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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.


Comments

  1. Melissa says:

    While it’s certainly true that renting is more cost effective than owning in Toronto and Vancouver, it’s not “more often than not” for the rest of Canada. If you even go a little bit outside of Toronto, it shifts to owning being cheaper. I definitely know people who have bought recently whose mortgage payment on a house is less than I pay in rent in Toronto, and still less than the rent for an apartment in the same city.

    Now, there are a lot of reasons one might continue renting even if on paper it’s more cost effective to buy, but on paper, I’d say in most places, buying is much more cost effective. Toronto and Vancouver are just in massive housing bubbles right now.

    • Jay says:

      I’m a bit outside of Toronto… it depends on the situation. Between property taxes and utilities alone, it’s probably $500-600/month. So depending on the amount of interest being paid, not to mentione maintenance, it could easily take one into “rental” amounts.

  2. Currently in the UK there is a big problem with the lack of new homes being build. That was pre 2008 credit crises. Now since the recession even fewer houses were being built. This has done two things. Firstly it has kept house prices at the same level when they should have gone down and secondly it has pushed rental prices higher. They are predicting a rise in rental prices at 5% per year for the next 5 to 10 years. Mean while the only people who are buying are landlords and people who are relocating or are needing a larger house.

    There is also a very strange statistic for the UK with regard to house prices. If you look back at the average house price since records began it shows a 50% increase every 10 years no matter what.

    So if you purchase a 2 bed house for £100,000 next year in 2012. Lets just say you will be paying £450 mortgage repayments a month including interest. Now to rent a 2 bed where I live you are looking at £550 per month. So already we have a £100 a month saving.

    Now lets look at 10 years down the line and experts were correct about 5% increase for the next 10 years.

    The total rent for 10 years would be £83,014.

    As opposed to a mortgage which would be £54,000.

    So fair enough you will have a saving of £29,014 if you got a mortgage.

    Now I understand that you have to pay for maintenance and upkeep and so on and so forth with a house. But the real saving isn’t in the money saving in rental repayment. Its in equity.

    If you remember that house prices in the UK has gone up by 50% every 10 years consistently for the last 10 years.

    That means in the year 2022 the house would be worth £150,000. With a whopping £50,000 in equity. Plus the £29,014 equals a nice £79,014 savings why buying as opposed to renting.

    Please remember this from what I understand is only likely to happen in the UK because there aren’t enough houses being built.

    Now its all very well getting all this equity the only problem it is will be that all the other houses will go up in value so the trick is to own more than one house :-)

  3. Stephanie says:

    I completely agree with point one. The bank does NOT care what you can or cannot afford.

    We have purchased two houses in our life time. The first house cost us $86,000. The bank had approved us for $150,000. We lived there for five years and the monthly payments were just possible. Anymore would have been almost impossible.

    Our current house was $170,000. We were approved for $250,000. The payments on the $170,000 are spread over 40 years and the are comfortable right now. If one of us loses a job we would be hurting.

    This shows that the bank DOES NOT care what you can actually afford. If you can’t make the payments they get your house. If you can make the payments then they make a ton of interest, either way, they are winning!

    It is always best to know before you go to the bank what kind of monthly payment you can afford and do not let the bank make such an important decision for you.

  4. Michelle says:

    Where I live, buying a house is more cost effective than renting. I bought a house at the age of 20, and I do wish I would’ve waited longer so that I could’ve bought something a little nicer. Oh well, I love my house.

  5. “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.” – This is a very good point and one that many homeowners or prospective homeowners fail to grasp.

    I feel like the younger generation in the U.S. may be more cautious and wary of buying their first house after seeing the meltdown that’s happened in recent years. I know I’m not planning to buy anytime soon! (mostly because I don’t want to settle down yet, either)

  6. SP says:

    Great post! Renting is definitely better for me, as we don’t even know if we’ll be hear in 5 years. And homes in this area are way overpriced, so we’d have to move far out of the “ideal” areas just to afford something. No thank you!

    It really depends on where you live, what your plans are, and what makes sense for you. I’m SO TIRED of my 55+ coworkers telling me to buy property. Note than none of my coworkers who are about 35 are so amped about the housing market!

