Renting vs Buying

It has long been thought that buying a home versus renting was always the smarter option and overall a worthwhile investment in the long run. However, despite current low-interest rates, the real estate market in Canada has seen a substantial rise in the prices of homes, which is causing many people to reconsider taking the plunge into becoming a homeowner.

There is no right answer to whether or not the best option is to rent or own as the decision needs to be made on personal factors and what your long term goals and priorities are. Also, people are starting to take a different view on the traditional method of building wealth through homeownership after they have factored in the rising home prices, total costs of repair, maintenance and other expenses related to owning a home. Many are deciding that building wealth as a renter can be equally as profitable by investing the considerable savings from not owning a property into an investment portfolio.

If you have been considering the idea of becoming a homeowner, make sure that you understand and evaluate these factors to truly determine if home ownership is the right choice for your personal situation.

The True Cost of Ownership
When you are renting an apartment, a single monthly fee covers the majority of your housing “hard” costs. As a homeowner, there are four payments that have to considered: principal, interest, insurance and the always dreaded property taxes. Having a solid understanding of these costs can help determine how much you can afford to spend on purchasing a home.

Combined, principal and interest are what your mortgage payment is comprised of. Each month, the principal portion reduces your balance and the interest is a fee paid for being lent the money. Taxes are charged on your property and can vary in cost by the municipality, but usually average between $3,000-$6,000 annually. Insurance is a requirement if you hold a mortgage to cover the cost of rebuilding your home should it be damaged by a fire or another disaster and the average cost in Canada hovers around $1,250 per year.

If you purchase a condo, there is a fifth cost factor to be aware of; which is homeowners association dues, offered referred to as ‘maintenance fees.’ This cost covers on-going building maintenance and upkeep, common area amenities, landscaping, and a portion is also reserved to cover any major repairs like the replacement of a roof or exterior painting. If you haven’t purchased a condo that requires fees, it is recommended to apply the same principal and save a fixed amount of money each month that can be used towards unexpected maintenance or repair costs that your home may require.

Understand Your Homeowner Tax Benefits
One perk of being a homeowner is the variety of tax benefits that may be available, which can reduce your annual taxable income. Depending on whether or not you rent a portion of your home, mortgage interest and property taxes may qualify as being deductible. In addition, there are several rebates and tax incentives for new homeowners or people that have built a new home such as:

First-time Homebuyer Credit
You can claim $5,000 for the purchase of a qualifying home. You or your spouse must not have owned a home in the year purchased or the previous 4 years.

Land Transfer Tax Refund
First-time home buyers can receive a land transfer refund of up to $4,000 in Ontario and an additional $4,475 in Toronto. Refunds are also available in B.C. for $8,000 and P.E.I. for $2,000.

New Home Rebate
Purchasers of newly built homes may qualify for GST or HST rebates and there are other deductions available to those that have built a brand new home or a rental home.

Home Buyer’s Plan
The Home Buyer’s Plan allows a first time home buyer to borrow up to $25,000 from their RRSP to help with the down payment or purchase the property and have 15 years to replace the funds without penalty.

What is the Right Choice?
There is no one size fits all answer to whether or not it is better to rent or buy. If you are considering purchasing a home, it is important to not stretch yourself financially and be able to cover the unexpected costs that can arise with homeownership and also not be stuck in the mentality that owning a home is the only way to amass considerable appreciation and wealth over time.

If you do feel that you would like to start taking the steps to becoming a homeowner, start by preparing your credit score. A good to excellent credit rating is essential to securing a mortgage with a lower rate as lenders want to be sure the purchaser has a reliable on-time payment history and credit depth.

Experts recommend that no more than 30% of your monthly household income should be spent on housing costs. When taking the initial steps to create a detailed budget, make sure to include all the costs of homeownership such as the insurance and property taxes to calculate your true monthly cost and determine if it is affordable for you at this time.

Owning a home doesn’t always make the most sense for everyone, whether the reasons are financial or a personal lifestyle choice. With the increasing costs of real estate, especially in metropolitan areas where the price of homes have soared almost 20% in just a short period of time, banking and investing the difference may end up offering more return on investment over the long run and additional flexibility.