Don’t roll your eyes just yet. This is not another debate as to whether renting is better than buying or conversely. I am actually not advocating for either option. I have been both a renter and a homeowner. In fact, I have rented more than I have owned.
I noticed there is a lot of calculators out there to help people determine which option would make the most sense financially.
Most of these calculators are flawed for various reasons; the biggest one being that they calculate based on gross income instead of net. They also don’t take into account non-financial factors, which could have a huge impact on your decision.
So, I have come up with my own analysis: non-financial factors and financial ones.
buying a home is a long-term project
Where do you see yourself in five years? As a rule of thumbs, five years is the minimum amount of time you need to stay in a property to break even or be ahead financially.
During the first five years, you pay more interests than principal on your mortgage. You also need to recoup the closing costs you paid.
Don’t get fooled by crazy real-estate markets like Toronto or Vancouver. It can be tempting to sell after a year or two, but you would actually be losing money by doing so.
if you need to buy a car or two, keep renting
Transportation costs in Canada are very high. They can -and will- eat-up a huge chunk of your income.
if you have student loans or credit card debt, keep renting…
…at least for the time being. Pay-off your debt or significantly lower it before looking at buying. Debt repayments are a huge financial burden.
A lot of recent graduates seem to be obsessed with becoming homeowners as soon as they receive their degrees. It sounds a little bit crazy to me.
So, you have determined the above first point applies to you and the second and third don’t. Let’s do some basic math.
35% of your net income is the maximum for housing costs
Lenders always use gross income to qualify people for mortgages and other loans. The problem with that is your gross income is not what is deposited in your bank account.
Always use your net income and really avoid going over 35%.
compare apples with apples
Compare the cost of renting and buying based on similar properties in similar neighborhoods. Renting or buying a two bedroom apartment will cost more than a one bedroom or a bachelor. You can find rental info on Craigslist or Kijiji.
include very comprehensive costs
Buying costs do not stop at the mortgage payment. Unfortunately, too many people can’t seem to look past this.
If you are buying a condo or townhouse, include: mortgage, strata/condo fees, monthly portion of property tax & any other municipal taxes, monthly portion of home insurance, monthly portion of Hydro and monthly portion of maintenance.
If you are buying a single, detached home, include: mortgage, monthly portion of property tax & any other municipal taxes, monthly portion of home insurance, monthly portion of maintenance and monthly portion of all utilities: hydro, gas, water….
a word on maintenance costs
As a homeowner, the biggest difference from being a tenant is that you are responsible for repairs and maintenance. And yes, you will encounter these! The costs will be different if you own a condo or a single detached house.
In a condo building, most of the maintenance costs such as landscaping, snow removal, elevator etc…are usually included in your strata/condo fees. Big ticket items, such as the roof, are shared costs. You are only responsible for repairs inside your unit. Costs are overall lower. Take 0.5% to 1% of the proposed purchase price. That’s your yearly costs. Divide by 12.
For a single dwelling, you are 100% responsible for all the costs and they are usually higher. Use 1.5 % to 2% of the proposed purchase price.
You may not spend the amount in a given month or year, but it is best to err on the side of caution.
If the number you end up with is lower than the renting cost AND does not exceed 35% of your net income, happy house-hunting! Otherwise, keep renting and invest the difference.
If home ownership is important to you, you owe it to yourself to do the above basic calculations.
There will always be opportunity costs whether you own or rent. The answer to this old age question is not so clear-cut anymore.