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Home Buying

Renting vs. Owning

June 18, 2012

Conventional wisdom is that buying a home is always the best option. With housing prices increasing significantly throughout Canada over the past 10 years and mortgage rates at all-time lows, it’s difficult to question this conventional wisdom. There are some factors to consider...

  • "Rent" to the bank in the form of interest. Keep in mind that when you borrow money from the Credit Union you are "renting" the money until you pay it back. To illustrate:

$350,000 mortgage at 3.50%, 5-year term, 25-year amortization

Total payment $1752.00 monthly

 

Portion of payment that is principal
_____________________________

$798.00
_______
 

Portion of payment that is interest or "rent"
+ Property taxes $2,400/year
+ Maintenance

$954.00
$200.00
$100.00
  = Total monthly costs of home ownership $1254.00

 
In this example, if a member can find a rental accommodation for less than $1254.00 plus utilities, it may be better to rent.

  • Down payment. Saving for the down payment continues to be the most difficult task for first-time home buyers, many of whom have student loan debt and other debt. Sources of down payment include savings, RRSPs and non-repayable gifts or loan from parents. One the best ways to save for a down payment is through an RRSP where you can take advantage of a tax break/refund.
  • Personal considerations. Speaking from personal experience, having rented for 12 years, it was time for my wife and me to purchase a home. Owning allows you to paint a wall a certain colour, hang as many pictures as you want or perhaps have a garden. The advent of marriage or family usually prompts the decision to purchase a home.
  • Permanency. Owning a home provides some degree of permanency. As a renter, you may be subject to rent increases and eviction notices. Young people who plan to travel or are unsure of career goals should consider renting. If circumstances change, and a ‘forced sale’ is required, real estate commissions can eat away at any increases in property value or result in a net loss.
  • Home as an investment. Two positive considerations for home ownership are tax-free capital gains and forced savings. Any gains made on the sale of a principal residence are tax free, which can provide a significant tax shelter. Home ownership also forces the borrower to put away money every month to pay the mortgage payment. A portion of the payment does go to principal, resulting in a forced savings plan. On the flip side, in the short term (e.g. 2008-2010), property values could decline and you could be in a loss position.

As illustrated, there are pros and cons to purchasing a home depending on your present circumstances.


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