Renting Vs. Buying. What Makes More Sense?

Renting versus buying has been a growing debate in the current Canadian housing market. With a shift in paradigm, people are living differently than ever before. The responsibility of renting and buying definitely has its pros and cons with a significant increase in sale prices and a shift in the global economy, thus making renting a more popular choice.

Overview

Benefits & Downfalls of Owning Your Own Property

There are several reasons why homeownership has serious appeal and here are a few reasons! As you make mortgage payments, you build equity. What is equity you may ask? It is a portion of your home that you truly own and isn't encumbered by a mortgage. So as you make your bi-weekly or monthly payments, you are that much closer to owning your own place in which renting cannot do. Another reason to purchase a property is that it is a great investment as the values of houses typically only go up. To reap the full benefit of your home appreciation, the general guideline is to hold onto your property for at least five years. Although your income may fluctuate, at least your mortgage is at a fixed-rate, making mortgage payments more predictable than the rent price. Another beauty of owning your own house means more privacy and you do not have to worry about your landlords monitoring your every move.

Though the benefits sound appealing, there are some downsides to owning your own home: committing, maintaining and restrictions on your income. Buying your own house means that you are bounded to the mortgage on your purchased property and cannot break it without a fairly big penalty, however, this is not always the case and does not mean you cannot go buy another house. Maintenance can be costly and mean less disposable income. When you are a homeowner, you have to find the funds to repair and maintain your house. This is one pro of renting as the landlord is responsible for the upkeep of your rental. Repairs and maintenance costs are not much of a challenge when you budget and save over time. Return on investment (ROI) can be another setback as it does take time for the value of your house to increase.

In general, owning a house can be costly, however, with the appropriate budget and plan,  you can have a balance between owning a property, paying all house expenses and enjoying life!

Benefits & Downfalls of Renting

Renting might be a popular option right now, and has a fair amount of perks to consider. In general, renting tends to be cheaper as the payments are typically lower than mortgage payments and sometimes leases cover costs, such as utilities, hydro, cable and internet. Leases are also flexible as there are short and long term rentals, which makes it great for people who love to move around and are not ready to commit yet. As mentioned previously, landlords are typically responsible for all leaks and other repairs, which leaves your pocket full of money while your landlord has to shell out a wad of cash! And of course, renting gives more financial freedom than buying a property as you have more cash for other purposes (i.e., retiring or planning that getaway) instead of pouring it into your house.

With pros, there are also cons. So what are they you might ask?  You're not building equity like you would with buying a house. Instead, your monthly rent payment is going towards someone else's mortgage. Another caveat of renting is having a landlord and instability. That is your landlord will oversee everything you do and they can raise your monthly rent price.

So, Rent or Buy? How to Decide

Timing is key and it is important to consider what your financial situation is or what your goals are short term and long term. To figure out if renting or buying is for you, it is crucial to compare the cost of rent to mortgage payments in your neighbourhood or desired area to live. If you are paying nearly $3,000 in rent per month, chances are you are better off on a mortgage. To help you effectively spend and save, you should spend 40% of your gross income on housing costs and registered debts (i.e., car loans, principal, taxes, etc.). To further break this down, about half your net monthly income should be used for housing, food and transportation costs. 

Another consideration would be the stability of your employment, as that would contribute to the likelihood of having a lender give you a mortgage and meeting other obligations.  If you're thinking of living in your current area for a short term, then you're also better off with renting as the longer you live in a place you buy, the better the investment. After all, commitment is a big step in homeownership. 

You should rent if:

• You're not ready to settle and you plan on travelling, going back to school or changing careers.
• The mortgage payment is too high for you and you have other money obligations and or debt (i.e., OSAP, car payments or other money commitments). Focus on paying off or lowering the amount of debt you owe. 
• You don't have a down payment saved up. Talk to your bank advisor to see what accounts (i.e., TFSA account) you can set up to help you save for a down-payment quicker!
• Building stability. If you are self-employed or your job is temporary, rent and build your proof of your income (i.e., produce tax returns from Canada Revenue Agency).

You should buy if:

• You're ready to settle and live at your property for at least 5 years.
• You're financially and emotionally ready to take on the several costs associated with homeownership. Having enough money for a down payment and to cover closing costs needs to be saved to purchase.
• You're almost debt-free, which means you can put the extra money into funds for maintenance and property taxes.
• You have a steady source of income and not planning any abrupt career change that could impact your income and if you're self-employed you have at least 2 years of CRA Notices of Assessment to show a mortgage lender that you've got a stream of income coming in the door.

So, what's your verdict? Do you think renting or buying is better? If you're renting now, it doesn't mean you cannot buy it later! If you're interested in finding a strategy that best suits you to buy your first home, email harrisdoeshomes@kw.com.