This is a guest column by Sean Cooper.
If you’re a renter you’ve probably heard it a million times from family and friends, “paying rent is like throwing away your money” or my favourite, “paying rent is paying someone else’s mortgage.” In certain situations both those statements are partially true, however, as you probably already know, nothing is ever clear cut in finance. Depending on your financial situation it may be make sense to rent instead of buy. Let’s look at 5 reasons when renting your primary residence might makes sense.
1. Short-term housing needs: if you plan stay your primary residence less than 5 years
If you’re working on contract, you’ve got a work visa and plan to only stay a few years, or you’ve just moved to a new city and you’re unsure how long you want to stay, it probably makes more sense to rent. It all depends on how long you and how likely you are to stay in one location – if you plan to stay for 5 years or less it most likely makes sense to rent – it will take at least a couple years to recover your closing costs (land transfer taxes, legal fees, inspection fees, and moving expenses, just to name a few).
The Canadian Mortgage and Housing Corporation (CMHC) recommends budgeting 1.5% to 2.5% of the purchase price for closing costs. For example, if you purchased a $500,000 home, the closing costs could range from $7,500 to $10,000. Also, in the first few years of your mortgage, your monthly payments will mostly go towards interest (unless you make a really big down payment) – it’s only if you’ve lived in a house for a few years that you really start to pay down the principal.
2. To free up your net worth for investing (it’s also risky to invest the majority of your net worth in one thing)
Let’s face it, houses are expensive. Anyone who is paying a mortgage most likely has most of their net worth tied up in their house. That’s fine and dandy if housing prices continue to appreciate like they have for past years (the Canadian real estate market has provided a 6.82% compounded annual growth rate 2000 to 2010).
However, if the real estate market was to slow down or a similar situation to the sub-prime mortgage fiasco was to happen in Canada, your net worth could decline significantly. A lot of people don’t buy their primary residence solely as an investment, but if you were to rent instead, you would free up a lot of your net worth and be able to diversify by investing in ETFs or index funds.
3. You live in a market where housing prices are expensive
If you live in a major city like Toronto, Montreal or Vancouver housing prices are among the highest in the country. Furthermore, if you can’t save enough for at least a 20% down payment, you’ll end up paying CMHC insurance. The average housing price in the Greater Vancouver area in 2010 was $675,853 – you’d have to make at least a $135,171 down payment to avoid paying CMHC insurance. On top of that you’ll probably have to take a mortgage with a longer amortization period of 30 years. Check the classified ads in your local newspaper to see how much rent is and see if renting makes sense.
4. Less responsibility and expenses: no maintenance or major repairs
Living in a house can be very expensive. Not only do you have to pay all sorts of recurring expenses like property tax, heating, hydro and home insurance that usually increases annually, there’s also the major expense of home maintenance and repairs.
Your house may be in relatively good shape, but eventually the roof, windows and furnace will need to be replaced. For an older home, I’ve researched that up to 3% to 5% of the value of the home can be spent on maintenance/upgrades annually. For example, on the same $500,000 home you can expect to spend $15,000 to $25,000 yearly. Homes also require upkeep – some home owners take pride in shoveling show or raking leaves, but if you’re busy or just don’t want to take on the added responsibility, renting can make sense.
5. Rent increases are regulated in some provinces (housing expenses are not)
An advantage to renting is that annual rent increases are regulated (in some provinces) – your landlord can’t just increase your rent overnight by 10%. Housing expenses, such as hydro, gas and cable, meanwhile are increased at the discretion of the service providers. Also, when you go to renew your mortgage there’s no way of knowing what interest rates will be like – your mortgage payment could go up substantially if interest rates jump.
Although there are a lot of advantages to buying a house, it doesn’t always make sense in every situation. It’s a good idea to look at why you want to own a house and see if it makes sense to buy or rent.
About the Author: Sean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University.