Should I buy or rent real estate? A Canadian’s guide
Making the choice between renting or buying property is one of the most important decisions you'll ever make. While both choices have their benefits and every situation is unique, it's always important to educate yourself on the pros and cons before diving into the property market. Some of the key factors that will influence your decision include your finances, your location, your long-term plans, your lifestyle, and your expectations. The Canadian property market is unique, which is why it's always important to make these decisions based on local knowledge and expert advice.
Before you decide whether to rent or buy real estate, you need to have a basic understanding of the costs involved. This can be a more complex decision than you may have thought, especially if you’re a first-time homebuyer, with both tangible and intangible costs needing to be taken into account. Along with tangible costs such as mortgage rates and payments (no matter if it’s a fixed rate mortgage or a flexible one) and monthly rents, you also need to evaluate intangible factors such as your time and lifestyle. Opportunity costs should always be taken into consideration, with each decision you make automatically eliminating other possibilities. Let's take a detailed look at the things you should consider before signing any contract.
Investment costs - renting vs buying
Before you decide to sign a rental agreement or enter the property market, you need to weigh up the costs involved, both now and in the future. While purchasing property requires a much larger initial investment, this typically comes with a greater potential to reduce living costs or generate profits in the future. Whether you want to live in your home after you've retired and paid off your mortgage or sell it to raise capital for a new venture, real estate is a very tangible and dependable asset.The potential to lower future living expenses or generate future profits does come at a financial cost, however, with an initial deposit required and ongoing mortgage and maintenance payments often more expensive than comparable rents. Whether you decide to rent or buy, it's important to consider all ongoing expenses along with your immediate deposit. While both renters and homeowners face regular expenses, there are considerable differences between how costs are generated and how they change over time. Talking to an expert, like a real estate agent may help to see what’s available.
Raising a deposit
The amount of money you have at your disposal is the single biggest factor that will influence your decision. In fact, being unable to raise a deposit for a house is one of the main reasons why so many people remain in the rental market. If you're unable to raise a deposit, get financial help from family, or access a 100 percent loan, then the decision couldn't be easier for you. While you may feel stuck at times, renting gives you the flexibility to move around, change jobs, and save money for your first deposit. Down payment amounts can vary considerable in Canada based on your income, credit score, and location, with anywhere between 5 and 20 percent standard. Also, based on your taxable income, you may determine what your deductions may be later on.
Ongoing mortgage costs
Saving for a deposit is just one hurdle to overcome, with ongoing costs also needing to be addressed. When you're paying off a mortgage, you need to create a long-term budget based on your immediate and predicted expenses. Getting a mortgage is a serious commitment and not everyone is ready to set up a 20 or 30 year financial plan. If you've decided to go down this route, there are a few key points to take into consideration.
Homeowners face a number of ongoing expenses, including monthly mortgage payments, property taxes, homeowner’s insurance, and maintenance fees. If you've decided to do what many Canadians are doing and purchase a condo, you'll also have to pay monthly condo fees. When paying off a mortgage, it's always important to make a distinction between your interest and principal outlays. This is one of the fundamental differences between short-term and long-term mortgages, with some people paying off nothing but interest for years before they start digging into their principal. There may be some tax deductions, but you also have to do your research to find out how to get it.
While most people are aware of the differences between mortgage and rental payments and how they're likely to affect the weekly budget, other expenses such as home maintenance and renovations are often forgotten about. Property is a robust asset that’s likely to grow in value over the years, but you need to look after it in the meantime. Unlike renters, property owners face regular maintenance costs, renovation fees and other carrying costs that can eat into their budget. Along with the impact this has on your balance sheet, it can also eat away at your time and lifestyle.
Mortgage costs and data in Canada
According to a report recently published by credit monitoring firm TransUnion, there has been a significant drop in mortgage numbers across Canada over recent months. The number of new mortgages issued in the first quarter of 2018 was down 3.4 percent compared to the same period last year, with a previous 8 percent drop seen between the last quarters of 2017 and 2016. While new mortgage volumes rose in Ottawa and Montreal at 8.4 percent and 5.2 percent respectively, they were flat in Vancouver and down by almost 18 percent in Toronto.
There was also a huge discrepancy between age groups, with new mortgages down 19 percent among millennials, down 22 percent among generation Z, up 18 percent among 54-72 year olds, and up a massive 63 percent among 73-93 year olds. According to the report, older Canadians are increasingly re-mortgaging or borrowing against their home equity in order to “support retirement or to financially support younger generation family members.” While the number of older Canadians using their home equity to support themselves is worrying, the ability to access funds during retirement is a key advantage to owning property.
According to the Canada Mortgage and Housing Corporation (CMHC), the average monthly scheduled mortgage payment for the fourth quarter of 2017 was $1,231 nationally and $1,438 in large metropolitan centers. This figure differed considerably between cities, with Vancouver recording $1,772, followed by Toronto at $1,635, Calgary at $1,486, Edmonton at $1,421, Ottawa-Gatineau at $1,198, and Montreal at $1,051.
