Buy or Rent?
It’s a question almost everyone faces at some point. Should I buy a home or rent?
On the surface the decision looks like an easy one. As a homeowner, you can reasonably expect the equity in your home to increase over time as your mortgage is paid down. That, combined with regular appreciation in property values over the long term, can be a rapid and rewarding way to increase your net worth – especially during the last boom cycle we have experienced in Canada.
In contrast, the person renting over the same amount of time is left with no property investment, but may have enjoyed lower living expenses, lived in an area that they may not have otherwise been able to afford, and had the opportunity to invest in other opportunities.
When comparing owning to renting, you have to add up all of the figures, including the cost of your home, the size of your down payment, utilities, immediate repairs, interest rates and insurance, and compare them with how much you are currently spending on rent.
Of course, you also have to place a value on the enjoyment and satisfaction of owning your own home. It’s harder to put a price on that.
Let’s break it down:
Benefits of buying
When buying a home the first question you should ask yourself is: “What can I afford?” Home ownership should fit into your lifestyle, but it should not become your lifestyle. Many buyers take on more debt than they can manage and quickly find themselves “house-poor” – meaning they have nothing left over at the end of the month.
There are an abundance of mortgage calculators available online that can help you figure out your monthly payments. The size of a down payment can vary. Depending on the type of mortgage, down payments generally range from five per cent to 20 per cent of the purchase price.
One thing is almost always certain: the larger your down payment, the more you save in the long run. A larger down payment reduces the amount of your monthly principal and interest payments and reduces the total amount of interest you pay over the life of your mortgage. Don’t forget, if you put down less than 20 per cent you’ll have what’s called a high-ratio mortgage, so you will be required to purchase default insurance.
New homes tend to be move-in ready, even if the neighborhood can’t be described as such. You’ll have to factor in how close you are to amenities such as schools, transit, shopping and entertainment. If looking at a resale, don’t forget to include potential renovation costs in the equation. Plus, don’t forget to factor in closing costs, legal fees, land transfer taxes and insurance when opting to buy.
Most new condo developments also make you fork over thousands of dollars for various development charges and levies. Here’s a valuable tip: If you’re buying a new condo, make sure your agent caps the amount the developer will charge you at closing. This could save you thousands of dollars, but make sure you get it in writing!
Benefits of renting
If you rent, you don’t have to be concerned about interest rates and fluctuating payments. Rents are based on what the market supports and are fairly stable. Plus, if you rent, you are covered by the Residential Tenancy Acts, which provides you certain protections, such as the amount the landlord is allowed to increase the monthly rent by. You don’t have to worry about contractors – major home improvements are the responsibility of the landlord. Property taxes are also typically the responsibility of the landlord.
One of the most important things you should do when making the decision to rent or buy is to calculate what your cash flow will be like in each scenario. For example, if owning a home cost you $2,100 a month due to the mortgage, taxes, insurance maintenance costs, etc., and renting costs you only $1,400, what are you doing with the remaining $700? If you invest that extra $700 each month, you may be able to accumulate greater assets over the long run, as opposed to just relying on the increased value of your property as your sole investment. Industry Canada offers a great tool to help you break the numbers down between renting or buying.
The decision is also much more than just a financial decision. It has just as much to do with personal preferences and time horizons as it does the financials. Is there a possibility that you will be moving for work? Will you need to upsize if you have children? Are you planning on retiring in five years and downsizing to a condo? These are all factors that must be taken into consideration when contemplating whether to buy or sell.