt than a renter who was not so careless. They also have an additional $1,000/year bill to interest. Interest is this really stupid thing modern society has created where you pay and pay and pay, and have never have anything to show for it except an empty wallet.

I realize trying to get Canadians to live their lives without debt is just me screaming at a brick wall, day-in, day-out, but I’m going to keep trying. Life without debt is better. Choose it.

Problem #6: you will be totally effed if interest rates increase because you have a mortgage AND a line of credit

I didn’t really think that 6.79% interest rate on a line of credit was that great, but it’s certainly lower than credit cards or other loans out there. However, for someone that borrows at the max of their affordability, even the smallest increase in interest rates can have a catastrophic effect on their finances. For the house, they’d be ok for 5 years assuming they lock in low rates for that term, but they’d have to start paying more for the line of credit right away. A small rise in interest rates of only 1% would raise their annual interest costs on their $15,000 line of credit from $1,018.50 in interest to $1,168.50 — an increase of 15%.

The same 1% rate increase on their mortgage 5 years from now at time of renewal, would increase their monthly payment by about $100. If interest rates rise by more than 1%, their mortgage payment will increase by hundreds of dollars each month.

It’s also important to note that a rate increase will increase your monthly payments, but at no benefit to you. It’s just interest. You will paying more for the same thing. You can test your vulnerability to a rate raise here.

Problem #7: performing financial gymnastics to buy things you cannot afford is one of the reasons the Canadian housing market is so heated and over-valued in the first place

Most of the reasons mortgage brokers suggest now is a “great” time to buy a house — like low interest rates and the ability to borrow to fund your down-payment — have led to our problematic real estate market to begin with.

Everyone is so caught up in buying a house, they never stop to think that a truly bizarre thing would happen if people acted more responsibly, such as waiting until they had 20% to put down: house prices would decrease.

Making the market more accessible through low interest rates and quick & dirty loans for down-payments, gives more people the ability to buy a house, which increases the demand for houses, which drives their prices up. Canada needs to take swift and firm action to stabilize the market through stricter borrowing laws, higher down-payment requirements, and higher interest rates, because right now, we are selling housing to people who cannot afford them.

And those who have to borrow on lines of credit in order to scrape together a down-payment are those people.


66 Comments

  1. Susan

    I still can’t wrap my head around the number of comments where people were asking if their low credit scores would qualify for this weird scenario where you invest in an “asset”. And comments basically perpetuating that, as long as you can afford the payment, you’re doing fine. No, as a homeowner, your level of responsibility for a property increases because you’re the one who’s on the hook for the bill if the roof needs to be replaced.

    People buying houses right now almost need to have the same mentality of people financing new cars. You finance it knowing that, as soon as you drive it off the lot, it depreciates. You still technically have an asset but you’ve already lost money. I am guilty of doing it and I will, likely, never finance new car again.

    I’d love for my light bill to be about $50. I don’t think I’ve heard of anyone having that low a bill on the East Coast.

    • The comments actually make me nauseous. I feel so bad for these people. They think they’re accomplishing a major financial goal, but their actually putting themselves under huge financial strain.

      Our electricity bill is $50-$60/mo for our 2 bedroom apartment… probably so low because Alberta still operates on a lot of coal power plants =p

      • Susan

        I brought the post up while out with friends on Friday night so it made for good pub discussion. It frightens me to think that someone would see it being a good idea to get a loan to get a bigger loan. Then again, the provincial government (http://www.releases.gov.nl.ca/releases/2015/exec/1022n08.aspx) seems to think it’s a solid idea. They did get rid of provincial student loans but not to the extent that they’d forgive and write-off old loans.

        We’re just letting electricity supply flow down a lot of rivers over here and using oil based power while the “future” of hydroelectricity for NL is being built and significantly over budget. Meaning the power bills will probably continue to go up so we can pay for it. My bill for January was just shy of $94 and I’m one of the lucky ones. I can’t imagine heating a home with these rates.

  2. Your CMHC premium is low for your $300K example. The premium is a .25% higher for “non-traditional down payments.

    http://www.cmhc-schl.gc.ca/en/co/moloin/moloin_005.cfm

    The Gov of Canada can also improve their worksheets. It drives me nuts when they are not accurate. The mortgage part of the worksheet does not account for the lower balance as payments are made over the term.

    • Awesome. So it’s even worse.

      • Love your sarcasm, it is worse.

        You should look at some of your math or amounts for the borrower area of your example as the mortgage payments don’t seem quite right and in fairness to the comparison, the borrow will have some equity after the first year. Not all of the payments are going towards interest.

