While almost half (49%) of Canadians want to own a home in the next five years, renting can be a good choice too, especially if you like flexibility and not having to worry about repairs. However, tenants’ worry about affordability, particularly for those with lower incomes, are rising as rent hikes reach a record high of 8%.
So the question remains whether to rent or buy a home in Toronto? Let’s first check the pros and cons of each side and you’ll have a better idea of which one to choose.
Pros and Cons of Renting a House
Renting a house offers flexibility and fewer responsibilities compared to home ownership. However, it also has its drawbacks that might impact your long-term financial goals and stability.
Advantages of Renting
- Move freely: If you want to explore a new neighbourhood or find a new job in a different location, renting allows you to move about simply. For renters, moving is typically less expensive and difficult.
- You get savings: As you don’t have to pay for condo fees (depending on your lease terms) or property taxes, you can save up some money for travel, hobbies, or future plans.
- Less maintenance: Leaky faucet? Broken appliance? Those become your landlord’s problem, not yours. Enjoy more free time without worrying about repairs.
- Predictable budget: Rent payments are usually fixed each month. This makes budgeting easier and helps you avoid surprise expenses.
Disadvantages of Renting
- No equity building: The rent you pay goes towards your landlord’s wealth, not yours. You won’t benefit from any increase in the property value over time.
- Less control over your space: Making major changes or renovations might require permission from your landlord. You also don’t have freedom, as you should follow rules related to noise levels or pets.
- Rent increases: Rent is rising in many Canadian areas, which makes renting an expensive choice. This might eventually make budgeting more challenging.
- Not your place: Ultimately, you’re living on someone else’s property. This can feel less stable than owning your own home.
Pros and Cons of Owning a House
Owning a house can be a significant financial investment and provide long-term stability. Yet, it also comes with responsibilities and costs that renters don't have to worry about.
Advantages of Buying
- Creating Wealth: Having a house is a result of making monthly mortgage payments. You will own the equity as the property’s worth rises over time. You’re investing in your future with this.
- Stability and Customization: Purchasing allows you to make changes to your property and gives you a sense of stability if you want to remain in your current location for an extended period of time.
- Long-Term Security: Having a house gives one a feeling of security and stability. You don’t have to worry about being evicted by a landlord for any reason.
Government Assistance: To assist first-time buyers in saving for a down payment and even receiving certain tax advantages when they buy, Canada offers programs (The Home Buyer’s Plan (HBP), First-Time Home Buyers’ Tax Credit HBTC, and First Home Savings Account (FHSA)). Learn about how these programs could help you in attaining your first home.
Disadvantages of Buying
- It Can Be Difficult to Save Enough: For many people, the largest challenge is saving enough for a down payment, in addition to closing expenses and additional expenses
- Qualifying for a Mortgage Can Be Hard: Due to high property prices and fluctuating interest rates, securing a mortgage that covers the cost of the property can be difficult.
- Not Having Flexibility: If you want flexibility or might need to relocate suddenly because of personal reasons (e.g., studies, job) then owning might not work. Selling a property takes time – time that you may not be able to afford.
- Upkeep Costs: You have to fix anything that fails as a homeowner, including leaking roofs and faucets. Be ready to pay for maintenance and repairs!
- Unexpected Costs: Unexpected costs associated with house ownership, such as property taxes, condo fees, and/or POTL fees, may not have crossed your mind when you first bought.
Factors to Consider When Deciding Between Renting vs. Owning a Home
Take into account these important elements when choosing to purchase or rent a condo in Greater Toronto. The main factors are financial situation, lifestyle, and market conditions.
When To Rent:
- You don’t have the required finances for a down payment.
- You don’t want to deal with repairs.
- You’re not sure where you’ll be after 2 to 3 years because of career changes or studies.
- The home you want is out of your budget.
When To Buy:
- You have the money to purchase property in an area you like.
- You prefer building equity with your monthly payments.
- You view real estate as your home, not just as a means of making investments.
- You want freedom to personalize your space the way you want.
Cost of Owning a Home vs. Renting
Here’s an insightful application of the 5% rule to determine which choice could be more financially advantageous when renting vs. owning a property. According to the 5% rule, purchasing a property may be more beneficial if the yearly expenses of house ownership (such as upkeep, property taxes, and other fees) equal less than 5% of the property’s worth. Renting could be a better financial choice if these expenses are more than 5% of total costs.
Example: Buying is Better
Costs and Calculations:
- Home Value: $500,000
- 5% of Home Value: $25,000 per year (this is the threshold to compare against).
Annual Costs:
- Mortgage Payment: $18,000 per year ($1,500 per month)
- Assuming a mortgage rate of 3.5% over 30 years on a principal of $400,000 (after a $100,000 down payment).
- Property Taxes: $3,500 per year
- This is often around 0.7% of the home’s value, depending on local tax rates.
- Maintenance: $2,000 per year
- Typically estimated at 0.4% of the home’s value for general upkeep.
- Other Fees: $1,000 per year
- This can include homeowners association (HOA) fees, homeowner’s insurance, etc.
Total Annual Costs: $24,500
Conclusion: The entire annual cost of house ownership is $24,500, which is less than the $25,000 — 5% barrier. Therefore, purchasing the property would be a more prudent financial move than renting because the costs of ownership are within the recommended range, potentially making it a wise investment. Buying could be more expensive at first, but it might end up being a better investment in the long term.
Generally, purchasing may initially cost more, but in the long run, it may be a wiser investment.
Renting vs. buying: which one to choose? To sum up, the home buying process can be complex and requires careful consideration, but it can be a wise strategy for gradually accumulating money. Like in the example, owning allows you to acquire hundreds of thousands of dollars through equity and appreciation.
But remember, it’s not a sure thing. There are other factors to consider, like:
- Renters can invest their savings towards a down payment and potentially see returns.
- Additional expenses associated with ownership include property taxes and upkeep.
- Future appreciation is not assured, and home values are subject to change.
So, the best choice will always depend on your situation and goals.