One question I receive quite frequently is, “Is it better to buy than to rent?”
Personally, I was raised that it doesn’t make sense to pay someone else’s mortgage so have never rented in my life, but this meant staying at home with my parents a bit longer to save up for the down payment. Not everyone has this luxury, but there are actually options out there if you have a great paying job where you might not even need a down payment*. Also, if you are a first time home buyer and have some money in an RRSP, there are programs in place where you can borrow from your RRSP tax-free for up to $25,000 to help with your deposit.
To really answer the rent vs. own question, I believe it is best to back it up with a real world example. I decided to run a comparison on a property in my building that recently sold then rented a few months later. Here is what I discovered:
Subject Property: 1 bedroom condo at 4K Spadina Ave. (for privacy purposes I can’t reveal the exact address)
Sold Price: $256,000 as per MLS in January, 2014.
Rental Price: In April, the property was leased for $1400 per month as per MLS.
Given today’s historically low mortgage rates, the carrying costs for the property would be as follows:
Interest: 3.05% (generic rate)
0% Down (5% cash back, 4.85% rate): $1,437.67 with CMHC premium + $226.16/mth Condo Maintenance Fee & $110.54/mth in Annual Property Tax = $1774.37
5% Down: $1,193.63 with CMHC premium + $226.16 Condo Maintenance Fee & $110.54/mth in Annual Property Tax = $1530.33
10% Down: $1,122.59 with CMHC premium + $226.16 Condo Maintenance Fee & $110.54/mth in Annual Property Tax = $1459.29
20% Down: $866.85 no CMHC + $226.16 Condo Maintenance Fee & $110.54/mth in Annual Property Tax = $1203.55
So as you can see above, if you can manage to get 5% down, then your monthly carrying costs for the property would be slightly more than your monthly rent. If you set your mortgage payments to weekly or increase your down payment, then these numbers could be brought down even more.
The main benefit though is you will actually OWN the property, not just rent it. You will be paying your own mortgage, instead of someone else’s. If you are currently renting, this is what your monthly rent could buy you if you can manage to save the 5% down payment:
(Image courtesy of Mortgage Architects, Bosley’s in-house mortgage team)
Ownership does come with some risks. Sure, there is a possibility the economy could tank and take real estate prices down with it, but unfortunately I don’t own a crystal ball and nobody can predict a major financial crisis. As a condo owner, you are also responsible for any major building repairs, but these typically have warning signs that your lawyer will be able to pick up when looking at a status certificate.
There are also some other costs associated with the purchase of a condo, such as land transfer tax and legal expenses. The nice thing though is if this is your first purchase, you are likely eligible for a first-time home buyer’s credit, so the total closing costs should be under $2000.
DISCLAIMER: The numbers in this article are based on an owner occupied property. Investment properties have different lender restrictions. If you are looking for an investment, please contact me and we can discuss your options further. While I have done my best to ensure that math in this article is correct, I am not a mortgage expert. For expert advice, please consult a mortgage broker. If you don’t have a mortgage broker, contact me and I can connect you with our in-house team.
* While this may sound too good to be true, it simply means you will be paying a higher interest rate initially until you build some equity in the property. It is ALWAYS better to have as large of a down payment as possible on a property to help reduce the CMHC premiums and the amount of interest you will pay over time. This is just one way to get into the housing market if you don’t have a down payment yet.