        Don’t take this as me being critical, but there are so many issues with mortgage examples and calculators on the interest that fail in their calculations or their logic. It is a bit of a pet peeve of mine. 🙂

        • I used the math they had in the example in the Facebook post — it didn’t work out for me either when I used RateHub’s calculators, but these small differences are not enough to change the outcome.

          • I will have some time later today to look at their example and your example and post the results.

  3. Courtney

    Hahaha oh man, I was wondering the other day if you had responded to my tag/I had missed the notification, etc and hearing that you got banned for exposing their shady advertising techniques is a little hilarious but also sad. These guys have similarly worded radio ads blaring on Sonic that are driving me crazy- trying to sell the benefits of borrowing money to take out a mortgage because it’s ‘cheaper’ than renting. Thanks so much for the followup article on this. I loved how in depth this was – I felt like their weird shady logic was starting to pick apart at my own beliefs on home ownership a little bit and this helped get my head back on straight with it.

    Keep fighting the good fight and I will definitely share this article around!

  4. Hi Bridget,

    Credit where it’s due: this is a good post and an important one for people who are making this decision.

    I think you nailed a few points and missed a few as well. Here are a couple of thoughts:

    – Is this strategy right for everyone? No. You’re correct to point this out.
    – From a cashflow standpoint you’re right to point out that buying vs. renting isn’t always cashflow equivalent and that people need to factor in the possibilities of higher repairs / maintenance costs etc.
    – You’re also right to point out that property appreciation and depreciation is an important guideline for whether or not this makes sense. I’d argue that, in Alberta at this point in time, it doesn’t. It has in the past and it may well again. Other markets may vary.

    However:

    – In order to qualify for this approach you need to have a very good credit score and strong, reliable income that easily covers the PITH payments (Principal, Interest, Taxes and Heat) for the mortgage AND for the line of credit. It’s not like everyone just magically qualifies for this.
    – NEVER is a strong word. There are scenarios when this strategy can make sense…
    – AFFORD is different than “I don’t have a down payment”. A dentist who graduates school and starts making a lot of money right off the bat can AFFORD the payments, the taxes, the utilities, etc. from a cashflow perspective (and keep in mind that’s a big part of the qualification test) but maybe doesn’t have a down payment yet. He or she could wait a year or two, or purchase something now (because they need a place to live). This is especially an important distinction when property values are rising and good advice about the property type is key as well, because some hold their value better than others.

    – I think you touch on this but downplay the value of principal payments on an annual $16,000 in payments (*based on a 5 year fixed rate of 2.59%, over $1000 less than the amount you used), your annual principal repayment is approx. $8,500 in year one and $9,500 in year 5, vs. $7500 in interest and $6500 in year 5). That’s like taking money out of your left pocket and putting it in your right pocket. Over the first 5 years in this mortgage the homeowner in your example ($300k purchase price) would create over $44k of equity, assuming the value of the home neither rises or falls.

    – There is no such thing as the “Canadian Housing Market” and implying otherwise lacks accuracy and diligence. Real estate markets are the definition of local markets. How is the housing market in Vancouver the same as the one in Hamilton, or Saskatoon, or Edmonton, or Halifax?

    – I think your point about selling homes to people that can’t afford them isn’t supported by the evidence or the data. We have some of the lowest default rates in history on mortgages. People who own homes have had tremendous appreciation in the value of those assets (which tends to make non-homeowners jealous I find), which is not unlike the appreciation in financial instruments. Sure it’s “paper wealth” but it’s a relatively liquid commodity that you can sell if you want to.

    – Canada has some of the strictest lending requirements anywhere and they’ve gotten progressively stricter as interest rates have come down to counter-balance the risk. I’ve been in this business since 2002. Trust me – it’s much harder to get a mortgage now than it was back then.

    – From an affordability perspective I’ll point you to RBC ‘s housing affordability report which is easy to find on Google. If you use Edmonton, for example, housing affordability is better now than on the 20 year average. Rates are lower, sure, and prices are higher, yes, but up until recently at least, household incomes were also higher. Basically it’s the same…and you have to remember that renting has gotten a lot more expensive because people were attracted to this market. It was literally a question of getting gouged on rent or owning your own home. Most people made the rational choice.

    – You assume that people’s incomes stay static. This is clearly not the case and most people buying their first home end up using the equity to move up to a nicer home when their income and equity growth allows.

    – This is an emotional piece that looks only at short-term cashflow as a snapshot in time. From that point of view it’s very well argued and you should bring it up for people to discuss…but what you forget is that the data suggests that home ownership has been very good for people’s wealth, their net worth, their retirement options and that most Canadian home owners have very small mortgages relative to their home value.

