What's the sweet spot for a down payment on a house?

Q: We’re buying a home valued at $275,000 and 100% of our down payment is coming from our RRSPs. We do not have enough to come up with a 20% down payment so now we’re trying to decide: (a) is it better to put down only 5% and pay more on mortgage insurance premiums, but have more cash in hand; or (b) put down 15% on the home, pay less in insurance premiums but have less cash in hand. —Glen Slim, Ottawa

A: Owing a home is a good idea for many, but despite your best laid plans, you could be faced with unexpected expenses. If you can’t quite hit the 20% threshold to avoid mortgage loan insurance, I think you’re right to hold some money back. Joe Jacobs is a broker with Mortgage Connections and based on his calculations you should consider a third option, let’s call it option (c). “The sweet spot is likely 10% down,” he says, because of how the premiums are calculated. For the house you’re buying, the insurance premium with 5% down would be 3.6% of the total or $9,400. With 10% down you’d pay 2.4%, or $5,940, which is a savings of $3,460. If you go with 15% down you’d pay 1.8%, or $4,200, but save only another $1,740 and tie up $14,000 that you might rather have around to cover any surprises. If it turns out you don’t need that money in the first year or two, and you have some financial flexibility, you can put it down on the mortgage later. Any additional lump sum payments you can make will reduce the number of years it takes to pay your mortgage off, saving you thousands of dollars in interest costs.

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