According to the TransUnion report, the average mortgage amount in Canada based on data from the second quarter of 2018 is $260,547. This is 4.76 percent higher than the $248,706 recorded during the second quarter of 2017. Non-mortgage debt also increased over the same period, growing 3.9 percent to $29,648. According to separate data from Statistics Canada, household credit market debt, which includes consumer credit, mortgage loans, and non-mortgage loans, is now worth $2.16 trillion.
Rental prices vary just as much as mortgages in Canada, with people needing much more money to live in some provinces than they do to live in others. According to the latest Annual Rental Market Report from CMHC, the average rent per month for a two-bedroom apartment in Canada at the end of 2017 was $989, a rise of 2.7 percent from the year before. This number is much higher in large urban centers, however, with average monthly rental costs over 2017 up 5.9 percent to $1,297 in Vancouver, up 4.5 percent to $1,296 in Toronto, and up 1.6 percent to $1,128 in Calgary.
Rents increased by more than twice the inflation rate in 2017, which has it made it harder for Canadians to afford rent and save for a mortgage deposit. Current renters looking to purchase their first property face numerous challenges, including rising carrying costs related to mortgages and property maintenance, and rising down payment amounts due to increased lending restrictions.
Despite a cooling market in many Canadian cities, rising entry level property prices are also a key hurdle, especially for low-income earners or people who want to buy real estate in heated urban markets. While the supply of purpose-built rental areas has increased to accommodate the growing rental demand, new units are normally more expensive than existing ones.
In order to work out how much you can afford when it comes to rent, it's important to compare properties and areas based on your rental and lifestyle requirements. For example, there's no use getting a cheap apartment if you can't find work in the area, and no use renting in the outer suburbs if you're wasting funds getting to and from the city everyday. While rental costs are more transparent and easier to manage than mortgage costs in most cases, where you live will have a significant impact on how much you pay. This handy tool can help you to find the perfect destination for you based on your income and living needs.
Building equity and selling potential
Other than the security of owning your own property, the ability to build equity and add value is the single biggest advantage of home ownership. Equity occurs when the home that you own rises in value at the same time as your mortgage debt falls. This happens naturally over time in most modern housing markets, although there are some notable exceptions. While real estate is known to be one of the safest investments you can make, buying an expensive property when the market is overheated can be a recipe for disaster. It's always important to compare home appreciation with rental prices and buy property with solid selling potential.
Purchasing property with the intention of selling it later is both an art and a science, with property investors and house flippers often taking years to perfect their craft. Despite the difficulties involved, there are a number of well-known considerations to make when you're developing a property short list. Other than the price of the property itself related to your budget, it's also important to research the location, the supply and demand curve, past growth rates, and the growth potential of the immediate and surrounding areas. Buying the cheapest property in the most expensive street is a well known saying for a reason, with the surrounding environment having a huge impact on the desirability of the property in question.
Rental vs mortgage calculators
At the end of the day, it's impossible to say whether buying or renting is the right choice for you based on cost alone. Each person is different, as is each property, each city, and each budget. While you still need to do your homework, there are some valuable case studies and mortgage vs rental calculators out there that can give you a helping hand based on your location.
Time and other intangibles - rental vs buying
Just because you can't hold something in your hands doesn't mean it's not important. Opportunity costs and other intangible factors should always be considered when you're making the decision whether to rent or buy. While time is the biggest intangible cost that you need to take into consideration, you should also look into how your decision will impact your lifestyle, your freedom to move around, and your state of mind. Looking for a property to purchase can be time consuming and exhausting, living with a mortgage can significantly reduce your freedom, and the stress of home ownership can adversely affect your mental health.
Looking for a house or apartment
The time it takes to look for a property to purchase can be significant, not to mention the stress involved. While finding a house or apartment to rent can also be stressful, home ownership is a whole new level due to the large costs involved. People often spend months or years searching for the perfect home, often putting their life on hold in the meantime. This is one example of an opportunity cost associated with home ownership, with other examples including lack of flexibility, increased responsibility, and less disposable income to spend on hobbies and entertainment.
Stability vs flexibility
Lack of flexibility is typically recognized as a disadvantage of home ownership. Not only does renting carry fewer upfront costs, you also have the freedom to move out at the end of the lease. Instead of being tied to a specific property or specific city, renters can move around from town to town and take advantage of new employment opportunities. This is an important consideration, with lack of flexibility and mobility a significant opportunity cost that should always be weighed up against stability.
On the other side of the coin, home ownership provides an almost unparalleled sense of security and stability. Instead of having to move house every six months or getting stressed about being kicked out, property owners can enjoy the deep sense of belonging and security that comes with home ownership. This intangible factor should not be underestimated, with each person needing to find their own balance between flexibility and stability. While you don't necessarily have to give one up to have the other, opportunity costs are a very real thing and everyone needs to find their own balance.