    I don’t want this to be overly critical because I think your focus on short-term cashflow arguments is a good one, but I think over time the data backs up the fact that home ownership has been a real wealth driver for Canadians and that our qualification rules have prevented any kind of market collapse or panic in the streets.

    Like any system there are ways to improve it and policies and guidelines need to be adjusted to market realities.

    It’s not my job to stick up for other (competing) mortgage brokers, but thought I’d add some industry insight to the conversation so everyone gets the complete look at it.

    Respectfully,
    Gord

    • Tim Casey

      Money wise, you’re better off renting an apartment. Ask the Calgarians with million dollar homes that are now selling for $600K

      • Snapshots in time make for very poor statistics. Ask the people in Vancouver who bought a place for $300k that’s worth a million now. We could play that game all day.

        Over time homeowners build equity and wealth. It’s not the only way and we recommend diversifying so that all eggs are not in one asset basket. Home ownership can and should be an effective part of a wealth building strategy – but not the only one.

        • Russ

          Can be a part of wealth building… Sure.

          Should be a part of wealth building… Nope.

          • Evan McFatridge

            I agree with you 100%. I plan on purchasing a house. However, I am not counting on it to “build wealth” for me.

            I don’t care one way or the other if my house appreciates or depreciates over time. Do I hope it appreciates? Of course I do, but I am going to take great care in finding the fight home for me.

            I want my house to be the house I will live in for the rest of my life, not a retirement plan. I think buying a house based in the fact it’ll probably rise in value over the years to help finance your retirement is silly.

        • No one is saying never buy, we’re just saying don’t buy in a declining market with a borrowed 5% down-payment.

        • Cody

          Let me guess your next advice Gord will be to say that you should borrow money from your LOC to buy lottery tickets as a retirement plan. I have a sneaky suspicion that you are somehow connected to the mortgage industry.

          • Hi Cody…I’m not hiding it. I’m a mortgage broker. I have been for 14 years. I also own a general insurance brokerage and am partners in a Financial Planning firm.

            Our mortgage brokerage has been a 2x finalist for top customer service in the country. I won the first-ever Accredited Mortgage Professional of the Year award, have been a finalist for both Broker of the Year and Brokerage of the year, We’ve helped thousands of people own a home and saved Canadians millions of dollars compared to what they would’ve paid at the bank. It’s a record I’m quite proud of and I’m not ashamed of anything I’ve said on the subject we’re discussing.

            Did you have a specific point you were going to make or do you feel that everyone in any particular industry is just out to get you?

            If you’d like to debate the key points or the math I’d be happy to do that with you. If you just want to pick an internet fight then I’m sure there are better forums for that.

            Have a nice evening.
            Gord

        • Tim

          And how much did they pay in property taxes and upkeep ?

    • I agree with this 100%. Great input here.

  5. Irene

    Very interesting article, and I think it should be criminal for companies to suggest these types of loans. It’s almost as bad as money-mart and pay-day loans.

    • Anne-Marie

      Negative. Not even close to being similar.

      • Shaun

        Comparing mortgage rates that have been well below 3.5% (currently in the 2.5% range) for almost 5 years and line of credit at say 5-9% interest to money-mart and pay-day loans of 30% and higher is pretty careless and 100% inaccurate.

    • Shaun

      Comparing mortgage rates that have been well below 3.5% (currently in the 2.5% range) for almost 5 years and line of credit at say 5-9% interest to money-mart and pay-day loans of 30% and higher is pretty careless and 100% inaccurate.

      • Irene

        I realize that pay-day loans are different and can financially destroy someone on a whole other level. What I was trying to say (albeit poorly worded), is that the marketing around convincing someone to take a down payment loan is almost as bad as pay-day loans. It’s deceiving, and that’s the part that I think needs to be tackled. I doubt the those that advertised this plan, also explains the risks.

  6. Katelynne

    Problem #6: you will be totally effed if interest rates increase because you have a mortgage AND a line of credit

    Yes. A thousand times yes.

    • Shaun Serafini BMgt - Mortgage Professional

      Let’s assume a person used $10,000 line of credit with current rate of interest at Prime plus 4%. That would carry minimum payment of $55.80. Then let’s assume that rates go up 2% before a person has paid any principle on this line of credit. Their min payment has now increased to – WAIT FOR IT — $72.50. Yeap a full $17 dollars. Pretty scary right? Definitely totally effed if rates were to go up! How would one survive such an increase?

      In actuality, the above scenario of rapid interest rate increase is extremely unlikely. To illustrate how unlikely it would be for Prime rate to actually increase by 2 full interest points over period of say 2-3 years, look up historical rate changes to Prime over last 100 years. Then pay even closer attention to rate changes over the past 5 years.