  7. Diedra B says:

    I live in NYC and housing prices here are pretty high, even in the outer-lying boroughs. I live in a reasonably priced rental and when I consider the wear and tear that the weather and aging does on a house, I’m not prepared to take on those extra costs. Leaky basement, broken steps, shoveling snow, broken boiler, broken hot water heater, and on and on. Even if you purchase a condo, the common charges are there to cover these additional expenses.

    Perhaps living in a two season climate, I’d be more inclined to buy.

  8. Potato says:

    “More often than not, renting will be cheaper than owning.”

    I think you’ve got that wrong, Krystal. The normal situation is for renting to be more expensive than owning — how else would landlords ever make money unless rents were higher than their cost of owning?

    And that’s where the trouble comes in: in Toronto and Vancouver right now, it’s not cheaper to own, it’s often much cheaper to rent. That’s the best evidence I have for over-valuations/brewing bubbles, and a great reason to just sit the housing market out and be a renter.

  9. Jeff says:

    Renting works best for me right now. Mid 20s downtown Toronto, ten minutes from the office. My rent is inclusive (including parking). It’s a fixed expense each month guaranteed not to change for a year, no worries about broken appliances, fluctuating utility costs or structural deficits.

    Also, I don’t have a few hundred thousand dollars hanging over my head if I lose my job or decide / need to move.

    Where I grew up, all my friends own houses. Mortgages are 150-240k; it works for them. But for my line of work I couldn’t stay in a small town, so I rent. I don’t feel like less of a human being because I’m not a home owner, either.

  10. Col says:

    I get a TON of flack for renting. Everyone tells me it’s a bad idea. I’m single and for where I am in my life, renting is the right move for me. I live outside of Detroit. My parents are in their 80s… chances are if something happens, I will most likely move in with them to help out. Or I might get married. Either way, I don’t want a house/condo to have to unload.

    Also, what’s ironic, is all of my friends who *advise* me that renting is such a bad move, are in houses they are upside down in. They can’t get out if they wanted to move. When I move, I won’t owe anything. If they want to move, they owe so much more than what their homes are worth. Personally, I think I’ll make out better in the end…

  11. Leah says:

    I think it is a rare situation when renting adds more to the bottom line than buying. If you need to be mobile, you probably shouldn’t risk being at the whim of the market at any time in specific places. But if you are staying put the bumps are smoothed out should you need to buy elsewhere, and there are not closing costs etc to factor in on a frequent basis.

    I think the benefits of buying are overstated when it is considered an investment. Our home has at a minimum tripled in price since we bought it 11 years ago. Sounds fabulous except that everything else has risen as well.

    What has also gone up remarkably is rent. Our mortgage is now 50% of what rent would be. We chose a mortgage we could comfortable afford on one of our incomes. So unless mortgaged rates skyrock and for some reason rents do not, we have a discount week to week. Eventually our housing costs will be a lot smaller, just rates and maintenance, freeing up cash.

    We always need somewhere to live, the actual investment in the home is to provide that, the increase in net wealth is not that important until the day we no longer need a home to live in. It will be a blessing to our kids when we pass on, as will our parents homes be for us when they do.

  12. Erica says:

    I’m in the whole buying a brand new house stage and sometimes I wonder what I’m getting myself into. With that said thou, buying a house is the better option for myself since renting would meaning I would have to live farther away from my job thus increasing my commute to work. I also have rented before and I hated having to share laundry and dealing with the constant worry of strangers walking around in my building. Due to knowing several individual within the housing/mortgage industry I was able to get a pretty damn good deal on my mortgage, so I’m pretty happy with my decision.

  13. Happygirl says:

    It’s important to remember when renting you’re usually limited to Condos and apartments….otherwise to rent a house in Toronto like what I’ve bought you’re paying $2100-3000….my mtg payment is much less. So if you want to live like what you would have if you buy, renting might not be an option.

    • Potato says:

      @MOA: “I can’t see renting being better than owning long-term. I really can’t.”

      Remember that price matters.

      If someone is willing to rent you a house for $1/mo, and that house costs $1,000,000 to buy, then it is overwhelmingly better to take the rental option: you can invest your million bucks in a savings account and make more than that in interest, and if you don’t have a million bucks, then even better. Conversely, if rent was $1000/mo, and the house was $50,000 to buy, then it would make sense to buy the house instead: you’d have it paid off in just a few years.

