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Chances are, you’ve heard more than one person preach the value of buying a home versus renting. But with the current state of the housing market in Canada, what was once a steppingstone for many young Canadians has become more difficult for those who simply can’t afford to enter the market. It’s important to understand the circumstances where renting might make more sense than buying. Learning more about your options and asking yourself the right questions about your future can help you determine which option is best for your personal situation.
Advantages Of Buying A House
Owning your own home has serious appeal, with both tangible and intangible benefits. While these benefits will always vary person to person, there are some general advantages that you’ll want to take note of as you weigh your options:
Buying a home is often considered a long-term investment, as you’re paying into something you now own, which allows you to build up equity that you can access later in life if needed. But as with any investment, how well it performs will depend entirely on a number of different factors, like location, the current economy, maintenance and even environmental concerns. Most of these things aren’t static, so it’s important to note that the value of your investment can potentially change often and frequently over the course of time. Just note that the real value of owning a home becomes evident in the future, once you’ve built up your equity and worked to pay off your mortgage, so you need to be in it for the long haul to see those benefits come to fruition.
Being a homeowner brings with it a sense of pride, stability and often some perks in the form of tax deductions and credits. Unlike renting, it gives you the flexibility to make your own decisions about decor, layout and how you use your space. You can find solutions as you see fit, approach problems the way you prefer and invest in your property at your own discretion. Being a homeowner may mean you have more responsibility, but that isn’t always a bad thing.
There are many expenses that you’ll encounter as a homeowner that you likely never would as a renter. These can cover everything from maintaining your property to paying for pest control services, and sometimes these expenses come unexpectedly. As a homeowner, you’re responsible for making any repairs yourself, and you won’t have your landlord to fall back on when it comes to calling the plumber to fix a leak or simply switching out a broken appliance when it stops working. More responsibility means more financial commitment, so it’s important to keep that in mind.
Paying for property taxes is an unrecoverable cost of owning a home. Individual property tax amounts are calculated based on the value of your home and the municipal property tax rate in your area. Property values are typically assessed by a government authorized entity on a regular basis, but this time period can vary depending on where you live in Canada. For example, in Ontario, it’s once every 4 years.
Each municipality across Canada determines its own annual property tax rate, and your personal finances will have nothing to do with the amount you’ll be required to pay. Typically, it can range from 0.5% – l 2.5%, so it’s wise to ask about property tax history for a property if you’re considering buying a home.
Owning a home will likely be your largest single financial investment, so it’s important to protect your property and contents against unforeseen risks with homeowners insurance. This is coverage that’s legally required by all mortgage lenders for all borrowers in Canada. As a homeowner, you need to insure your house for its rebuilding costs in the event of serious damage or destruction, and homeowners insurance will help you do that. In Canada, the average cost of homeowners insurance is $960 per year, but this will vary based on the type of home, the home’s location and other pre-determined risks associated with your property.
Is Renting Cheaper?
Renting can be predictable in that the cost is fixed for the year and you can more easily plan your life and expenses around that number. Despite what some people may say, comparing the cost of your monthly rent to the cost of your monthly mortgage payment is not comparing apples to apples. The overall cost of homeownership tends to be higher than renting, even if your mortgage payment is lower than the rent.
As a homeowner, you’ll encounter a myriad of expenses that you likely won’t as a renter, so it’s important to factor these in for consideration as well. Some may include:
- Property taxes
- Saving up a down payment upfront
- Condo/HOA fees (if applicable)
- Water and sewer service
- Pest control
- Homeowners insurance
- Pool cleaning and landscaping costs (if applicable)
- Earthquake insurance or flood insurance (if applicable)
- General upkeep and maintenance of pipes, roof, furnace, etc.
Factors To Consider
Aside from finances, there are other non-monetary factors you’ll want to consider when looking at your housing options.
How Long Will You Live In The House?
This may seem like an arbitrary question, but it’s important to ask yourself how long you plan to stay in a home because breaking your mortgage early will result in penalties and costs that you won’t want to incur unless absolutely necessary. Forecasting how long you plan to be in this space will help you determine if the investment is worth your while or if it may become an issue if you aren’t able to stay for a certain duration of time.
If you’re not sure how to answer this question, think about where you see yourself in 5 years’ time. Are you considering having children? Might you be married or in a long-term relationship? Is a promotion on the horizon at work that could take you to a new office location? Are you thinking about starting a small business? Are you planning to change careers to something that requires more travel? These are all important questions to help you determine whether or not settling down in one place for a certain duration of time is a wise decision at this point in your life.
Do You Need Flexibility In Housing?
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 more flexibility than buying. 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.
Are You Financially Ready?
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 asking price and walking away. Using a system like the 5% rule will give you a good idea of whether you’re 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 should probably keep renting and choose to invest the difference into a TFSA, RRSP or stocks.
Your choice to rent or buy will be entirely dependent on your personal situation, your lifestyle and your personal preferences. Owning a home isn’t always better than renting, and renting isn’t always as simple as it seems, so there is no right or wrong answer to which is a better choice. If you’d like to learn more about the home buying process, mortgage financing or how to determine if you’re ready to buy a home in the first place, you can reach out to our team of experts any time.