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To Rent or Buy a House – Pros and Cons of Home Ownership

24 March 2017,
 0

Should I continue to rent or buy a house?  This question plagues many Canadians who struggle with the pros and cons of renting vs. buying a house.

While conventional wisdom seems to point to owning a house as the better choice, it is actually a lot more complicated than that.

With mortgage rates down and average home prices across most parts of the country still stable, now may be a good time to buy a property.

But to be sure of your choice, you can look at both sides of the spectrum and assess which option is smarter for you.

 

5 THINGS TO CONSIDER BEFORE PURCHASING A HOME

The decision whether to buy a house now or wait can be agonizing but don’t try to time the market. Despite some gloomy predictions, Canada’s housing market remains stable.

Rather, base your decision on answers to 5 important questions.

  • How much do you pay for housing now?
  • What are your present needs?
  • Do you have the down-payment saved?
  • Will you live in the house for at least 5 years?
  • Are you prepared for the responsibilities of home ownership?

By answering these questions, you will have a starting point for determining if it is the right time to buy a house.

 

To Buy Now or Wait

A person who is seriously contemplating to buy a house can apply for pre-mortgage qualification. This will assess whether you qualify for mortgage and have financing in place before you make an offer to buy a house.

It is also a good idea to assess your housing expenses now.  For some people living in hot property markets like Toronto and Vancouver, it may be more ideal to rent than to buy because of skyrocketing home prices.  If in your calculations it turns out that your rent will be cheaper than your mortgage, it may be better to continue to rent and invest your money in other lucrative options.

Finally, you need to plan to live in the house for at least 5-7 years.  If you live in it for less than that time, then decide to sell, you may burn money on legal fees, taxes, and other costs.

If you have a job that may take you overseas in the next couple of years, you might be better off postponing home ownership.

 

Will you qualify for a mortgage?

Total debt service ratios refer to the percentage of one’s gross annual income that goes to housing payments, property taxes, car loans, credit cards, and personal loans.  Banks look at this factor to evaluate a person’s eligibility to borrow money.

Whenever money enters your bank account, only 40% or less must be tied up in fixed costs, meaning things you can’t get out of paying.  Considering that you need to save enough money for other things such as your children’s education, clothing, and vacations, anything higher than 40% leaves you with no more room for spending money.

If your debt servicing ratio passes at least this 40-60 rule, the next question to consider would be how much can you afford to pay for a home.

Overall, every person dreams of one day owning a home because it is the “grown-up” thing to do.  When you buy the home of your dreams at the right time and place, it can be the best decision and the smartest investment you have ever made.

 

THE COST OF HOME OWNERSHIP AND FEES YOU WILL LIKELY PAY  

When you buy a house, there are a number of upfront fees you need to get ready for.

The biggest expense to buying a house is the down-payment.  In Canada, it is possible to purchase a property with as little as 5% for a down-payment but bigger lenders prefer at least 10%.  Financial experts recommend at least paying 20% down payment.

A low down-payment may seem like a windfall but the less you put down, the higher the amount you will be paying for mortgage.  You will also need to get mortgage loan insurance which is charged to anyone with less than 20% down payment.

Home buyers don’t pay for real estate agent fees but there are also a few closing costs that need to be considered.

Depending on the location, land transfer taxes can contribute significantly to out- of- pocket expenses. In addition, you pay appraisal fees, home inspection fees, property tax adjustment, legal fees, and even moving expenses.

These expenses signify an individual’s financial capacity for home ownership.  If you are struggling even with the down-payment, it might be better to wait a bit for your financials to improve.

In contrast, what are the upfront costs of renting a house?

Renting has fewer upfront expenses, including:

  • Security deposit
  • First Month’s Rent
  • Renters insurance
  • Utilities (can be included in the rent on separately charged to the renter)

Other one-time expenses also include moving costs, furniture, and hook-up for cable and internet.

 

Benefits and Savings from Renting

It’s easy to see that renting is so much easier to accomplish than buying a house which is why some people go with it for so long.  It is also very convenient as renters don’t worry about the upkeep of the house or apartment and only need to call the landlord when things go wrong.

The only downside – you’ll never own the property and won’t get anything back from your rent.

You’ll often hear people tell you when you are renting that you are throwing away your money or making your landlord rich.

If it is smarter to rent based on your personal circumstances, you can still come ahead by putting your savings into a balanced portfolio.

 

COMPARING RENTAL COST VS. MORTGAGE COSTS: WHICH IS AFFORDABLE?

Considering the hefty expenses related to the purchase of a home, majority of young people start by renting.  As their careers blossom and they are able to save money and have a family, they then decide to buy a house.  Homeowners who reach retirement may opt to sell a family and either downsize or go back to being renters.