      So the important concept is that there is going to be some cross-over point between those two extremes where rents and prices are such that it’s a break-even proposition for either choice. And beyond that point, there will be a set of prices so high and rents so low where it just doesn’t make sense to buy any more, long-term or not. Exactly where that cross-over point is depends on a lot of factors, like interest rates, how long you’ll stay, taxes, appreciation, maintenance, insurance, risk tolerance, etc., but there is that break-even point (and beyond a regime where renting is better) somewhere.

      For most of our history, we haven’t been on the other side of that line, so it seems hard to imagine — all our heuristics are geared towards a life where landlords make money and buying a house is a smart financial move. So yes, in most markets most of the time it’s better to be an owner if you’re in it for the long-term. But in Vancouver and Toronto, it’s not most of the time: we’ve crossed the line.

  14. Maybe in VanCity, but I can’t see renting being better than owning long-term. I really can’t.

    It’s like saying if you put 20,000 kms on your car every year, and you intend to own the car for 10 years, you’re better off leasing vs. owning a car.

    Just like GICs and cash are good for short-term goals, renting is good for short-term periods, say 1-5 years. After that, you’re losing out to inflation, rising prices, and not building equity.

    There may be many reasons why it makes sense for folks to rent, over having a mortgage for the short-term, but long-term, most Canadians in most markets are way better off being an onwer and having equity.

    JMO of course.

    • JA says:

      Actually I would respectfully disagree. It depends on a bunch of factors.

      If someone is buying close to their financial limit and barely making the minimum payments and taking the max amortization available, any equity they build and the appreciation in the property will be drowned out by the interest costs over the life of the mortgage plus the property taxes and maintenance / repair costs etc.

      For people who stay aggressive and can pay off their mortgages within a decade or so and don’t over extend themselves, buying is probably better if the mortgage rates are right and the market stays up.

  15. kitty says:

    renting is paying someone else to own.
    you rent rent rent, and at the end that money is gone nothing to show for it.
    Buy a home in your budget, rent out a fraction of it. someone else is paying for your mortgage, and eventually you will have something to show for it.
    Key is stay within your means, otherwise the interest you will have paid to the bank while collecting someones rent kind of negate one another. I’m renting the basement out for 1500/month, my interest is 3500 a year.
    so kids just do that math.
    Living in the city is expensive- and no doubt is why a large portion of people rent in the city, because IT IS too expensive for the average person to afford with ease.
    but if you have a relatively stable, well paying job, buying a place and renting out a portion will offset your expenses while still having your own asset.. you can even write off a portion of your bills because of the tenant.
    If you have condo, with no basement, think about getting a roommate.. etiher way you will be profitting off of someone else. that’s how things work in this world.

  16. Country Girl says:

    The first point you make is bang on. I don’t know how many times I’ve heard people say this. I want to give people who say the bank is looking out for them a shake. I had a friend’s brother tell me this, and he’s unemployed with two mortgages! Argh!

  17. JA says:

    Its funny. I wrote about Home Buying today (http://whotookyourmoney.blogspot.com/2011/12/mortgage-good-habits.html) and touched on some similar topics.

    Renting is always better if you’re not sure about being in the place for at least 3 or more years. Also if your minimum required Mortgage payment is going to be the same as your rent, renting is likely going to be better because it probably includes some utilities and total housing related expenses will be higher when owning.

  18. Tom says:

    I think it is mainly economic situation that helps people decide to either rent or buy. For example, there is an increasing trend in which rentals are on the rise in the US while the national home ownership rate declines. It is understandable when we take into consideration that there is an accessible financing for rental housing and some of the lowest mortgage rates in history. However, when the situation changes, people might turn to buying over renting again.

  19. Steve says:

    It’s almost always better to rent first before committing to buying a house IMHO. Lower commitments and also cheaper maintenance fees, too.

  20. Mr. Negative says:

    I don’t think this is even a discussion. Renting is cheaper than home owner ship. No one wins when buying a house unless you buy it out right. The interest payments most people make over 30 years would buy them 2 1/2 houses. When you actually take into consideration the average home price in Toronto, 370,000 the average under 30 won’t pay this off until they retire. “what a great time to buy, lowest interest rates ever” have they not seen the price of the average home? Of course the interest rates are low, imagine they were at 9% at 400,000. Give your head a shake. I love being fooled, i am not an economist, but a bubble will burst, weather it be in the next year or 10 years. The younger generation cannot afford to buy 400,000 dollar homes at these wages. Who will buy them? The investors who are trying to offload them? We continue to smash down smaller homes, affordable homes, and build mcmansions to make a profit, but who will afford these in the future?