      Truth of the matter is that the payments on the line of credit are factored in to a customer’s debt servicing. In fact, as a safety valve, it’s not the $50 min payment that is factored, it is actually 3% of the line of credit being used for the downpayment – in this case, $300. People who get approved to pursue this method are very well qualified and very well insulated & able to make payments on both the mortgage & line of credit with room to adapt to variations in Prime.

      And before you come out and say that I didn’t mention the change that would occur to the mortgage that is set up, you’d want to consider that the person setting it up would almost assuredly be setting the customer up into a fixed mortgage that wouldn’t be changed by fluctuations in Prime if they felt rate changes would put them in harm’s way. Moreover, it’s unlikely that a person spending so close to their budget would even be approved for a variable mortgage under this scenario and likely wind up with fixed regardless.

      But I’m sure you factored all of that in before making such a sweeping statement?

      Fact is that many of the Mortgage Professionals I know take extreme care and pride in ensuring that the lender, insurer, product, program fit is right for their client. They also spend countless hours personally in maintaining the highest standards of education, licensing and promotion of financial literacy to ensure financial vices like consumer credit cards, payday and on-demand loans and fine print mortgage / loan agreements are avoided.

      • Katelynne

        I think what you don’t take into account is the fact that a lot of people in the Canadian market have taken a lot more house than they can afford, and used a line of credit to pay part of the downpayment because they wanted to get into the market before they had 10% or 20%. So they lock into 5 years and while a rapid change may not occur, gradual changes over 5 years, changes in jobs in economy, having other household debt affected, potentially being affected by the job market and probably not having an emergency fund – this is a realistic situation, I’m not just pulling it out of the air- after that term is up it will feel like a dramatic raise in interest rates and impact people more than they think.

        And you can’t separate the scenarios because purchasing a home doesn’t exist in a vacuum. yes, I know the blog post didn’t address this but a raise in interest rate, gradual or not, will further cause Canadian households to stretch and strain because they have been told that buying a house is the way to go even if you don’t have the money to or can’t afford it.

        (I say this as a homeowner who used a mortgage broker)

  7. Lindsay

    So many people are linking their friends to the post… I want to message all of them with the link of your post!

    • hahahah I know me too, but I feel bad… just hoping someone subtly shares it via email on in their facebook feed. Hopefully I can reach the masses that way!

  8. With so many future variables to look at, there will never be a definitive answer to which will work out better for each individual or couple over the long term.

    Will renting rather than borrowing a down payment be a better choice on paper? If we look at today? Yes. If we look at a year from now,? Most likely. If we look at 25 years from now? Who knows? An accurate answer on the long term difference between renting and borrowing a down payment to purchase is impossible. Investing or home purchase decisions should not be made with short time spans in mind.

    Individual views will differ as well. Someone who busted their butt to pay off a heap of debt may not be interested to take on the biggest debt of their life. On the flip side, ask someone who has paid off their mortgage how they feel and how their cash flow is doing?

    This is far from a “one size fits all” life decision and not only brings financial factors into play, but lifestyle also comes into play.

    • But I’m not saying never buy, I’m saying don’t buy with 5% down funded by a line of credit.

      I think if you’re debt free and have 10%+ (ideally 20%+) saved for a down-payment, purchasing a home can be an awesome decision.

      • We can go in circles, but again, everyone’s situation is different and we can’t accurately compare over a longer time frame.

        Interesting though, using the same purchase price and rates, if you have 10% down,you could borrow the other 10% and after your five year term was up you would be ahead just under $4k.

  9. Sarah

    Just to be clear, it’s not necessarily CMHC insurance. There are other mortgage insurers in Canada. Also, mortgage insurers are insuring the mortgage lender, not the home buyer. Lenders pass mortgage insurance premiums onto home buyers.

  10. Shaun Serafini BMgt - Mortgage Professional

    I was notified today that I was lucky enough to be among a few select Mortgage Professionals that were being singled out on social media as “sleazy” for advertising a government approved “flex-down” mortgage option to people who may not have saved or be lucky enough to have been gifted, a full 5% required to buy a home in Canada. Allow me to respond despite knowing that doing so in this forum is likely to go over about as well as bathing in pig’s blood prior to swimming with barracudas.

    Let me start by saying – is a program like borrowed downpayment for everybody? Perhaps not. But to some it provides means to get them into a home now, while interest rates are lowest in history and building towards wealth and equity. Further, with a proper debt reduction & savings plan (which many of the evil Mortgage doers you aim to discredit) also set up for the customer, people can be much further ahead than paying high rents, saving for years and finally after accumulating the magic 10 (or 20)% you tout, finding that rates are higher and the interest cost exposure is actually worse than it would have been if they bought now.