Moving costs - renting vs buying
Moving house can be a significant expense, not to mention a stressful and time consuming endeavor. While most of the costs involved with moving are similar whether you're moving to a newly purchased property or a rental, there are some important differences. While not actually a moving cost, renters will need to pay fees if they break their lease early. It's also important to make sure that your rental payments are up to date and the property is clean in order to keep your rental security deposit. If you're moving into a rental property, you will need money to pay for the bond and set up utilities. You will also need to pay a renter’s insurance.
When you're moving into a home that you've just bought, many of the moving expenses will be the same. While you still have to pay the moving and the utility companies, there will be no obligation to pay any deposit. While this is great news, the cost of four weeks bond will more than be offset by closing fees, taxes, insurance, house inspection fees, and other costs associated with a new home. Make no mistake, moving into a newly purchased home will always be significantly more expensive than moving into a rental.
Interior decoration costs - rental vs buying
Interior decoration and home renovation costs should always be addressed when making the decision between buying and renting property. While fully furnished homes are available on the rental market, generally speaking, renters and buyers will need to pay for their own furniture and perform their own interior decoration. When it comes to large design decisions and renovations, however, there are very real differences between renting and buying property.
While renters have more flexibility when it comes to moving around from place to place, they have much less flexibility when it comes to changing their home environment. Something as little as installing a new light fitting may require approval from your landlord, and a new kitchen or bathroom is simply out of the question. The lack of freedom to perform renovations does come with its advantages, however, with renters likely to spend much less of their income in an attempt to make their homes look and feel perfect.
Taxes and fees - rental vs buying
Purchasing a new home comes with a number of taxes, fees, and associated costs that you may not have even considered. Along with the deposit amount, you are also responsible for closing costs, mortgage insurance, home insurance, home inspection fees, property taxes, security costs, and possibly condo fees. Closing costs alone can easily go into the thousands in Canada, including title insurance, land transfer tax, lawyers fees, registration, statement of adjustments, mortgage application fees, federal and provincial taxes and more.
Land transfer and other taxes vary considerably between locations, so it's important to check the details in your jurisdiction. For example, according to a new study by home listings site Zoocasa, Vancouver has the lowest property tax rate among Canadian municipalities at just above 0.24 percent of a property's value. In terms of the actual property tax paid, which is based both on the tax rate and the assessed value of a home, Hamilton has the most expensive property taxes, followed by Mississauga, Toronto, and Ottawa.
If you're moving into a condominium, you should always do detailed research into monthly maintenance fees and what they cover. While condo fees are a normal part of condo life, fee structures and services can vary considerably between buildings. For example, some condo fees will include utilities and others will not. When it comes to renting, saving for a bond is your only real responsibility, with many renters also taking out home and contents insurance to help protect their personal belongings.
Maintenance and repair - rental vs buying
When people are comparing mortgage costs with rental costs, they often fail to include maintenance and repairs. Keeping up to date with repairs is not just an important responsibility, it also represents a significant ongoing cost. Whether it's fixing the plumbing, patching the roof, or dealing with rising damp in the foundations, home ownership can be a significant financial burden. The real price of home ownership is not just the purchase price of the property, but it should always include maintenance costs, including regular preventative measures and emergency repairs. It's also important to keep a contingency fund available in the case of natural disasters and other unexpected emergencies.
The cost, stress, and responsibility that accompanies home maintenance is one of the factors that has led to a rise in condo ownership across Canada. In a typical condo purchase arrangement, the person buys the apartment along with the right to access common areas and building assets. Along with the cost of the apartment itself, the condo owner is also required to pay monthly maintenance fees for common areas and the building exterior.
In contrast, renters have it very good in this regard, with landlords responsible for all general maintenance on the rental property. While renters are responsible for any damage they cause, they don't have to face the regular maintenance bills and associated stress experienced by homeowners. Whatever choice you decide to make, it’s important not to overextend yourself and let your property take over your life.
Q. What are the key advantages of renting over buying property?
A. Renting is associated with greater flexibility, less stress, and fewer costs than buying property, including no down payment and less outgoing expenses.
Q. What are the key advantages of buying over renting property?
A. Buying property is associated with greater stability, improved economic security, and the ability to build equity for your future.
Q. Are property ownership rates falling in Canada?
A. According to Statistics Canada, 50.2 percent of millennials owned their homes at 30 years of age, compared to 55 percent of baby boomers at the same age.
Q. What is equity and why is it important?
A. Equity exists when the value of your home increases at the same time as your mortgage debt falls. Building equity gives you access to capital later in life and is one of the fundamental advantages of home ownership.
Q. What are some common mortgage costs?
A. Along with the deposit and mortgage payments, owning property is also associated with regular maintenance fees, taxes, and condo fees if applicable.