No matter at which end of the spectrum you are in, you can compare rental cost vs. mortgage costs to find the most affordable option.

There are rent vs. mortgage calculators that you can use to determine affordability and savings.

Below is a sample computation for your reference:

Sample computation Outlook for buying a home for $250,000

 Length
of Stay
Mortgage
Rate
Down-payment Term Monthly
Mortgage
Home Price
Growth Rate
9 years  3.67% $50,000
(at 20 %)
20 years $1,719.56 3%

** Length of stay is calculated at 9 years (more than the recommended 5-7 years minimum stay)

Owning a home means paying closing costs for first buying a house and then selling it, property taxes, maintenance and fees.

Recurring costs for owning a house includes monthly mortgage payments, home repairs, property tax, and insurance costs.

In calculating affordability, it is important to also factor in opportunity cost – the return you would have earned by investing the money spent on the down-payment in other investments.

Cost after 9 years Rent Buy
Initial cost $884 $60,000
Recurring costs $107,046 $192,537
Opportunity costs $15,411 $48,819
Net proceeds -$884 $-122,457

** For renting, initial costs include security deposit, first month’s rent, and broker’s fee

** For renting, recurring costs are monthly rent and renter’s insurance

** If you buy a home, you will incur closing costs of 4% for buying a home and 6% for eventually selling the home.  During the 9 years of ownership, you will be spending on maintenance fees and other expenses that renters don’t ever pay.

** This data is for informational purposes and should not be taken as expert financial advice.

As a rule of thumb, buying a house tends to be more affordable the longer you live in it because upfront costs are spread out over a long period of time.

 

The Verdict:

If you plan to live in a home you will purchase for $300,000 for only 9 years, it may be better to rent if you can find a rental property for $884.

As a rule of thumb, buying a house tends to be more affordable the longer you live in it because upfront costs are spread out over a longer period of time.

Canada Mortgage also offers an online calculator for rent vs. buy to help you decide. Using the same data but over a 20-year period, the rental alternative (at $1000 a month) allows you to save the down-payment of $50,000 and monthly rental savings of $130 (difference between mortgage and rent).

At the end of the 240-month term of before tax investment, your property investment will have grown to $18,532,819, assuming a savings rate of 29% per annum.

 

THE MANY BENEFITS OF OWNING A HOME

You’ve certainly heard the cliché, “There’s no place like home”. In many ways, it is true.

From tax benefits, financial stability, and intangibles like sense of pride and achievement, security, and comfort, the benefits of owning your home are innumerable.

  1. Build personal wealth over time.Your parents may have told you that owning a home should be your #1 goal.  But in the last 10 years, the real estate market has changed drastically and has influenced the way many people view home ownership.  It is important to think and discuss it carefully.  Buying a home can be the best decision if you buy at the right time and at a price you can afford.  Over time, property value appreciates and becomes part of your personal wealth.
  2. Increase your equity every month.Equity refers to the amount of money invested in your home that you get back after selling it and paying what you owe your lender.  Each time you make a mortgage payment, the amount you owe is reduced while your equity grows.
  3. Benefit from Tax DeductionsUnlike in the US, interest on mortgage for a principal residence is not tax deductible in Canada.  However, no taxes are payable on capital gains when you sell a house. If you want to make your mortgage work for your taxes, there is a strategy you can use.Every time you make a mortgage payment, you increase your equity in your home which you can borrow against often at low rates.  If you use these borrowed funds for an income-producing investment, interest on the loan is tax deductible.

    A homeowner who borrows on the principal portion of mortgage payments to invest can become good debt because a large portion of it is tax deductible.

    There are several other tax deductions and credits available in Canada, such as:

    • First-time home buyer’s tax creditFirst time homebuyers can get a non-refundable tax credit of up to $750.  You can claim with your spouse or common law partner.
    • Home accessibility tax credit (HATC)Renovation costs to make a home more accessible or safer for the elderly or the disabled can also qualify for a new tax credit of up to $10,000 under the HATC.  This is available for seniors and those who hold a valid disability tax certificate or providing support to a qualified individual.
    • GST/HST tax rebate
      If you purchase a new home to be a primary residence and the sale price is less than $450,000, you can claim a new housing rebate.  Ontario and BC residents can also qualify for the provincial portion of the HST if they buy, build, or renovate a primary residence.
    • Home Buyers PlanThis plan lets you avail up to $25,000 from your retirement savings plan to buy or build a home.  You may fill-out a T1036 tax form to submit a request.
    • Other Home tax creditsHomeowners in Manitoba have 2 other home tax credits – School tax credit for homeowners and education property tax credit.  In Ontario, homeowners can also avail of the Ontario property tax credit and senior homeowner’s property tax credit.
  4. In the long term, buying a home is better than renting.For the first few years, it may be cheaper to rent an apartment than to buy your own house.  But in the long term, as the interest portion of your mortgage payment decreases, the interest will be lower than the rent you pay.  Costs are also more predictable and stable compared to renting because mortgage costs are usually fixed rates.
  5. Greater Privacy and SecurityOwning a home gives you greater privacy and security.  You have freedom to do what you wish inside your home (within legal bounds) and have control over your security and safety.Before deciding to buy a house, consider these benefits along with how the purchase will affect your lifestyle and finances.

