A milestone is a significant event in life or an important change in a stage of development of a person or project and homeownership is a milestone for any individual, despite the changes in the economy and the pandemic. Admittedly, buying a home now’s more difficult than it used to be. This is why we’re witnessing a growing number of renting households.
While buying a home can provide security and be a solid investment, renting a home can offer more flexibility. On another note, although renting is less expensive when compared to buying a home, owning one can give you more stability and freedom. Buying a home can also save you from worries such as rent increase and the possibility of eviction.
In spite of these pros and cons, many still feel torn between the decisions of owning or renting a home. Take a look at this guide to learn what you’ll need to know on becoming a renter.
7 Questions to Consider When Contemplating Renting vs. Buying a Home
Renting and homeownership have their financial advantages and disadvantages, depending on your lifestyle and financial situation. Here, we’ve listed 7 important questions to consider when contemplating renting vs. buying a home.
1. How much does it cost to buy a home these days? Will I save more if I rent?
The average price of property is at $450,000, whereas the standard down payment for a Canadian mortgage falls between 5% to 20%. There’s also closing costs, legal fees and taxes that must be taken care of. A lot of factors affect the price of a property – such as the location, the economy’s situation and government policies. Fortunately there are government programs, such as the First-Time Home Buyers Incentive that can help.
Buying a home isn’t easy, but it’s also not impossible. It entails hard work and a solid commitment. When it comes to costs, questions that should come into your mind are: what type of home do I want? Or how long do I intend to live there?
While monthly rent may be cheaper than a monthly mortgage payment, there are 2 other factors that must be considered – the principal and interest. The principal component can be seen as a form of “forced” savings. While you’re making your regular payments, you’re building equity in your home. The interest component of your mortgage, on the other hand, decreases over time, thereby increasing your savings each month.
That being said, if you take out the “forced savings” portion of your monthly payments, the total amount may be lower than the cost of monthly rent. This is what all home buyers must remember when getting a mortgage.
Keep in mind that as property values increase each year, so does rent.
2. Mortgages can be as long as 25 years or more. Won’t I get tied up paying a mortgage, compared to if I just rent?
The amortization period in Canada is usually 25 years or more. While paying off for a mortgage can take decades, renting can be more costly and comes with more uncertainty.
If you don’t want to spend the next few decades paying for your mortgage, you’ve actually got another option, that’s to pay off your mortgage early. You can do this by making extra payments. Just be sure that these payments are directed to the principal amount. You can also refinance your mortgage to a shorter term, but this entails higher monthly payments.
3. Will home maintenance keep me poor?
When buying a home, you’re responsible for replacing the roof at least once every decade, fixing clogged toilets and attending to repairs and maintenance activities associated with homeownership. On the other hand, when you rent, your landlord’s responsible for the upkeep of the home.
Yes, it can be costly, but this doesn’t mean that home maintenance should be a reason for draining your budget. Remember that homeownership is a lifetime commitment, so what’s an additional 1% to 2% from your income if in the long run it’ll result in safety, security and an increase in equity.
The great news is, you can use some of your equity to help finance some of your home improvements.
4. Since renting can be cheaper, will I save more renting in the long run?
While renting can save you from paying for a mortgage, unexpected maintenance costs and other expenses associated with homeownership, you’re not building equity for yourself and there’s no return on your investment.
So yes, renting may cost you less as compared to buying a home, but in effect you’re actually paying off someone else’s mortgage. Renting also doesn’t provide you any guarantees on your rental payment because that’s determined by your landlord.
5. Can I get a mortgage if I’m self-employed? Or am I better off renting?
Being self-employed can make getting a mortgage a bit more difficult, but this shouldn’t stop you from buying a home. Good credit score, timely payment of debts, accurate business records and proof of self-employment income are some of the requirements that’ll help you get a mortgage.
Generally, renting is cheaper than a mortgage in the short term. However, as a self-employed individual, if your income isn’t high enough to afford a mortgage, then renting may be a more suitable option. On the other hand, if homeownership isn’t for you, renting can leave you with more disposable income to invest elsewhere.
6. Is it better to buy a home if I’m retired?
Whether you’re renting or buying a home, housing costs will always form part of your retirement budget. Buying a house after retirement gives you a sense of security and stability as compared to renting a home. Whether you’re a retiree or not, you should already start preparing for expenses associated with homeownership, such as maintenance, fluctuations in market value and insurance deductibles.
The decision on whether or not to purchase a home or move to a rental property can be a difficult one for people entering their golden years. It’s important to plan ahead and budget wisely before making a choice between renting or buying a home.
7. Is home ownership a good investment?
Homeownership is considered a great investment, especially if you have enough resources. It’s considered to be a safe haven for your money and home values tend to increase over time. Plus, unlike renting, buying a home helps you to build wealth.
Ultimately, your decision on whether to buy a home or to rent one should be based on your lifestyle and financial situation and circumstances.
Verdict: What’s the Better Option?
A person’s current personal and financial bearings will largely determine whether it’s better to buy or to rent a home. If you choose the path of homeownership, remember to shop around and get the best mortgage for you. Consult with an experienced mortgage broker as they have access to multiple lenders – big and small that they can work with to help you accomplish your goals.
If you choose to rent, be sure to start a savings plan and build a good credit report that’ll help prepare you for buying a home in the future.
Based just outside of the GTA (Greater Toronto Area) – Daisy Raouph is a mortgage broker and financial security advisor with over 30 years of experience in mortgage and financial services. If you need help with your mortgage or seeking financial advice, just ask Daisy.