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From a young age we’ve been told it’s better to buy than to rent. Better to build equity in a house than “pay money into nothing” as a renter. What was once a milestone in the life of the average Canadian has become a longer-term goal for some as the jaw-dropping state of Canada’s real estate market takes hold. There are plenty of circumstances when renting might make more sense than buying. Below, you’ll learn more about the pros and cons of each option so you can determine which is best suited to your needs.
Pros Of Renting A House
Homeownership isn’t for everyone and that’s OK. Some housing markets in Canada make owning a home nearly impossible where others may present unique rental options that could far outweigh the pros of buying. With the right investments and know-how, you don’t need to own a home to achieve financial security.
If you don’t like the idea of being tied down to one neighbourhood, one style of home, one city or even one country, renting may offer the most flexibility. Once your lease is over, you’re free to do as you please instead of being forced to stick around for long enough to avoid penalties for breaking your mortgage. If you like to travel, have considered living abroad, or just want the freedom to move around as you please every year or so, renting may be better suited to your lifestyle than homeownership.
One of the perks of renting is not being on the hook for any maintenance issues or necessary repairs. The daily maintenance and regular upkeep of a home can cost a LOT of money from sourcing materials to paying for the skilled labour to get the job done properly. Renting means your landlord is responsible for any issues that may arise so you’re a free phone call away from a solution to your problem, no investment of time or money necessary.
Despite the way it may seem, renting is often cheaper than a mortgage in the short term. If you don’t make enough money or have a high enough credit score to qualify for a mortgage, renting is typically a lot more affordable and accessible. If you’re looking to invest in other things or areas of your life, renting may also free up more disposable income for you to do with as you please.
Cons Of Renting A House
If we’re being honest, there are a lot of not-so-nice things you’ll encounter as a renter and it’s important to be aware of those things before you make any big decisions.
You Don’t Own Your House
As you’ve probably heard a million times already, renting means you aren’t building any equity. Sure, you’re able to avoid a mortgage and taking on any serious debt as a homeowner, but at the end of the day, your hard-earned money is going toward paying off someone else’s mortgage instead of your own.
Increases In Rental Prices
Rental rates can be just as high as the price of homes in today’s market. Finding a place that suits your needs while also working with your budget can be difficult. You’ll also have to consider that the price you’re paying now will continue to increase over time and there’s nothing you’ll be able to do about it as your landlord can legally raise your rent by a certain percentage each year in accordance with local laws.
Less Stability Compared To Homeownership
Renting comes with the acceptance that things may be more unstable than you thought. Your rent is never a fixed cost and building ownership/management can change at any time which could trigger new policies, procedures or even costs. Generally speaking, it can be hard to feel stable while renting.
Pros Of Buying A House
There’s no denying that homeownership has serious appeal, especially if you’ve been renting your whole life and know first-hand the cons associated with it. While the benefits will vary person to person, there are some general benefits that look impressive on any pro list across the board.
Often renting can seem like a more stable option, but it’s important to remember that your landlord can hike the rent at any time. If improvements are made to units or if a year has elapsed, he/she is legally allowed to increase what you pay for no reason whatsoever. A fixed-rate mortgage is the solution with a set rate you’ll pay every month that makes mortgage payments predictable and easy to work into your overall budget.
It also means if you want to paint or make the space your own, you’re able to pursue whichever home improvement projects you want instead of requiring approval from a landlord or being generally restricted by rental rules/regulations.
If the value of your home increases, you get to pocket the equity as the homeowner. If you choose to sell down the road, those capital gains (minus tax of course) will be yours to reap.
Building Equity In Your Home
We’ve all heard this from a young age: Paying into your home will help you build equity. But what does that really mean? Every time you make a mortgage payment, you’re moving closer and closer to fully owning your home and as a result, having something of value you can truly call your own.
Cons Of Buying A House
When you buy a home, you’re making a long-term commitment. Even if it isn’t your forever home, it’s going to be your home for a least a few years and as a result, there are some cons you may encounter.
As a renter, your landlord is responsible for any maintenance related issues that may arise in your unit. As soon as you become a homeowner, that responsibility falls solely on your lap, so you’ll need to be prepared for the extra costs you’ll encounter. Whether it’s replacing the roof every 10 years, fixing a pipe that’s leaking or keeping up with landscaping, there are plenty of hidden maintenance costs you should be prepared for once you make the decision to buy.
Mortgage payments are often higher than monthly rent. Plus, that’s not factoring in property taxes, condo or community fees (if applicable) and all the costs you’ll encounter up front when you officially buy the property like land transfer taxes, legal fees, insurance etc.
Rooted To The Same Place For A Longer Period Of Time
When you buy a home, you’re making a commitment – to a specific place for a specific amount of time. Breaking your mortgage will result in stiff penalties and costs you won’t want to incur unless absolutely necessary. If you have some doubts about where you see yourself in 5 years or aren’t sure you want to commit to being in the same neighbourhood/city/country for an extended period of time, mortgages don’t offer nearly as much flexibility as renting does.
More Responsibility With Ownership
When you make the choice to purchase something, you take on a considerable amount of responsibility and debt as a result. If you previously enjoyed the freedom of disposable income, you’ll likely lose that with extra money being shifted into new areas like maintenance, taxes, legal fees etc.
Should I Rent Or Buy A House?
There is no such thing as a right or wrong answer when it comes to the age-old argument of renting versus buying. Before you do anything else, take a look at rental costs versus home costs in your neighbourhood of choice. You can look at property value reports to see what homes sold for recently in your area which will help give you a better idea of what you’d be paying for a mortgage versus monthly rent payments. Beyond anything else, your local housing market will likely play a huge part in influencing your decision to rent or buy.
You’ll also want to ask yourself important questions like how stable is your employment situation? How long do you plan to stay in your current place? Are you ready and willing to commit to homeownership? Answering these questions honestly will also help guide your decision to determine if you’re ready to make the leap from renting to homeownership, or if that choice even makes sense for you.
The 5% Rule For Renting
When most people talk about buying a home versus renting, they often underestimate the actual cost of owning a home. Purchasing a home isn’t just paying the ticket price and walking away. The 5% rule will give you a good idea if you’re finally able to afford buying a home and help you clarify the real costs related to renting and buying.
The annual unrecoverable cost of owning a home is about 5% of the property value (whether you have a mortgage or not). If your rent is lower than that for a comparable home, you should keep renting. If your rent is higher than that, you’re probably better off buying a comparable home.
When you’re renting, the total unrecoverable cost is the amount you pay in rent every month. When you own a home, the total unrecoverable cost is a bit more complicated and includes property taxes, maintenance of your home and the cost of credit (aka the interest you’re paying on your mortgage).
Property taxes are around 1% of your home’s value each year, maintenance costs are also around 1% and the cost of credit generally comes up to 3%. That means that the total unrecoverable cost from a home you own should be around 5% of the total value each year, which is where the 5% rule originates. If you can rent for less than 5% of the value of a comparable home (calculated annually), you may decide to keep renting and choose to invest the difference into a TFSA, RRSP or stocks.
There is no perfect housing option, just the perfect option for each of us as individuals. While both renting and buying have their cons, they also have their pros. Lean into the process of understanding the difference as it relates to cost savings and be sure your decision is being based on data and your personal finances, and not just on what your relatives told you is best.