    Home ownership is not for everybody.  It requires a homeowner to have a growing and stable income.  Owning a home is a huge responsibility and requires you to have a savings plan and a budget in place.

    Your credit score also has a big impact on how much you can borrow and at what terms.  It is advisable to work on your credit and pay down your debts before applying for a mortgage.

 

ARE YOU REALLY LOSING OUT BY RENTING?

Canada has a high rate of home ownership which reached 69% of households as of 2011.

According to Rentseeker, the price of bachelor apartments to 3-bedroom apartments are highest in major cities like Vancouver and Toronto.  In Markham, a bachelor apartment has an average rent of $1057 per month while rent is cheapest in Saguenay, Quebec at $374 monthly.

Here’s a list of other Canadian cities and average rental costs: (as of 2015)

 

City Average Rent for
1-bedroom apartment
Richmond, BC $1025
Vancouver $1079
Burnaby $957
Surrey $773
Calgary $1122
Coquitlam $862
Edmonton $1029
Winnipeg $813
Guelph $898
London $781
Mississauga $1066
Toronto $1103
Vaughan $1,148
Ottawa $972
Gatineau $656
Montreal $668

Traditionally, rental rates are cheaper than mortgage rates for the same type of property.

Some of the benefits of renting include:

  1. Flexibility for those who could be faced with sudden job relocation
  2. Ability to live in an area where you cannot afford to buy
  3. No maintenance fees
  4. Low insurance for renters
  5. Savings after rent which can be invested in high-yielding products

If you are a homeowner moving multiple times over a 7-10 year period, you’ll be throwing money away with expenses incurred every time you purchase and sell a house. You can rent a nice condo or small house for less than what you might pay to buy the same property.

For those who can’t afford to buy a property, especially in expensive cities, renting is an ideal option. With a good investment strategy, renting can also be a financially savvy move in order to build savings.

The average person will buy a home even if it costs more because of the belief that in the long term, home ownership is a security blanket.  Before taking the leap, just be sure you are ready and able to be a homeowner.

 

How much money do you need to make to afford a house in Canada?

The prices of real estate in some of Canada’s cities, such as In Toronto and Vancouver, are astronomical.  In these places, renting can seem more appealing as it costs less.

In Montreal, housing is more affordable while over in Calgary, there has been a sharp increase in home prices since oil started to boom.

How much money do you need to make in a year to be able to afford buying a house in Canada?

Below are prices from Canada Real Estate Association (CREA) for all residential properties including semi-detached, detached, townhouse, duplexes, and triplexes.  The average salary information was obtained from Statistics Canada’s 2014 Metropolitan Area Census while property tax figures are rough estimates.

How much you should earn to buy a property in the top 10 largest cities in the country?

CITY AVERAGE HOME PRICE AVERAGE MONTHLY MORTGAGE PROPERTY
TAX
MONTHLY
REQUIRED ANNUAL INCOME
Vancouver $1,007,687 $3,693

 

$265

 

$152,206

 

Calgary $469,325 $1,935

 

$241

 

$107,123

 

Edmonton $384,504

 

$1,586

 

$256

 

$72,812

 

Regina $314,714

 

$1,298

 

$359

 

$65,881
Saskatoon $346,879

 

$1,430

 

$363

 

$71,006
Winnipeg

 

$282,684

 

$1,166 $286 $58,191
Ottawa $374,431 $1,544 $335 $74,216
Toronto $709,825 $2,927 $406 $128,746
Montreal $349,218 $1,440 $240 $78,473
Halifax $292,511 $1,206 $294 $56,929

Housing prices across Canada are on the rise and Canadians are feeling the pinch. It’s all about location, where housing remains super affordable in some cities but an impossible dream in others.

Ultimately, the decision whether to rent or to buy can only be made by the individual after a careful assessment of financial capability, needs, goals, and housing costs.

Armed with this information, we hope we can help you make the best decision when it comes to buying a house or renting.

 

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