renting versus buying : what’s the best way to go?
Which is best for you?
Renting versus buying a home is a very common question which basically comes down to knowing your options so you can make a decision you are comfortable with. When considering renting versus buying a home it is important to think not only in the moment, but long term.
If you are planning to relocate or even travel, explore your options and you may find that renting a home is an ideal option for you. If however you’re looking to settle down, planning a family, or looking for an investment then buying a home is likely the better way to go for you.
Let’s explore both options further though.
Renting A Home
The typical lease commitment when renting a home is 1 year however month to month options may be available depending on your market.
- Damage deposit (typically one month rent)
- Internet / cable / telephone
- Tenant’s insurance (content insurance)
Buying A Home
A typical mortgage term is 5 years but shorter terms are available.
- Down payment – minimum 5% of purchase price
- Legal fees
- Property taxes
- Home owners insurance (house insurance)
- Internet / cable / telephone
Now, a look at some numbers
A typical rental fee or mortgage payment amount over a 5 year term is around $1,800.00 so we’ll use that for our calculations.
If you are renting then a total of $108,000.00 is paid to the landlord, yup, a good chunk of change into his jeans (towards his mortgage, retirement, or vacation fund).
Option 2, purchasing a house for $400,000.00 with a 5% down payment ($20,000.00), putting the same $1,800/month towards a mortgage, you’ll see approximately $48,000.00 to interest and $60,000.00 against the mortgage principal.
Your first thought may be darned interest, almost half of my payments have gone towards interest, but the positive take away here is that a little more than half of the $108,000 has knocked a chunk off the mortgage principal thereby creating equity for you! In the long run this will likely be money in your jeans!
But you might ask yourself, what if the price of houses continues to drop, I’ll never be able to recover my money? Fact is that the Alberta economy has taken hits in the past but has recovered each time so even in a down economy, that may just be a great opportunity to buy low.
Then, since history tends to repeat itself, you’ll likely be able to sell high when the market recovers. Check out the trends shown in the following graphic of average residential home prices in Calgary since 2011.
Either way you need a roof over your head and although living at home is a great option, there comes a time when you’ll have to consider renting versus buying a home.
If you are new in your career it is a perfect time to start investing in your future. You can manage your payments today, just think how much easier it will be as your income increases with experience and tenure, all while you are building your own equity!
The biggest hurdle for many folks is saving the down payment. Fortunately, lenders offer a variety of options when it comes to meeting home down payment requirements.
Today, if you have excellent credit and an employment history, we’re seeing some lenders offering flex down payment options (borrowed, personal loan, or line of credit) on insured mortgages. Gifted down payments from immediate family members, or using your RRSPs are also possible options.
If you’re curious about buying versus renting a home, give us a call, we’re happy to help.