Should You Rent or Buy?

There’s a common belief that renting is throwing away money. Since you’re paying someone else’s mortgage, you’d be better off buying and building equity for yourself, the argument goes. While this may be true in some cases, the numbers don’t always add up.

The buy-or-rent question requires careful consideration as it can have a sizable impact on your life.

The pros and cons of buying a home

Buying a home is a significant decision that requires a commitment and some level of financial independence. While it’s tempting to jump into the real estate market since prices have steadily increased in Canada, you still need to consider the pros and cons of buying a home.

» MORE: What is real estate?

Pros of buying a home

• You build equity. With every mortgage payment, a portion goes toward equity.
• Stability. You don’t need to worry about any increases in rent or being forced to move.
• Full control. You get to decide how your home looks since you’re the owner.
• Forced savings. Your mortgage payments build equity, so you’re always saving.

Cons of buying a home

• High upfront costs. Not only do you need to come up with a down payment, but there will also be closing costs required.
• Less mobility. You can’t easily pick up everything and move when you own a home.
• You’re responsible for all maintenance. You have to take care of all the maintenance, including the costs.
• Building equity can be slow. Rising real estate prices are not a guarantee. It can take many years before the value of your home increases.

» MORE: How a mortgage works in Canada

The pros and cons of renting a home

Many people choose to rent for lifestyle or financial reasons. While others may not agree with this choice, there’s no denying that renting does come with plenty of benefits. If you’re not sure if renting is for you, consider the advantages and disadvantages.

Pros of renting a home

• Flexibility. You have much more flexibility compared to owning. You can pack up your things and move whenever your lease is up.
• It may be cheaper. You don’t need to worry about maintenance costs, property taxes or mortgage payments.
• Less maintenance. Your landlord is responsible for most of the maintenance and repairs.
• Increased cash flow. The money you save from renting can be used for other things, such as investments, saving for your child’s education or vacations.

Cons of renting a home

• No equity built. Your rent payments don’t build equity or help grow your net worth.
• Your costs could rise. Landlords can increase the amount you pay in rent every year.
• Nothing is guaranteed. Even though your landlord is responsible for maintenance, they may be slow to address any issues that you bring up.
• You could be evicted. There’s always a chance that your lease won’t be renewed, or you’re evicted for another reason.

The cost of buying vs. the cost of renting

Many people who debate the cost of buying vs. renting will often look at a mortgage vs. rent. The argument is that if your monthly mortgage is similar to renting, you’re better off buying so you can start building equity. While that’s a quick way of looking at things, there are other factors to consider.

Rent is an unrecoverable cost, but owning a home also has expenses that don’t build you equity. For example, property taxes and maintenance will typically run you about 1 per cent of the value of your home each year. There’s also mortgage interest and the cost of long-term repairs that need to be factored in. As an owner, you may have less discretionary funds available than renters, which is an opportunity cost. Renters can invest the money they’ve saved and potentially get higher gains compared to owning real estate.

For many people, the decision comes down to affordability. As a general rule, no more than 32% of your gross annual income should go towards housing-related expenses. This is known as your gross debt service (GDS) ratio. Another ratio used is the total debt service (TDS) ratio, where your housing expenses and any other outstanding debt shouldn’t exceed 40% of your gross annual income.

» MORE: How much mortgage can I afford?

How to decide what is right for you

Since buying a home is a major decision, you need to ask yourself a few questions to determine if you’re ready to own a home:

• Do I have a down payment and steady income?
• Will I be able to handle the mortgage payments?
• Do I qualify for government programs such as the Home Buyers’ Plan and the First-Time Home Buyer Incentive?
• What are my current and future housing needs?
• Can I handle the ongoing maintenance?
• Am I ready to commit to such a large purchase?

Once you’ve answered the above questions and considered the pros and cons, you’ll have a better idea about whether you should buy or rent.

» FIRST-TIME HOME BUYER? Check out our guide

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