Renting Vs Buying Real Estate - Calculate and Evaluate!

So the New Year is upon you and you're probably thinking about making changes in your life. One of those, whether single, with a family or not, is thinking about whether you should keep renting or perhaps time to buy a house. Great goal for sure!
So by now you're scouring the internet, checking out Realtor.ca aka MLS.ca and other sites to see what the going prices are, what pretty houses you like, etc. But really, can you AFFORD it and is home ownership right for you at this time in your life? This is a Part 1 Series and Part 2 will follow immediately tomorrow.

Before you make hasty financial decisions, you're a smart person so analyze before just jumping in. You've probably come across a rent vs buy calculator or two which is also a great start. However, the problem with most rent versus buy calculators is that they fail to account for the additional costs that come from moving from an apartment or townhouse with little to no yard or driveway, into a 2,500 square foot home complete with a yard and a driveway.

When you move into a home that is double the size of your rental home, there are costs  you need to be aware of that Mortgage Brokers, Real Estate Lawyers and Realtors may or may not be bringing to your attention. Facts to consider are:

• You will now have to pay the utility bills on heating and cooling twice the square-footage.
• You have twice the space to furnish and decorate (and you WILL buy more furniture to fill up that space)
• You will now have a yard and driveway to maintain (if moving up from an apartment - more grass to cut, trees to plant, gardens and flowers in wanting to "showcase your home to be proud of).
• You will now be paying property taxes on the value of the entire property.
• You will now have to get homeowner insurance to protect you from loss (requirement of having a mortgage)
• You will now have to repair, maintain, and replace ALL fixtures, appliances, heating-cooling equipment, plumbing, landscaping (lawnmower/shovel/snowblower/rakes and such equipment), floor coverings, windows, shingles/roof/eavestroughs, brick, siding, driveway, etc as they break down or experience wear and tear, dated or, or become obsolete. And if you fail to properly maintain your property, don't plan on the value appreciating as much as the real estate agent is boasting it will.

Don't have your head in the sand....really. Just don't bury your head and always ask are the expects having your best intentions at heart of ulterior motives in wanting to sell you a house. If you don't have the down payment, don't take a second mortgage out just because you want to own a home. It may sound good at the time but then you're also paying more interest and your monthly out of pocket expenses are higher.  Unfortunately,  home buyers failed to recognize that those experts do stand to gain so make sure you research and have the right team that will disclose to you the costs of home ownership and also disclose the right neighbourhoods that suit your needs. Ask questions and always trust your gut instinct (but that will be another blog one day)

The choice is yours, you can choose to ignore the costs of home ownership when contemplating a home purchase, or you can take painstaking steps to accurately forecast and budget for them now, while you can, in the save haven of your rental that you've already budgeted for. 

So, with that in mind, take a look at this Rent Vs Buy Mortgage Calculation on the image below. Calculations and values were entered to calculate and compare the cost of renting to the true cost of buying a home. It's not honestly all bad and yes, absolutely beneficial but IS IT RIGHT FOR YOU?

Let's say you pay $1100 per month and you stay in that home for 5 years.  You've spent $66,000

Now, let's pretend you were paying $1500 and that was a mortgage. If you put $500 away each month in the same amount of five years, that's $30,000 you could have saved. That's right. That's more than the minimum 5% required** (see note) for a down payment if you were to purchase a home for $250,000.  You can use that money to allocate for closing costs and/or use more towards a down payment to reduce your monthly mortgage amount or put that into a savings account for "a rainy day" and any unexpected maintenance costs.

**(downpayment definition:  A mortgage down payment is a specific sum of money deposited towards the purchase of a new home. It is not required in all cases, however, in the case that it is, there is a minimum amount required. This amount is relative to the value of the home you are looking to purchase. 

Note: the bigger your down payment is, the more affordable your mortgage loan will be. This is because a larger down payment results in smaller overall interest payments (a smaller loan). Down Payment Requirements For a Mortgage in Canada - Minimum Down Payment

For home buyers that are paid hourly or earn a regular salary, a minimum of 5% is required as the down payment for a home. For self employed home buyers a minimum of 10% is required to purchase a home. More could be required if your credit is poor (learn more about your credit score). Anyone choosing to put less than 20% of the value of the property as a down payment will be required to obtain CMHC (Canada Mortgage and Housing Corporation) mortgage default insurance. This protects the lender from losses in the event that you were to default on your mortgage.

Ok, don't want to overwhelm you. Not here to talk you into or out of buying. Again, just want you to make a well-informed decision because don't want you to be taken advantage of. The world is not all about Barbie's, sunshine and rainbows. Part 2 tomorrow


Happy New Year and happy new you!


sources: 
Mortgages Canada
Canada Revenue Agency


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