Many first-time buyers are debating whether they should continue to rent or should they buy. It’s also a consideration for those entering retirement age that are thinking of downsizing out of their home to a condo or apartment. But what makes more sense to rent or to buy? There are some big advantages to rent in certain situations and some even bigger advantages to buy a home.
Answer these 7 questions to know for sure if you should buy or if you should rent.
The first question we need to look at is the financial implications of buying or renting. In order to purchase a home or condo, the banks will generally require that buyers show proof that they have 6.5% of the purchase price (for homes under $500,000) as down-payment.
Why 6.5% versus 5%? Well many banks are looking at the costs to close the transaction (notary fees, inspection, insurance, etc.), and they want to ensure there will be sufficient funds to cover these costs in addition to the minimum required down payment of 5%. So if you haven’t at least this amount saved up, it makes sense to continue to rent until which time you can save or borrow this amount to purchase.
There are some interesting programs available to first-time buyers including the Home Buyers Plan which allows buyers to withdraw up to $25,000 from their RRSPs as down payment for a qualifying home. Even if you don’t have this amount and are thinking of buying, contact me if you would like more information or other strategies that can work to help get you into home ownership more quickly.
Can you even afford to purchase a home right now? Add up all your monthly payments for the home you’d like to buy, including the monthly mortgage payment, municipal and school taxes, heating and electricity costs.
However just because you can get a mortgage that doesn’t mean you can afford to maintain the same lifestyle you had as a renter.
Now take your family household gross income and divide it by this number. If you are under 40% of your monthly pre-tax family income you are within the range of what most banks will accept. However just because you can get a mortgage that doesn’t mean you can afford to maintain the same lifestyle you had as a renter.
If you are over this percentage, you may want to consider either reducing your expectations for your next house (and thus your budget for it), or increase income to ensure that purchasing a home will not drain you completely financially.
If you have a large enough down payment and you can afford the monthly housing holding costs, there are really only a couple of other reasons why you should consider renting over buying. They are:
If you are paying much lower than average rent and can maintain that low rental rate for the long-term, and you are happy with the lifestyle your rental provides, by all means, do not buy, continue to rent.
If your rent is really low and you can maintain that rent over the long-term it does not make a lot of sense to buy a similar property that will cost you much more each month.
If your rent is really low and you can maintain that rent over the long-term it does not make a lot of sense to buy a similar property that will cost you much more each month. That monthly savings can build inside an investment and ultimately you will end up further ahead providing your investments go up more than the value of your house would.
The costs to purchase and sell a home can be quite high. Everything from the notarial costs, legal documentation, surveys, inspections, mortgage discharge, and broker costs, can add up. The good thing is that if you own the home for many years those costs are divided out over many years, and generally most homes will appreciate exponentially more than the costs to transact them.
So the shorter your moving time frame, the better deal you need to get when buying the home.
If you are however going to buy and re-sell in a short period, you must ensure the value of the house increases by at least the same amount or more than the costs to transact it. So the shorter your moving time frame, the better deal you need to get when buying the home.
If you are buying at market prices and still want to move in a year or less, it may not make a lot of sense to buy as you may not recover your costs to buy and sell the home. In normal real estate markets, it normally will take a couple of years of appreciation to cover the total costs of buying and selling.
Now here’s why you should buy (again assuming you pay a reasonable price for a home in a normal appreciating market) whenever possible. When you purchase a home you are paying yourself back over time. You are borrowing from the bank and paying that monthly mortgage payment back into your equity of the home.
When you rent you have paid down the owner’s mortgage but you yourself are at a negative from when you started.
So when you go to sell you will invariably “own” more of the home than when you purchased. Try that with renting, each month you own “0” of your property and when you move out you will continue to own “0” of the property. When you rent you have paid down the owner’s mortgage but you yourself are at a negative from when you started.
Now as I mentioned above if you are paying very low rent and can invest your savings into high-paying investments, then go for it, many people however have experienced the exact opposite investing in the markets.
As you are paying down your mortgage your property may also be appreciating in value, and likely is. Now what happens if the market is entering a downwards cycle? Should you still buy or wait until it starts to come back around upwards again?
Again it all depends on your time frame. Most people who invest hundreds of thousands of dollars in their biggest investment of their lifetime (their home) are thinking long term. Like all markets the housing market goes up and down over the short term and always up over the long term.
Trying to time the market is a fool’s paradise. What if you guess wrong and the real estate market goes up instead of down? Now the home you want costs more.
Trying to time the market is a fool’s paradise. What if you guess wrong and the real estate market goes up instead of down? Now the home you want costs more. What if you wait until you think the market is going to be really, really low then you pounce and buy? Doesn’t that make more sense? Yes, if you are right with your assumption about where the market is going and yes if you don’t miss the boat and yes if that happens during the time frame when you need to move and yes if you still have the financial means to purchase at that time. And yes if the banks continue to lend easily when prices have collapsed.
What if it takes years or even decades for the market to hit the bottom you are looking for? What if it never hits that rock bottom you are waiting for and does the opposite? All those years renting and waiting will not be paying you back. Unless you have amazing low-rent, that stays low over the long-term.
Now I’m not saying to buy if a local market is clearly in a frothy bubble that looks like it might pop. Unless you never want to recuperate your money you invested. But in a normal, healthy real estate market buying usually makes more sense if you are planning on not moving for several years.
A good home purchased in a good location will pay you back over your lifetime. Like any investment there are ups and downs in prices, but in the long term you will undoubtedly be better off than the lifetime renter who has paid down his owner’s mortgage and is left with nothing of value when he moves.
If however you don’t have the financial means to purchase, are paying a super low rent and/or are able to beat the housing market in other investments, then purchasing a home may not be for you.
Buying a home is one of the biggest investment decisions of your lifetime. If you are debating whether it’s the right time to buy your first home or downsize from an existing home, I invite you to contact me for a no-obligation consultation on your situation.
An earlier version of this article I wrote appeared in the Montreal Times newspaper.
I'm Andrew Mitchell, Chartered Real Estate Broker and Owner of Vistacor Realty Group. I help buyers, sellers and investors in the West Island, Montreal and Vaudreuil-Soulanges areas buy and sell homes. My goal is to provide you with useful, straight-forward insights and relevant real estate market updates. Contact me with any questions. Follow me on twitter here.