This is a question that everyone asks themselves at some point in their lives, but the truth is there really is no “better” option when it comes to renting vs buying a home.
It all depends on the current market and what your options are. Below we will outline some things to consider when asking yourself this question.
Buying a Home is Expensive!
Most people that compare renting vs buying don’t actually realize all of the spending costs associated with purchasing a home.
The expenses people often overlook are for things such as:
- House Insurance ($1000 + annually)
- Annual Land Tax ($1000 + annually)
- Mortgage Payments
- Land/Title Transfers (In SK, for example, if over $8.8K in value it’s .30% of the property’s value)
- Minimum 5% Down Payment (not recommended)
- Default Insurance (if down payment is less than 20%)
- Home Inspections ($250 – $500 Not mandatory)
- Legal Fees ($500 – $1,500)
- Property Maintenance (about 1% of the property value yearly)
- **Possibly Others Fees Depending on Your Situation
Now let’s say the house you’re looking at is $250,000 and you have a down payment of $15,000.
Your monthly mortgage payment (according to RBCs mortgage payment calculator with an amortization of 25 years and 3.75% 5 Year Fixed Interest rate) will be about $1,250 a month, plus utilities, insurance, taxes and maintenance. So you would be looking at paying about $1,800 – $2,200 a month to keep up with the investment.
Also, if you only put $15,000 down on a $250,000 loan, you will be forced to pay about $9,000 in default insurance. This doesn’t have to be paid right away and is usually put on top of your mortgage, but if you think about it that $15,000 down payment is now only about $6,000 down on the property if you subtract the default insurance.
You Can’t Build Equity Renting
Now let’s take the example above and compare it to renting a property that is $1,200 a month, assuming it has free utilities.
Now there are still expenses such as contents insurance or tenant insurance and any extras such as WI-FI you must pay for, but those are quite inexpensive and would typically only cost about $75 a month extra on top of your rent.
So now you’re spending about $1,275 a month and saving anywhere from $600 – $1,000 a month extra compared to having a mortgage.
Now the average housing price moves up about 7% – 10% a year and nowadays you can get an investment portfolio that pays out about that much.So let’s say that you took the money you saved every month plus your down payment and instead put it into an investment that gains you 8% – 11% per year.
With the investment compounding every year (could be compounding more if it pays dividends) at an average rate of 10% and you’remaking an annual addition of $9,600 ($800 x 12) a year from the money you save after about 10 years that sum will grow to $207,205.34.
Let’s Compare Renting VS Buying
Now, let’s take the property investment and see what a 10 year outlook looks like.
You put $15,000 on a $250,000 property with a 25 year amortization period and 3.74% fixed interest rate. You wait ten years and now you’re sick of living in the same place so you’re looking to sell your home and move somewhere else. Let’s say your property on average hit 9% growth a year, it’s now worth a whopping $591,840!
$250,000 – $591,840 = $291,840
$291,840 (Gained Equity) + $65,930 (Principal Equity) = $357,770 in equity, crazy!
Now let’s also look at some of the common expenses that would be associated with your home over this ten year period assuming you didn’t switch mortgage lenders.
3.74% Interest: $72,886
Taxes 1.5%: $37,500
Property Maintenance: $25,000
House Insurance: $12,500
Mortgage Insurance: $9,400
Sellers Fee 3% – 5% (Unless Done By You): $15,000 – $29,550
That adds up to about $177,286in total expenses, subtract that from $357,770and you are left with $180,484 in total from your property investment compared to $207,205.34 renting and investing for 10 years.
This is no way means one is better than the other, it all just comes down to crunching the numbers with the current market status before you make the decision. We are just trying to show when it comes to renting vs buying a home both of these options can be financially logical.