For many individuals, homeownership is a pivotal financial milestone, and for others, renting means flexibility and freedom. The decision to rent vs. buy a home can be difficult and depends on an individual’s circumstances. Let’s weigh the advantages and disadvantages of each:
Pros of Being a Homeowner
Wealth Building: Homeownership provides a tangible avenue for accumulating wealth. When you purchase a home with a mortgage, each monthly payment you make goes toward paying down the principal balance of your loan. Over time, as you continue to make payments, your equity in the property grows. Equity represents the portion of the home’s value that you truly own, and it increases as you pay down the mortgage. You can take the equity from your home and borrow money against it or use it as profit when you sell. When you rent, you’re paying down someone else’s mortgage and allowing them to reap the financial benefits.
Historical Appreciation: One of the primary reasons why real estate is considered a sound long-term investment is its historical track record of appreciation. Over several decades, real estate properties in many regions have consistently appreciated in value, often outpacing inflation. While there can be short-term fluctuations, the long-term trend generally points to an increase in property values. According to the Toronto Regional Real Estate Board, the average house price in Toronto appreciated 82% in value from 2012 to 2022, jumping from $497,073 to 1,189,758[1].
Forced Savings: Owning a home serves as a forced savings mechanism, enabling you to build equity over time, a stark contrast to renting, where you don’t gain any ownership.
Stability: Homeownership offers a permanent place to establish roots and provides stability, making it an ideal environment for raising a family.
Control and Customization: As a homeowner, you have complete ownership and the freedom to make alterations and improvements to your property that align with your lifestyle and preferences without needing to consult a landlord.
Expense Reduction: Each mortgage payment brings you closer to full ownership, resulting in a substantial reduction in living expenses once your mortgage is paid off. In contrast, renting often entails ongoing and potentially escalating living costs, which can be less appealing during retirement or when on a fixed budget.
Tax Benefits: In Canada, homeowners enjoy certain tax exemptions, such as the ‘GST/HST new housing rebate’ for newly built houses or homes that have recently been substantially renovated. According to the CRA, the rebate allows homeowners to recover some of the GST or the federal part of the HST [2].
Cons of Being a Homeowner
Costly Initial Investment: Homeownership entails substantial upfront expenses, including a down payment and closing costs. Depending on the property’s price and your circumstances, these costs can be substantial.
- Down payment: While the mandatory minimum down payment for homes under $500,000 is 5%, it is advisable to strive for a more substantial down payment, ideally reaching 20% or higher. To put this into perspective, according to WOWA, the average house price in Ontario as of August 2023 was $832,376 [2]. It’s important to note that Canadian Mortgage Housing Corporation (CMHC) insurance is mandatory for mortgage loans with a down payment of less than 20%. To avoid the need for mortgage loan insurance, a down payment of over $166,475.20 would be required. Although certain lenders may request it even when you have a 20% down payment, particularly if you are self-employed or have a less favourable credit history. The cost of mortgage insurance is calculated based on the loan-to-value ratio of the home, the premium can be up to 4%, which in this case would be $33,295.04 [4].
- Closing costs: Prospective homeowners must account for closing costs, which encompass various expenses such as land transfer taxes, legal fees, and inspection costs, among others. These costs can range from 3% to 4% of the total property value, according to general recommendations. An online tool, such as the one offered by NerdWallet, can be a valuable resource to facilitate the estimated calculation of closing costs: Closing Cost Calculator [5].
Maintenance Costs: According to Scotiabank, it is recommended to follow the 1% rule and budget for annual home maintenance costs around 1% of your home’s value. If we take into account the average Ontario house prices, the average homeowner should budget for approximately $8,400 annually in general maintenance. In some cases, this percentage may even rise to 3-5%, which can be a significant financial commitment [6].
Property Availability: In regions like Ontario, where property markets can be highly competitive, finding a suitable home meeting all your criteria can be challenging.
For those considering homeownership alternatives, co-ownership options like those offered by Co-Own My Home can be an attractive avenue to explore. Co-Own My Home partners you with a pre-qualified compatible co-buyer to qualify for a mortgage with the buying power of two.
Pros of Renting
Flexibility: Changing your residence while renting incurs fewer costs compared to homeownership, which involves expenses like land-transfer taxes, real estate agent fees, and closing costs. Renters likely also have the flexibility to move at their convenience, while if a homeowner were to break a mortgage before their term is up, it could become quite costly. Associated fees for breaking your mortgage will be outlined in your contract, however, you can expect a prepayment penalty, administration fees, mortgage discharge fees, and more.
Lower Initial Costs: While mortgage payments may initially appear lower than rent, factoring in property taxes, maintenance, and insurance often makes renting the more cost-effective option.
Predictable Expenses: Renters enjoy predictable monthly expenses without unexpected homeownership costs. In many cases, aside from fixed rent, rental agreements can also include utilities such as water, electricity, and gas.
Remote Work: With the rise of remote work, location stability becomes less critical, making renting a more viable and appealing choice for many, compared to when individuals were tied to work locations.
Furnished Options: Renting sometimes offers furnished accommodations, reducing the need for significant upfront investments in furnishings.
Cons of Renting
Lack of Control: As a renter, you may face the uncertainty of being asked to vacate if the landlord decides to sell or occupy the property. In some cases, it gives you only 60 days to find a new rental to live in.
Limited Customization: Renters have limited control over their living space. They typically cannot make significant structural changes or renovations to the property without the landlord’s approval. This lack of customization can be frustrating for those who want to personalize their living environment.
No Ownership: One of the primary drawbacks of renting is that you do not build equity in the property. Rent payments go to the landlord and do not contribute to ownership. Over time, renters miss out on the potential wealth-building benefits that homeownership offers through mortgage payments and property appreciation.
Ultimately, the decision to rent or buy a home depends on your unique circumstances, financial goals, and priorities. There is no one-size-fits-all answer, and careful consideration of the factors outlined above is crucial. To assist with this decision, the National Bank of Canada offers a helpful calculator that takes various financial aspects into account: Rent vs. Buy Calculator [7]. Remember, what’s right for one person may not be the same for another.
Sources:
[1] (n.d.).Historic Statistics. trreb.ca. https://trreb.ca/files/market-stats/market-watch/historic.pdf
[2] (n.d.). GST/HST New Housing Rebate. Canada.ca. https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/gst-hst-businesses/charge-collect-home-construction/new-housing-rebate.html
[3] (n.d.). Canadian Housing Market News. WOWA.ca. https://wowa.ca/reports/canada-housing-market
[4] (n.d.). Mortgage loan insurance and premiums. Www.Cmhc-Schl.gc.ca. https://www.cmhc-schl.gc.ca/professionals/industry-innovation-and-leadership/industry-expertise/resources-for-mortgage-professionals/mortgage-loan-insurance-and-premiums
[5] (n.d.). Canada Closing Costs Calculator. NerdWallet.com. https://www.nerdwallet.com/ca/mortgages/closing-costs-calculator
[6] (n.d.). How Much Should I Budget for Home Maintenance Costs? Scotiabank.com. https://www.scotiabank.com/ca/en/personal/advice-plus/features/posts.how-much-should-i-budget-for-home-maintenance-costs.html
[7] (n.d.). Should you Rent or Buy? Nbc.ca. https://www.nbc.ca/personal/mortgages/calculators/rent-or-buy.html