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.
Buying a home is a significant decision that requires a commitment. 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: How a mortgage works in Canada
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.
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?
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:
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
Barry Choi is a personal finance and travel expert. His website moneywehave.com is one of Canada's most trusted sites when it comes to all things related to money and travel. You can reach him on Twitter: @barrychoi.