Discussions

So I have a question for all you numbers savvy ones out there! The question is: is it better to have a larger downpayment or less debt with a smaller down payment. Here are some simple (made up) numbers.  
 
Yearly income: 50,000$  
Saving/DP: 20,000$  
Debt(total): 33,000$  
 
Now let's say a person was wanting to buy a house, would it be better for said person to go into it like the situation above or, would it be better to apply some of that savings/downpayment to dept.  
 
Yearly income: 50,000$  
Savings/DP: 10,000$  
Debt(total): 23,000$  
 
What are your thoughts? I've heard from financial advisers and such that it's better to have a bit of debt that nothing(to keep credit relevant?) but i don't know. Thanks for your time!

Is your debt credit card debt, car loan, university debt? If credit card debt pay it off.

No credit card debt. Just a car loan.

A lot depends on your goals and your attitudes. It's not just strictly a numbers game.  
 
Personally, it makes no sense to save a large sum of money for a down payment when there's outstanding debt. Debt, by it's very nature, will generally cost you more than what you will earn saving due to the differences in interest rates. It takes away from the amount you can save if you're servicing debt. It also increases the amount you MUST save for rainy day funds, as you would need savings to make payments on debts should you lose your job etc. So to that end, debt is generally something to be avoided.  
 
In your example, if you have an income of $50k, and you're paying $500/month on that debt, that's taking $500 a month away from your ability to save. This is especially true in the short-term (say, less than 5 years), vs. long-term savings like retirement when compounding interest plays a bigger role. If in your example, you're paying $500 to your debt and putting $500 into savings, if you paid your debts you could then channel the entire $1000 into savings. Inversely, if you stopped putting money into savings and put the full $1000 into servicing debts, you could then put $1000 into savings once the debt is paid. You would also save interest on servicing that debt, gaining you money in the long run.  
 
The other part to look at it is the type of debt. You hear ideas like "good debt" and "bad debt" tossed around, but ultimately all debt is bad. It's just what degree of bad. Consumer debt is the among the worst, so if your $33k includes $10k of consumer debt, and $23k tied up in vehicle debt, I would categorize the $10k of consumer debt as plague and dispose of it as quickly as possible. I would then focus on paying the vehicle debt as quickly as possible, to gain a positive net value as vehicles often depreciate faster than the loan to buy them is paid off, especially in those first few years of a new car.  
 
In the end, it kinda depends on what your long-term goals are. If buying a property is your goal, you do, realistically, need to get your debts to their lowest levels possible to pass stress tests of getting a mortgage. To keep some debt to maintain credit scores, there is some validity to that, but keep in mind that once you own a property it can be used to leverage for credit.  
 
A few things to think about.

What’s the interest rate, monthly payment and length of time remaining on the loan.

What is the interest rate on the car loan? What will the mortgage interest rate be? Will you be putting less than 20% down in either scenario?  
 
If it's possible to avoid having CMHC involved in the mortgage, d0 that. It costs money if CMHC is involved.  
 
If CMHC is going to be involved either way, put the money on whichever will have the higher interest rate.

Your monthly loan payment factors into your debt servicing ratio, which could hamper your ability to afford a certain amount of a mortgage payment in the bank’s eyes. Therefore they might request that you pay the car loan off in order to get approved for the mortgage, depending how much the mortgage payments would be. It really depends on a number of factors, and would be best to run your situation past a mortgage specialist to see which would be best for you.

Some lenders will also offer cashback on the mortgage as an alternative to a deeply discounted rate. You could get up to 5% of the mortgage amount back to pay off debts. The interest rate is higher but could be worth it if funds are used to pay off debt at even higher rates. Also, having a slightly higher interest rate helps prepare you for the rate you will get down the road when you renew.