    Conversely, an argument could be made just as strongly that pouring in all of one’s savings to get to say 10-15% is bad advice in that the person may not have a reserve for surprise costs / expenses whether they be home / vehicle / job related etc.. Completely exhausting a person’s cash reserve can be severely damaging in a very short period without access to additional funds. Not saying that putting a major portion of savings towards as large a downpayment as possible is definitely bad advice, but an argument could be made. In anything financial related, it is hard to deal in absolutes. There are so many factors to each person / couple /family’s financial picture that grandstanding a notion that a person / company is definitely out to get you or crooked simply because they have a different outlook / approach to assisting others than you do is extremely careless.

    The main thing that you have failed to recognize in your writings is that the truly good Mortgage Professionals aren’t in business to get a deal done and move on like a one night stand – that’s more like how a bank does it. The true value for us as mortgage professionals is in managing a client’s mortgage(s) throughout their borrowing lifetime and providing custom strategies and tools aimed at reducing the total cost of borrowing overall. The focus is on securing not a single mortgage but a client relationship and trusted advisor status to these important clients & securing their financial position. If that client happens to come to us first because they are in a unsatisfactory living arrangement, struggling to save for a downpayment, likely due to high rent and looking for a plan to become a homeowner sooner, we can provide a strategy to not only help them achieve this, but also to manage their entire debt (not just mortgage) and credit / financial wellness. I’d call that a win for the client.

    If you want to grandstand, I’d suggest blogging about the ease of securing high interest credit cards normally used solely for valueless consumer goods, no credit required auto loans (“interest rate says 14.5% but just look at the payment, as long as you can pay that – we’re good, right?”), cash-back mortgages (big bank’s answer to no-downpayment ) etc. I did find it interesting that despite banging so heavily on a drum against using a line of credit for borrowing, at the very top of your Facebook page you have a pinned post with an online application to apply for a credit card. But we’ll leave that as a topic for another discussion.

    Regards,

    Shaun Serafini BMgt – Mortgage Professional

    • You keep going on about my pinned fb post.

      It’s a commercial I did for Amex, not an application for a credit card. You gotta chill, bro.

      • Shaun Serafini BMgt - Mortgage Professional

        The point being made there is that there is some thick irony in your stance that it’s ok for you to be ok starring in and touting an advertisement promoting a consumer credit card aimed at purchasing consumer goods yet at same time disparage well-regarded licensed mortgage professionals advertising using a line of credit to assist with downpayment on an actual asset. The double standard is just glorious. I wish I could blog for a living and not be held accountable for what I put in writing. Oh wait, no I don’t. Because that would scream absence of integrity.

        Like you, I am passionate about the industry I work in, passionate about helping people do better financially and about financial literacy overall. Being demonized for advertising one (of many) government approved mortgage programs that many people are interested in really touches a nerve.

        That’s the main reason there’s no chill, bro!

        –out!

        • Susan

          Credit cards are a great tool to use for day to day spending as long as you pay your balance off every month and don’t pay any interest.

          You’re here defending people’s right to choose to increase their debt load to buy a home in a bloated market. If they can’t afford to put away money for a down payment then they may not be financially stable enough to come up with the financial responsibility of owning a home.

          Everyone knows that the devil is in the details and the prospective homeowners using this method you’re advocating could find themselves worse off tomorrow or ten years from. Buying a home is the cheap part; it’s all the responsibility of homeownership that costs more money. I’m willing to bet no bank or mortgage broker tells the client that they may need to sock away an extra few thousand dollars for maintenance or renovations they might want to do because in the bank of their mind they see future $$$$

          • Shaun Serafini BMgt - Mortgage Professional

            Actually as part of getting approved for a mortgage through a mortgage broker, we have to prove that the client has money over and above the downpayment and legal fees to account for things such as that. That’s a pretty naive response. We are licenced professionals who (despite the fear mongering of certain blogs and blog readers) take great care to act in best interest of our clients. Part of this often entails helping people get rid of cumbersome high interest debt and payments from these “great tool” credit cards you applaud.

          • Ok, we get it: you really hate my Amex commercial.

            I understand why you’re upset. The fact that people can have a credit card but not have any credit card debt is probably very confusing for someone that sells debt to their clients. But I promise you, you can manage credit responsibly! For those that can’t, maybe you can do a guest post about how you live without a credit card?

            You do not have any credit cards, right? Because they’re so evil?

            That’s what I thought.

