When renting is better than home ownership
There is a lot to think about when it comes to buying a first home, and sometimes the decision can be overwhelming. But after purchasing my first home in Vancouver earlier this year, and with so much talk about a coming housing correction, is renting a better option?
There is definitely a perception that, once you’ve become a homeowner, you’ve somehow ‘made it,’ which means it can sometimes be hard to think rationally about the purchase. Especially when you’ve fallen in love with a property, or convinced yourself that you can afford a home well outside of your price range.
Here are four lies we often tell ourselves to justify home ownership:
The bank wouldn’t lend me that mortgage if they didn’t think I could afford it: Unfortunately, the bank isn’t your friend. They are in the business of making money for their shareholders. They are perfectly willing to lend you more than you should borrow. Why? Well, because you’ll likely cut out your retirement savings, vacations, and that new car you’ve been wanting, rather than default on your mortgage. And the bigger the mortgage, the bigger your interest payments to the bank.
Once I get that raise, things will be better: This might be a true statement when you’re trying to get out of debt or save money, but when it comes to paying for the biggest purchase of your life, is it smart to be counting on money you just aren’t certain you will have?
Even more important than the down payment, is the ability to spend within your means. If you cannot create a budget based on current income, chances are you won’t be able to make it work if you make more money in the future.
It’s better to buy than rent and pay somebody else’s mortgage: More often than not, renting will be cheaper than owning. And in two of Canada’s most expensive cities – Vancouver and Toronto – renting can be so much cheaper than paying down a mortgage that it’s tough to even make a case for becoming a homeowner.
Whether paying your own mortgage becomes better than paying somebody else’s depends on a lot of different factors – like when you buy, how long you plan on owning for, and how much extra money you have to put into the home.
A mortgage is like having a forced retirement savings plan: If having a mortgage is like having a savings plan, then it’s the worst one I’ve ever seen. For the majority of your mortgage amortization, over half the money is an interest payment. My mortgage payment is $600 every two weeks. Of that, $335.29 goes towards interest, while only $264.71 is applied to the principal balance.
When it comes time to sell, homeowners are often fooled into thinking they’ve made more of a profit than they actually have. Most people use the simple formula of subtracting the purchase price from the selling price.
But that formula doesn’t take into the consideration the non-mortgage cost of owning a home – like commissions when you sell your home, closing costs, property tax, home insurance, maintenance fees, renovations, and repairs – all of which you wouldn’t have to pay if you were renting the home instead.
Still, there are plenty of good reasons to buy a home. Check out this NY Times interactive calculator and run your own numbers.
NOTE: this article was originally written for Moneyville.ca and the Toronto Star.
The truth is that, even though I am a homeowner, I completely agree with everything I wrote in the above article. And I definitely think that homeownership isn’t for everyone. There is such a stigma around renting – that people are only doing it because they can’t afford to buy property. But that’s not a fair assumption, and most of the time, it’s not true at all. I think it can put a lot of pressure on people to buy when they might not be ready for it yet.
There is no rule that says you have to own a home in order to be successful, or that people that own homes are any better off financially than those who rent.
Do you think renting is better than home ownership?
Author: Krystal Yee
I’m a personal finance blogger and marketing professional based in Vancouver. I’m a former Toronto Star (Moneyville) columnist, author of The Beginner’s Guide to Saving and Investing, and co-founder of the Canadian Personal Finance Conference. When I’m not working, you can usually find me running, climbing, playing field hockey, or plotting my next adventure.