rent or buy

Buying a house is the biggest financial decision most people will ever make, but is buying the right thing to do? Should you rent or buy?

There are pros and cons to both, and you should take time to think about them as it applies to your situation, before you make the leap into home ownership.

Conventional wisdom says to buy. Buying builds equity and buying helps grow your wealth, whereas renting is just throwing money away and paying off someone else’s mortgage, making them rich.

Let’s think about that for a second, and look at the math. Average rent for a three bedroom house in Calgary is $1,614, whereas a typical price for a three bedroom home in Calgary is $440,000. Using a typical five-year rate of 2.94% and 25 year amortization with 20% down payment, your mortgage payment would $1,655 and property taxes would be another $226 per month. Assuming utilities are not included in your rent so would be the same for renting or buying, you would save $267 per month or $3,204 per year, or $16,020 over a five-year term. And, we didn’t include any maintenance or repair costs that a typical homeowner would have to pay. For some people having an extra $267 at the end of the month, can make or break their budget.

But let’s take it a step further, a mortgage payment is made up of both an interest and principal component, so for those thinking, ‘yes, but I’m building almost $1,650+ in equity each month’, you are not. Over a five-year term and you pay a little over $51,000 in principal or about $850 each month that does go towards your equity. So in this case owning comes ahead, by about $35,000 over a five year period.

Renting does come with some advantages, such as greater freedom to move, almost no house concerns regarding maintenance costs, and as shown above a lower monthly cost, allowing you to save for a down payment or pay off debts to improve your credit, or to spend on living your life. Some cons to consider include, the quality of your landlord, or being subject to their whims if they decide to sell or increase the rent. As a renter, you sometimes have little control over your living situation, or the timeliness of repairs, you are also limited in what you can do with the home for making changes and upgrades to better suit your situation.

Homeownership does provide some advantages over renting, such as a long-term benefit of security, and you will create equity and potential growth in personal wealth. When you buy a house, it becomes your home. You can use it without restrictions enforced by a Landlord, you have creative control of your property and can alter the property, including décor changes, landscaping and renovations, to suit your needs and your style. If you need, or want, a mortgage helper you can also look to rent out a room or a portion of your house. Homeownership also provides a forced savings by paying into your equity each month. As most renters won’t take the monthly savings to invest.

So should you rent or buy?

Things to consider are:

  1. Where are you going to be in five years? Are you planning to keep the job you have now? Are you heading overseas? Would you consider keeping this property and renting it if you moved? Before committing tens of thousands of dollars, or hundreds of thousands of dollars, think about your five-year plan.
  2. How much have you saved for the down payment? Under the new changes that came into effect in October and November of 2016, qualification has changed and is more stringent. Do you even qualify now?
  3. What about the “hidden costs” of home ownership? Do you have money available for the extras of homeownership, the hidden-costs? What happens if the roof needs to be fixed, the furnace breaks down, the basement leaks, or your locks, or faucets, or carpets, or fireplace, or hot water tank, or light bulbs, or… you get the idea.

To recap, there can be a case made for renting, and for some it is the right decision, as is homeownership. Renting can be a great decision if you cannot afford to buy or cannot qualify to buy, and if you are wise with your money can come out better for it.

Co-written with Martin Breeze, Mortgage Broker, TMG The Mortgage Group

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