      • KASSIA

        YAAAAAASS girl! hahaha

  11. Jonathan Ramachenderan

    Good work Bridget. You are promoting safe, financially wise decision making for young people and ITS NOT POPULAR! of course.

    You’ll upset some by pointing out that using credit to by property isn’t a good strategy, namely brokers!

    The greatest mistake is thinking that you need to have something NOW! and borrow the wrong way to have it.

    Again. Awesome work. Deposits rock!

  12. Sarah

    This is unbelievable that someone would suggest this is even near a good idea. I feel like people who fall into the ‘trap’ of borrowing for a down payment, are the type who may currently have enough knowledge or foresight at this point to understand the true repercussions of their decisions until later on – as you mention.

    As far as the housing costs. I am one of those in Calgary who purchased last year. Though we bought way below our means, our home still costs us so much. Just a few numbers I’d like to share that we paid in our experience;

    Home inspections $450 – Came recommended, however even he couldn’t predict the boiler would break down days into us owning our home ($500, as we know someone who is in the industry)

    Lawyer fees $1450 – This is a flat rate fee lawyer, and also doesn’t include the $300 refundable deposit they request in case the funds for the mortgage don’t get transferred to the bank in time. Took 3 weeks to get the money back from the lawyer. If the person you bought from paid their property taxes for the full year, you need to reimburse them via the lawyer, and they pro-rate this amount, $2K in our case.

    Furnishing a home now that there is more space: $6000 – we saved beforehand for this, but as we actually used our space, we realized we needed certain things we forgot to include in our original list.

    Property taxes :$250 a month , went up to $270 a month after moving in. A nice old suburb 15 mins from downtown. 1060 sq ft above grade.

    Heating: We use 9% less energy than an energy efficient home according to Enmax. Still at $220 – $280 a month in a warm winter.

    Home insurance: Getting adequate home insurance and not just the cheapest out there. $175 a month.

    Home ownership is very expensive, so it really needs to be reviewed thoroughly!!

  13. I’m going to be honest, I didn’t even know people actually took out loans to pay for a down payment – yikes!

    I would go into it like I do with my investments: if it’s not something I can understand easily and explain to someone else, then I’m not dipping my foot in that water. I think people get taken advantage of in these situations when they trust an advisor who potentially doesn’t have their best interests at heart. There’s no shame in saying that you don’t understand and, thus, don’t want to participate. You control your financial future, and until all the calculations make sense to you, you should avoid getting involved in financial tactics like these.

  14. J Thomas

    Hey, I read your blog all the time but have never commented before. I just wanted to say your article is awesome. I’ve been saying the same thing to my friends again and again. People think that getting approved for a mortgage and buying a house is the end of the story, much like the end of all fairy tales, everything is always happy! However, what a lot of people fail to realise is that getting approved is the easy part. Continuing to make the payments on the mortgage while being able to balance these payments along with expenses that may suddenly arise, while at the same time being able to still save some money into an RRSP or TSFA; these are the hard parts. I live in the Greater Toronto Area, where the housing market is on fire and so many people are becoming “house-poor”. If only more people would truly understand what they are getting themselves into. Great article!

  15. Nolan

    I completely agree that you shouldn’t be using a loan to finance a down payment. But I don’t necessarily agree with the comparison between renting and owning. The cost of property taxes and maintenance are likely included in the rent. Same can be said for utilities. But renters don’t see any of the benefits. Such as increasing the equity.

    • sarah

      I agree. I’m a landlord and the rent I charge my tenants covers the mortgage, property taxes, insurance and repairs. They pay their own utilities. They are paying the exact same amount I am as the owner of the property,

  16. Katie

    Bridget, this is a fantastic article. Our decision to buy (after renting for 8 years) was more about diversifying our overall portfolio, so we put about 25% down on a condo in a great building near campus in Edmonton where housing values tend to remain stable. We also spent well within our means to keep our monthly expenses about the same as our previous rent – and definitely didn’t borrow for a down payment (MBA over here, so there were many spreadsheets guiding our decision making). What surprised us was that – despite some fairly pointed conversations around what we were prepared to spend – the mortgage broker encouraged us to take on more credit for more house (can’t afford not to/interest rates will never be this low…etc). This is the reason – as are those you cited in your article – why financial literacy is so important. At very least people need to understand that retail banking (which I’d include mortgage brokers in) is based on trying to sell you a product in a commission-based environment which may not always be in the consumer’s best interest.

  17. Giovina

    Just a minor point but in the amount you put for renting, you double counted the utilities. Great article though, it’s crazy how people justify putting themselves in so much debt just to own property without really considering if they can afford it.

