Taking current economic and fiscal realities into account, it would be far more sensible to pay the initial 20 per cent down payment for a home purchase in full instead of saving the money for later, according to a veteran industry analyst.

In a March 10 piece for The Globe and Mail, markets observer Rob Carrick argued that the mortgage environment of today does not favor those who carefully save and spend their hard-earned funds.

“Home buyers who put less than 20 per cent down are seen as risky enough to require that they pay the cost of default insurance for their lender. But the best mortgage rates are in some cases going to people with small down payments,” Carrick wrote.

“The indignities for diligent savers are piling up. You’ll earn next to no interest on your savings, and then some mortgage lenders withhold their best rates when you buy a house.”

Carrick added that the increased popularity of high-ratio mortgages has led to the taxpaying public essentially bankrolling these mortgages in the event of defaults.

“Because they’re basically risk-free, high-ratio mortgages get the lowest rates at alternative lenders. The big banks, with their greater financial strength, don’t much look at down-payment size in setting mortgage rate discounts for in-branch clients,” Carrick explained. “But there are signs of a new favoritism toward people putting less than 20 per cent down. In a recent Bank of Montreal promotion offering up to $1,000 cash to first-time buyers, one of the conditions is that they require mortgage-default insurance.”

“Discrimination against people who save big down payments might be addressed if regulators follow through on a proposal to have lenders share some of the risk if an insured mortgage goes into default.”

In addition, RateSpy’s Robert McLister highlighted an additional benefit to fully paying the 20 per cent: More equity will prove invaluable to maintaining solvency, especially if residential reale state prices decline.

“If you’re trying to counsel people on being prudent, then you want to tell them to put down as much as they can,” Carrick quoted McLister as saying.
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