The rent vs. buy debate in the Canadian housing market
Money.ca explains the pros and cons of renting and owning property in Canada.
How stable is your employment situation?
With stable employment, you'll be able to convince a lender to give you a mortgage, but more importantly, you may run into problems meeting your obligations. Do a realistic survey of your employment picture before making a decision. Also, factor in your future plans. Do you plan to change jobs? Move neighbourhoods? Change your home province or move in with a significant other? All of these major life changes will impact your job and living situation.
How long do you plan to live in your home?
With all the talk of investments and equity, it can be easy to lose sight of some basic truths. Generally, the longer you live in a place, the better the investment. This is partly because there are numerous costs associated with the transfer of real estate.
Are you ready for the commitment?
Homeownership is a big step. It means you're saying "yes" to forking over a chunk of change for property taxes, home insurance, maintenance, utilities and a mortgage. Are you really ready for it?
When to rent in Canada
You're not ready to settle down
If you're not ready to put down roots and your long-term plans are in flux, renting an apartment, condo, or house would make more sense. For instance, if you plan to travel, go back to school, change careers or even employers, or test out living in a different city or province, then hit pause on your plans for homeownership.
You can't afford it
Affordability is another concern you may have. If you're unable to afford the mortgage payment and ongoing expenses that come with homeownership, renting is a more affordable option and makes fiscal sense in the short term for you. Affordability can also be affected by the debt you could have. Focus on paying off your student loans, credit cards, car loans or whatever else is bogging down your bank account. When you're back in the black, you'll be ready to approach a mortgage lender to talk about homeownership.
You don't have the down payment
You may not have a down payment saved up. Stick with renting, and instead, set up an automated savings plan to a high-interest tax-free savings account (TFSA). After a few years, you'll be golden. Speaking of savings, remember to invest what you've already saved. Renting will likely give you more wiggle room to make regular payments to a TFSA or RRSP investing account — and investing makes your money work for you.
You have "precarious employment"
If your job is temporary or you're self-employed, a mortgage lender often gets nervous. Your best bet is to spend a couple of years renting, saving up for a downpayment and building up proof of your income. That generally means being able to produce two years of tax returns from the Canada Revenue Agency.
When to buy a home in Canada
You want a place to call home
If you're ready to settle down and want a place to call home with no anticipation of moving for at least five years, buying a house may be the right step. You also want to make sure you're financially and emotionally ready for what comes with homeownership. If you're prepared to take on the many costs associated with buying a home, it's time for you to buy. We're talking about making your mortgage payments, utilities, repairs and maintenance, property taxes, home insurance, snow removal, condo fees, etc.
You're financially fit
You've saved enough money to cover closing costs and a down payment. Your debts are below manageable thresholds and you have a chunk of change that you can put toward ongoing maintenance and property taxes. You're prepared to put your needs ahead of your wants, temporarily shelving plans like travel and buying the latest gadgets.
You have a steady source of income
You're not planning an abrupt career change that could impact your income or taking time off to explore other pursuits like travel. If you're self-employed, you have at least two years of CRA Notices of Assessment to show a mortgage lender that you've got a stream of income coming in the door.
How much does Canadian home ownership cost?
If you're convinced that homeownership is for you, the next step is taking a detailed survey of the real financial obligations of homeownership. Use these guidelines to estimate the real financial responsibilities of buying a home.
Down payment: 5% to 20% - Regulations demand that home buyers invest at least 5% of their own money when buying a home. The amount required increases depending on what you're buying and the property's overall value. Suppose your down payment is less than 20% of the purchase price. In that case, you'll have to pay mortgage default fees, commonly called "CMHC insurance," since the Canada Mortgage and Housing Corporation (CMHC) is the federal institution responsible for developing and funding this regulatory requirement. This mandatory insurance premium protects the lender should you default on the mortgage loan, but the premium for this insurance is paid for by the home buyer.
Closing costs: 1.5% to 5% - This includes lawyer fees, appraisal fees, home inspection fees and property tax adjustments.
Home insurance: $50 to $200 per month - A home is an enormous investment. You'll want to protect it. Plus, lenders will often require you to get and pay for home insurance as part of the mortgage contract.
Maintenance: 1% to 4% of your home's value - You'll be facing a multitude of repairs in your home's lifetime: a new water heater, roof repairs, blown electrical circuits – you name it. Homes need regular, expert maintenance if they are going to be safe and efficient. That's why there's a general rule to expect your annual home maintenance to be 1% to 4% of the value of your home. Regular upkeep also protects your resale value.
A note for first-time homebuyers: incentives like the RRSP Home Buyer's Plan, the First Time Home Buyer's Tax Credit and the Land Transfer Tax Rebate can all save you a bundle.
Is homeownership a good investment for you?
If you have the resources to buy, homeownership is more than likely a wise investment. Every time you make a mortgage payment, you are essentially paying down the principal and taking a step toward owning a piece of property that will appreciate over time. Think of your mortgage payment as an investment or a savings strategy: If you sell your house down the road, you'll get back the money you've paid out and likely turn a profit. If you stay put long enough, this can grow into a very healthy nest egg.
Of course, there are no guarantees and even buying a house comes with risks. While data from CMHC shows that real estate, like the stock market, consistently appreciates over time, that doesn't mean that housing prices are stable and the market won't dip. Still, most experts agree that buying a house in Canada is a relatively safe investment. The key is to buy within your budget and plan to own the property for more than five years.
Verdict: Is it better to rent or own a house?
When it comes to renting vs. buying a house, neither is better than the other. There's no clear-cut answer to this age-old debate, and it will require some soul-searching and number-crunching on your part. Your current personal and financial situation, as well as your goals and location, will largely determine what's right for you.
Ready to buy a house?
If you decide to take the plunge into homeownership, remember to shop around for the best mortgage lender and get the lowest mortgage interest rate possible. A bit of research could save you hundreds of thousands of dollars in the long run. From our research on the best mortgage interest rates in Canada, consider one of the best online mortgage lenders in Canada. They offer some very competitive rates, and you can do the entire application online in mere minutes.
Have to rent instead?
If you choose to remain a renter, use the situation to your advantage and set up an automatic saving plan to an investing account with a robo advisor or online brokerage. You may not be building equity with mortgage payments, but you can still build a "wealth empire" with your disposable income. According to the 50/20/30 budgeting rule, aim to put away 20% of your after-tax earnings toward savings and investments.
With low interest rates and climbing market values, buying a home may well be on your radar. But this choice does come with some serious obstacles. You'll need to save up for a down payment and qualify for a mortgage (based on the more stringent mortgage stress test), and there is always the potential that the purchase could derail your future financial goals. To make the best decision, you really need to consider the risks and benefits of each option. Work through our checklists and guidelines and you should be able to make a realistic and informed decision.
This story was produced by Money.ca and reviewed and distributed by Stacker Media.
