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After renting for a couple of years, everyone eventually comes to the same crossroads: should I rent or buy? Like most things in life, there honestly isn't a definitive answer on the subject. Depending on the variables, you can see the same situation flip flop in either direction. Let's see which one comes out ahead over a 5 year period.
Assumptions
- You're currently paying $2100 per month in rent for a 1 bedroom condo in the heart of downtown Toronto; that rent is expected go up by 2% a year
- You have $140K in savings that can either go towards buying a condo or stay invested in ETFs, GICs, etc.
- Your 1 bedroom is currently selling for $600K (approx. $1000 per/SQ ft)
The Numbers Behind Buying
Let's run some quick math on a $600K purchase using Rate Hub's fantastic mortgage calculator:
- $120K for a 20% down payment
- $17K towards land transfer taxes (less if you're a first time home buyer)
- $1K towards legal fees
- $600 towards title insurance
The mortgage will cost you ~$2112 a month (on a 25 year term at 2.34% interest), however it's important to note a portion of that monthly payment is going down to pay your principal (i.e. paying back money that you borrowed) and interest (i.e. the cost of borrowing that money). In other words, you can think of the principal as money you're being forced to save that will eventually become available to you when you sell the home, while interest is money you'll never see again.
On top of the mortgage, other monthly expenses include:
- $450 on condo fees (which will go up by 2% each year)
- $250 on property taxes (which will go up by 2% each year)
- $100 on utilities (which will go up by 2% each year)
All in all, you can expect to be paying over $2900 a month to own the condo in Year 1.
The Numbers Behind Renting
When it comes to renting, the numbers are much more straight forward:
- $2100 per month towards rent (which will go up by 2% each year)
- $100 on utilities (which will go up by 2% each year)
That means you get to keep an extra $712 a month in Year 1 in your bank account each month. Let's assume you're investing the full difference into an investment account.
Scenario: 4% Investment Appreciation vs. 1% House Appreciation
Let's assume conservatively you manage to get a 4% return each year over 5 years, while the housing market goes up by 1% every year:
First thing you'll notice is that the annual savings from renting progressively goes down each year, mainly because while rent is going up by 2% each year, your mortgage is locked in for the same price through the 5 year term.
Initially, renting comes out ahead through Years 1 & 2, largely because you don't pay $18.6K on land transfer taxes, but eventually you end up making more money through owning in the long run through the magic of levered returns.
A mortgage lets you own 100% of a property in return for putting up 20% of the cash, while benefiting from all of the upside. In this case, even though you only put up $120K initially, by Year 5 you get to keep the full ~$30K in growth of the home. Likewise, while your investments in renting grew at 4x the rate of the house appreciation, home ownership still delivers a greater financial return over that period.
Final Thoughts
Home ownership is a loaded concept. Its filled with all of these social norms and expectations on top of the financial implications of the decision. Whether you value the flexibility of having your cash invested in the market or in a savings account over getting to call a place your own, at the end of the day it really comes down to where you are in life and what you're looking to prioritize.
About Requity Homes
Requity Homes offers a new path to homeownership by helping you live in your dream home today while saving up your down payment one month at a time. Check out how we can help accelerate your journey to home ownership.