  18. THANK YOU! I know our system is a bit different in the U.S., but I can’t stand when people put less than 20% down to buy a home. Especially, because so few seem to do the math on how expensive private mortgage insurance payments will be since they have so little equity in the home.

    P.S. It’s pretty great you were banned. Well, bad for the poor consumers, but hilarious that you stirred up the pot that much. Go you!

  19. Allison

    I never comment on blogs, although I ready them all the time.
    I just wanted to put my two cents in from watching my parents screw up and my best friend’s parents screw up doing this exact thing.

    IF YOU CANNOT SAVE FOR A DOWN PAYMENT, YOU CANNOT AFFORD A HOUSE.

    Some times it happens quickly, like in my parents case and we were homeless very quickly…
    or slowly in the case of my best friend’s parents who are still struggling to keep this house they “love” so much.

    Work hard, Save your pennies (or dollars) and then buy.

    Don’t throw your hat where you can’t reach it…

    As this article said the mortgage is only one aspect of home ownership and if you don’t even have self discipline to save for the down payment how can you manage a house and all the other responsibilities that come with it.

    If there is anything I have learn is before you buy a house have a Emergency fund… #1

    Have little to no debt #2

    and save for a down pay #3

    we need to stop teaching that it’s ok to get what you want without doing the work first.

    You pay for success in advance….

    take it from someone who watched this scenario go back twice….

  20. Katie

    I like this article, and while I completely agree with it and other similar comments by personal finance gurus for people in their 20s, I find it challenging to find advice that fits me. I’m an in my late 20s and interested in buying as a single person. This puts my income in a significantly different bracket than most advice I see, which assumes people are a couple and buying. I currently have enough saved for a 10% down payment if the property is $200,000 or less. I don’t make much but I don’t pay for my car since it belongs to my company. I live in Calgary with my mother which is not a permanent situation, as I crave my independence. Having a dog, renting is difficult and more expensive than the already inflated rental market. I seek advice on my situation but everything I read assumes I am 1. A couple or making significantly more than I am, 2. Have only 5% or plan to borrow 5%. 3. Already renting or have a satisfactory living situation that can continue indefinitely with little trouble. I’d like to see an article that analyzes options for the less typical buyers.

    • Marc

      Yeah, I’m seeking similar advice too. Everything I read assumes a couple making a purchase. Any advice for singles? Does the same apply?

      • The rules apply whether you’re single or in a couple. You don’t get a free pass to take on more than you can afford or rack up debt just because you don’t have a partner.

        If you cannot yet afford to buy as a single person, the only option is to save more. If you do not make enough money to save more, then you have to find a way to earn more.

    • Calgary is becoming a renter’s paradise right now. The vacancy rate has quadrupled in the past year, and it’s very easy to find affordable accommodation in the city. Having a dog does make it harder, but there are certainly options.

      Buying with only a $20,000 downpayment will make any home you choose so much more expensive than renting. You’ll need to save more if you want to buy. If you are currently living with your mother rent-free, this is an ideal situation to ramp up your savings. Assuming you’d be paying $1,000/mo to rent anywhere else, you should be able to put away that same amount in savings. You’ll be able to more than double your down-payment within the next 2 years, at which point you’ll be able to afford to put as much as 10% down on a pet-friendly condo in the city.

  21. Pretty sure I posted this comment on the 8th but, can’t seem to find it anywhere (wonder if it was deleted). Anyway…

    Bridget,

    Thank you for shedding light on this subject and the many problematic ways that Canadians borrow money. As a mortgage broker, I can attest that I have discussed this type of option with more than a couple clients.

    First off, I want to say that I do believe owning your own home is often more beneficial than renting. After reading through your blog post, this is the main reason I wanted to post a comment. Any decision to buy a home should involve very careful review of all the math involved, whether you’re borrowing funds for the down payment or not. First, there are a couple parts of your post that I want to help make some corrections on. The first part is regarding a couple of your calculations…

    In your ‘annual costs: renter vs buyer’ chart, you stated annual mortgage payments as $17,432.75 and annual LOC interest costs as $1,005 however, I believe the annual mortgage payments already took into account the LOC interest costs (I’m assuming we’re all talking about the exact same $300k home purchase using a 5% borrowed down payment from said mortgage broker’s FB post). So annual mortgage payments should be $16,427.76. Moving on… It is also important to break down the principal and interest portions of the payments since, the portion being applied against the principal of the mortgage increases the equity in the home and increases their total net worth and when the owners eventually decide to sell, whatever equity is left over after selling expenses, is all theirs. Of course, the home’s value will fluctuate over time and their home equity can fall as much as it can grow but, that’s no different than almost anything else a person could invest in. The point here is that with those mortgage payments, they grow equity vs renting where, 100% of the payments of gone into someone else’s pocket.

