Pros and cons of renting and buying

To buy, or not to buy (a home), that is the question. Hamlet lived in a castle, so he didn’t have to worry about this type of thing. But you probably do.

The traditional, pre-millennial path of moving seamlessly from school to work to buying a first home isn’t the reality for most Canadians anymore. Real estate prices, especially in major cities, continue to rise. Almost a third of Canadians who do eventually buy a house are “delayed homeowners” who rented for a decade or more before taking the mortgage plunge.

Due to these unprecedented and sustained high prices in Canada’s hottest real estate markets, long-term renting is becoming more commonplace. Once almost universally thought of as “throwing your money away,” the modern realities of renting have shifted and many financial experts now focus on its benefits just as much as its potential drawbacks.

At the same time, that doesn’t mean that the dream of home ownership is dead. 86% of Canadians aged 25-30 still think of real estate as a strong investment, and they’re not wrong.

Owning a home isn’t the cut-and-dried smart choice that it used to be, and the factors adding up to what’s possible are more complex than ever before.

Increasingly, this means looking beyond just affordability. Make sure that you’re taking a holistic look at not only finances but your lifestyle, emotional readiness, personality traits, and future plans to decide what’s right for you.

Stress

To successfully apply for a mortgage in Canada, you have to pass a test. Literally.

Now more than two years old, the federal government’s mortgage stress test is a stricter set of financial controls new applicants have to successfully clear to qualify for a mortgage. The big Canadians banks are mandated by law to follow it, and smaller institutions like credit unions likely use it to reduce their risk exposure and protect assets.

Use this tool to get a sense of how ready you are to pass the stress test and take on a mortgage. This might make your decision a little easier, based on whether you’re even currently able to secure a mortgage at all.

Privacy

This will hinge on your personality type and how much control you like to have over the management of your home. Ownership puts you mostly in full charge (you, sadly, don’t get a chance to audit your neighbours before moving in and so can guarantee how nosy they might be), while renting comes with a set of regular, (hopefully) reasonable interactions with your landlord that are unavoidable.

There are regulations, specific to each province, in how a landlord must interact with their tenants and their rental properties. Whether the landlord follows them, and what to do when they don’t, is an added consideration of renting that some people, particularly introverts, might not enjoy.

Risk

With every investment there is an element of risk, and mortgages are no different. When you rent, as long as you have insurance (you have tenant’s insurance, right?) you don’t need to worry about a market crash or a flooded basement. Your biggest risk will likely be whether you’ll like the place and have a great relationship with your landlord after you move in. Though there are some substantial move-in costs to keep in mind for renters (movers, first- and last-month’s rent, nonrefundable application fees, etc.) this is a more reasonable risk for most of us.

Financial Control

This is the big one. Depending on a variety of factors (your net worth, geography, job security, whether you’re planning on having kids, how much you enjoy lawn maintenance), the core financial benefits of buying or renting will vary based on your unique situation.

But, there are a couple common considerations that are pretty universal:

1. When you own a home you build equity. This is the most common argument for owning a home. All things considered, if you have the ability to easily afford a home there’s a very strong argument to be made for investing in a mortgage and generating equity as you pay it off. Each month you come one step closer to owning a large, secure asset that generally will appreciate in value.

When you rent, you avoid the hassle of a mortgage and the bills for running a house, but you also lose out on equity growth. While it may not be the same as throwing money away, your monthly rent does go towards paying someone else’s mortgage. Some of us can stomach that idea more than others.

2. You’re either the boss... or you’re not. When you rent you need to be comfortable with a certain amount of instability. Depending on your local laws, your landlord can raise your rent substantially. Particularly in hyper-competitive rental markets like Toronto and Vancouver, dubious landlord practices like “reno-victions” are, unfortunately, increasingly common. While laws are steadily improving, there are still loopholes and many people, particularly those in the most vulnerable financial positions, find themselves in the most precarious positions.

As an owner, you take on increased financial burden and responsibility, but you also gain a huge amount of control over your financial destiny. As long as you can continue to pay off your mortgage, you have a place to live, invest in upgrading, and do with as you please. For many, this pillar of stability is the most appealing reason to own in the first place.

3. Owning is more predictable. Renting is more flexible. With a fixed-rate mortgage, you can predict fairly exactly how much you’ll need to pay each month. Keep in mind you’ll also need to add property tax, insurance and other owner-related costs. It also means that you can’t just pack up and head off whenever you want to. Buying a home means staying put for, on average, at least five years. Return on your investment won’t be immediate and you’ll have to be patient. If this appeals to you, then great. If your a commitment-phone, then maybe not so much.

Of course, depending on the type of home you buy, you also have complete freedom to rent part of your property to generate some extra profit. While this is extremely attractive, being a good landlord is hard and takes a lot of extra work that you might not be anticipating.

Depending on your income and lifestyle, one of the major benefits of renting is its inherent flexibility. Aside from a standard 1-year lease, you have more ability to move unities, cities or countries as you see fit. If you have an agreement that allows subletting (or, especially, if you’ve hit the urban goldmine that is rent control) you haven even more ability to adjust your rental situation with your lifestyle and travel goals.

4. But if something breaks... When you own a home, renovations and emergency repairs are all on you. While they (hopefully) will ultimately increase your home’s comfort and value, home repairs are notoriously costly and difficult to manage.

One of the joys of renting is knowing that when something breaks you’re not responsible, although the ease of getting something repaired depends a lot on your relationship with your landlord and how seriously they take their commitment to you as a tenant.

5. Bye bye disposable income. The responsibility of a mortgage means taking on a significant amount of debt, potentially for decades. This is no small decision and shouldn’t be taken lightly. Depending on the overall cost and how much down payment you can provide, you can easily find yourself in the dreaded situation of being “house poor” and owning a home you love, but being unable to furnish it, keep it up, or, possibly worst of all, invest in savings for your future.

That said, with solid financial planning (or a substantial windfall) you might be in a situation where you can afford a mortgage without sacrificing saving and investing. This is the best-case scenario, and you want to be brutally honest with yourself about what you and your family can realistically accomplish.

As a renter, you’ll most likely have extra income that can be wisely budgeted toward long-term growth and retirement planning, like TFSAs and RRSPs.

Get to the (bullet) point

If you’re in a TL;DR mood or just want to break it all down, here’s a quick set of high-level circumstances to help guide your decision:

You should probably be renting if:

  • You’ve got tons of debt, particularly high-interest (like credit cards) or very long-term (like student loans) to pay off.
  • You don’t have any retirement savings at all, and want to put the extra income you have towards building that up first.
  • You’re unemployed, newly self-employed or don’t feel confident in the stability of your income for at least the next two years.
  • You don’t have any down payment saved at all.
  • You haven’t settled on long-term plans and don’t know where you want to live.

You should probably be owning if:

  • You’ve got a steady source of long-term income and have passed the mortgage stress test.
  • You’re emotionally ready to settle down and know where you want to live for at least the next five years.
  • You’ve got enough saved to cover a healthy down payment and closing costs.
  • You want the added responsibilities of home maintenance and are able to cover emergency costs.
  • You’ve done a full budget and financial plan and are confident you can shoulder the burden of a mortgage without sacrificing other aspects of your lifestyle that are important to you.
Jeremy Elder is a paid spokesperson of Sonnet Insurance.
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