    Anyhow, renting makes sense, at least to me. If i could pocket all the interest over the next 30 years, i would have 2 -300000 in the bank. Buying a home, will leave you with an assest, that has lost money over 30 years. Unless, that home triples in the next 30 years and the average home price is a million dollars. Wow that is scary, can you imagine our kids trying to buy a home on the same salaries we are making? You didn’t think the greed would stop and our kids will make more money, did you? I can say one thing, people aren’t making more money these days, they are making less. My parents had the opportunity to continue to make raises and rise with the growth of the country. We are going through the decline, where benefits are taken, good jobs are being shipped over seas, and the 1% are making more money than they ever have.

    I am 27 and can see the light at the end of the tunnel. slowly but surely it is burning out. We will be starting all over again. It might sound negative, but when governments are actually starting to cut the gravy jobs that allowed our parents to have cottages, boats and toys, and replacing them with younger workers for half the price. We are in trouble. Our generation won’t have gravy jobs, we will do the same work, but for less pay, while everything else keeps rising in cost. What a deal! Someone told me once, that the only way things will get better, is if the old people hording all the money start spending it! I never looked at it that way, but it is true. There are a lot of wealthy people sitting on there money, this money should be in circulation, not in competition as to who can have more.

    Sorry for getting off topic and bitching. I can’t help myself, this is all i can think about these days.

  21. Rent and Prosper says:

    when I started renting a townhouse in downtown Toronto, I simply took all the expenses that I would throw away – property taxes, maintenance, insurance, extra hydro and found an apartment that matched those costs. That was about $889 per month 21 years ago. Never thought about a mortgage, that would have doubled that cost and I couldn’t conceive of spending over $20,000 for a roof over my head. Now 20 years later the rent is about $1250 per month but the equivalent cost of owning a similar space is more than that per month plus likely $3,000 mortgage or almost 200% more. As you can see you can never get ahead owning a house. And here we are talking straight dollar to dollar. If we take the $800,000 a similar house would be worth that I rent, then @ 6% I would be losing an additional $48,000 a year of income on the lost earnings of having value uselessly tied up in bricks with no cashflow. So renting is basically making me anywhere from $36,000 to $48,000 per year compared to buying.

  22. Wayne says:

    I don’t think people are comparing apples to apples. Lets assume you have $50,000 cash. Case 1 you buy a home. Case 2 you rent a home of similar value and invest the 50,000 plus the difference each month. Lets look at 30 years later:

    Case 1 buying:
    Purchase 250,000-50,000 = 200,000 ~ 30 years @ 5% = 1,073.64
    Taxes @ 1.25% = 260.42
    Condo fee/heating/electricity = 300
    Total monthly cost = 1634.06
    Value after 30 years @ 4% per year = 810,849.38

    Note that in Ottawa the average return rate is around 5.6% percent averaged over the last 30 or so years.

    Case 2 Renting: Say we can rent a similar place for 1200 per month all inclusive.
    Difference is 434.06 or 5208.72 per year. With an initial investment of 50,000 and an additional 5208.72 per year @ 6.5 % return in the market = 809,864.45 after 30 years.

    The above calculations ignore inflation and rental increases. A better comparison would be to use a spread sheet and assume increases of condo fees, taxes, and heating/electricity. Also note that the amount of interest you pay over the life of the mortgage is moot; total interest doesn’t matter when calculating how much you save by renting/owning. It is the interest rate and housing return rate compared to the stock market rate that matters.

    If you are in the case where you have a very small down payment and invest the difference between taking on a 95% mortgage or invest the difference (the difference in monthly payment would be bigger since a higher mortgage), renting and owning would again be very comparable in 30 years using the above rates.

    So the question is, are you a stock market guru and be diligent to save every penny of difference every month for 30 years, or do you wish to invest your money in real estate. And if you can’t afford a mortgage or rent plus the difference, you should either find a new job or stop comparing the difference between renting and owning.

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