In Money

Buying a house without 20% of it saved is just asking for trouble

For all you new homebuyers out there, if you are ever thinking of buying a home with less than 20% saved for your down payment, here’s my advice to you:

DON’T BUY THE HOUSE IF YOU CAN’T AFFORD IT.

I know it’s hard to resist HGTV (Home and Garden Television) and all their awesome shows where the show you all the cool projects you can do to make your place looks so impeccable and chic, but you are forgetting one major thing.. and that is that you couldn’t even save 20% for your down payment on a home.

I know, I know, you’re outraged right now because houses are $500,000 in Toronto and a down payment of 20% means you need to have socked away $100,000 in cash just to afford it.

I mean, who can really and comfortably afford a $500,000 home in your 30s (the time when most people get really hot for buying a house so that they can stop renting)?

…but consider this:

With less than 20% saved for a home, you aren’t just paying for the mortgage insurance because you don’t have the right amount saved, but… YOU COULDN’T EVEN SAVE 20% OF YOUR HOME’S PRICE!

stock-photo-money-cash-piggy-bank

That 20% down payment to me, is the ultimate sign that you simply can’t afford that house no matter what the banks say, and what HGTV shows tell you about how you can rent out your basement for $1000 a month which would take a load off you for meeting your mortgage.

Interest rates rise and fall, and are you really going to make a bet that your interest rates will stay the same for your entire mortgage, and never, ever rise?

Or how about making another bet that you can meet your mortgage because you’ve already counted on having a tenant living in your basement paying half of your mortgage?


Maybe the fact that you have probably already stretched to the limit on your budget because the mortgage is eating 50% of your net income, and any little disaster could burst your bubble?

Want more?

There are plenty of other real-life horror stories out there that you think don’t apply to you, but happen more often than you think.

I repeat: If you don’t have 20% saved for your home, you simply need to find a cheaper home or not buy a home at all until you have 20% down on it.

Wait until you have the money, even if it takes you another 10 – 20 years. At least you won’t be screwed if anything happens, because it’s better to be cautious now than to be regretful later.

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Sherry of Save. Spend. Splurge.

Am my own Sugar Daddy. Am a millionaire at 36 after getting out of $60K of student debt in 18 months, a little over a decade earlier, using TheBudgetingTool.com. I have worked 50% of my career (taking 1-2 year breaks), and quadrupled my income within 2 years of graduating, going from $65K to $260K with an average lifetime savings rate of 50%. I have 11 side incomes that are on track in 2020 to make me $50K - $75K. I could retire today if I wanted, but love my work-life balance as a freelancing consultant in STEM (Science, Technology, Engineering, Math). I am all about balance - between time and money, and also enjoying my money. I also post daily on Instagram @saverspender.

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Posted on June 11, 2013

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3 Comments

  1. MJ

    Generally, I agree. But for some (like me) it works out. My husband and I put 5% down on a small condo just 5 weeks after getting married and getting kicked out of the rental we had JUST moved into because the owner wanted to cash in on a hot Calgary market. That experience really jarred me. Ten years and two kids later we are still in the same condo. Our salaries have risen steadily and the mortgage interest rate declined often. We will be mortgage-free in four years, just 14 years after buying what you would consider a place we couldn’t afford in the first place. Sometimes, with persistence, sacrifice, and luck, it works out,

    Reply
  2. Alexa Blanchette

    Great article! While I think this is great advice, I don’t think this works for everyone. My husband and I saved up $79k to buy a house. This was our 10% down payment and closing costs. Our monthly mortgage payment is less than 30% of our take home pay (and that’s after we contribute to our 401ks). In Seattle, home prices are continuing to rise and had we waited another 3+ years I don’t know how much home prices would have increased. Finding anything below $500,000 in our area is nearly impossible. We were also able to lock in a very low interest rate which may not be the case in a few years- this was fixed and so there is no possibility of it increasing.

    Depending on what part of the country you live in, etc, I think having 20% down makes a lot of sense. It also makes sense depending on your career field and job and if you have a greater potential for being unemployed.

    I enjoyed reading this. Thanks for sharing!

    Reply

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