    I’m sure if you reworked that ‘buyer vs renter’ chart, you may find the ‘annual net expenses’ a little closer and that’s not taking into account a more accurate measurement of the utility, maintenance and insurance expenses. Now, if all the numbers were equal, would a property that cost $1,400/mth in rent be the same as a home purchased at $300,000? No definite answer here either as this would include so many more variables.

    The other thing I didn’t totally agree with is the line ‘If interest rates rise by more than 1%, their mortgage payment will increase by hundreds of dollars each month.’ First of all, if we simply increased the interest rate by 1% on the exact same amount of money ($295,260) the monthly payment would increase by $156.34/month. In reality though, after 5 years of making $1,368.12/mth mortgage payments at 2.79% interest, the borrower should be left with a principal balance of approx. $251,426 (using a 25 year amortization) and if they renewed their then current mortgage of $251K at a new rate 1% higher than before (3.79%) and with the amortization now having only 20 years left, their new payments would become approximately $1,495/month. So, saying their payments will increase by hundreds of dollars each month is misleading.

    Now, potential of equity building aside, my view on borrowing a down payment isn’t always bad. If a person has a reasonable excuse for not saving the DP (maybe they had a large amount saved but, it was depleted due to some unforseen reason/s (medical expenses, vehicle repairs, helping family, etc.) because basically life is unpredictable and most importantly, they have proof that they have the extra income to pay down the LOC quickly, then borrowing a down payment could be an acceptable solution for this type of borrower.

    With that said, the type of scenario I just explained is very unique and I’m not sure I agree with advocating this as an option because what I have typically see from applicants who want to use this option is that they simply haven’t been able to save up the down payment due to a combination of poor spending habits, poor saving habits and inadequate income. People in a scenario like this, should seriously consider whether they really need to buy a home right now or not and they need to carefully review the numbers with their mortgage broker, then by themselves or with a third party (like a financial advisor) because even though buying a home can can be a form of investment, it can become a very slippery slope to a long time of financial struggle and possibly lead to ending up in a much worse situation than when you started.

    I’m sorry for picking apart your blog Bridget. Your heart is in the right place and I think we both feel the same way when it comes to the fact that Canadians need to be smarter with their money. It’s just important that as professionals, we provide people with accurate numbers, with accurate facts and we make sure we help them see the whole picture.

  22. Elizabeth

    You’re definitely not just screaming at a brick wall! My mother and my fiance’s parents were encouraging, even pressuring, us to consider buying a house despite the instability in my fiance’s employment and the fact that I’m basically making minimum wage in grad school. Thanks to posts like this, I’ve got great material to send them so they get off our backs and let us make better choices! We’re not planning on buying unless we can manage a mortgage for 5-10 years – if it stretches to 20 or 25, we’re not willing to make that commitment.

  23. Louise

    I come here for the blog. I stay for the comments.

    • hahaha it is insanity in this comments section rn. Glad you’re enjoying the circus!

      • This is a great blog. It’s nice to see not all of us have gone insane for house lust. I am not against home ownership, but the things that people do just to own a piece of real estate….it makes you wonder.
        I am also a fellow Albertan, so I definitely agree with you, this is not the best time to buy in Alberta.
        Thanks for voicing some sanity in a pretty messed up world filled with debt, entitlement and greed.

  24. I am almost giving up on this war, Bridget.
    When people want to buy a home they will come up with all sorts of excuses to justify their “need”. There’s not enough math in this world to show them it’s a bad idea.
    BTW, brilliant post!

    • TRUTH. It’s way too much of an emotional decision to be swayed by the logics of mathematics, unfortunately.

      Glad you enjoyed it, Dan!

  25. I actually can’t believe how unprofessional some of the people commenting on this post are, “bro”. Oh, and to actually comment about the post. I agree. Just like everyone who isn’t in the industry.

    PS: you looked fab in the AMEX commercial.

  26. Hi Bridget,

    Great post, I remember comparing renting vs buying myself in the past and came up with about the same numbers when i did it a few years ago, sans the line of credit for a mortgage. The information is accurate. I would just like to point out that there is an error in the calculation on the image Annual Costs: Renter Vs Buyer image. It shows the line of credit interest as a positive rather than a negative causing the end result to be off by $2000 which would prove your point even further as to why you should not take a line of credit out for a mortgage.

    Please fix the error or point it out, its been annoying me all day.

    • Hey Spencer, it’s fixed now. My apologies, I wrote the post in a bit of a rage 😉 It’s updated correctly now. Thanks for reading!