Early Worker Edition - Buying or Renting?
As the housing market continues to remain one of the hottest topics in Canada today - the endless debate of renting vs buying has taken the stage again. While home ownership remains one of the timeless goals on any person’s bucket list - the renting side of it equally seems attractive. Coupled with the fact that debt is something that cripples young professionals - it's time to settle this debate once and for all.
So here’s the main scenario going on: With owning a house you get homeownership - it's something you can call your own and build your equity over time. The way you build equity is that with each mortgage payment - a portion of it pays off the interest portion and the rest will pay off the principal. Over time however, these ratios change and while towards the end of a mortgage while you still pay interest more of the payment pays off the principal - this is because the interest % is charged on a lesser amount each year. The whole debate hinges on your return on equity and which option will be better in the long run. The problem when it comes to renting is that people are under the impression that their rent payment will just offset the mortgage of another person - so why you should pay someone else’s mortgage when you can pay your own?
Let’s take a hypothetical then. Suppose you have been working for 3 years and now decide you want to move into a condo. You have also managed to save 50,000 for a down-payment.
Option 1 Buying:
Suppose you decided to purchase your own place for $----- and put your 50,000 down. Each Month your mortgage payment comes out to 875 - of which 250 pays off your principal. Therefore your ROE would be 250*12 / 50000. Which is 6% return.
However, this 6% excludes all additional costs such as maintenance fees, utilities repairs, property taxes, welcome taxes, and interest rate risk associated with the mortgage. While the 6% does look appealing you may end up paying more in costs. The flipside is that over time, property prices tend to appreciate and when you ultimately sell your property you may even receive a capital gain or can rent out your property.
Option 2 Renting:
So now with rent let's assume you find a condo and the owner charges you 1200 in rent. Is this better than buying?
The answer depends on your viewpoint. While the 1200 is more than 875 in mortgage - remember you as the tenant are not responsible for damages, taxes, property taxes etc - this all falls on the landlord. The only-downside is that you are not the owner but you also do not have any house related debt (i.e no mortgages).
So how do you build equity with renting?
The beauty with renting is the money (50k) you originally saved for your down-payment is still sitting in your bank account and you can invest it and build equity that way. Both options are plausible and both carry their own risks. Its up to you to decide which option fits your mindset better.
Disclaimer: All of the above information is my own personal opinion. Both buying and renting are equally good options and both carry their own risks. Please consult with a licensed representative when choosing which option is best for you. Please do your research when making any financial decision. Examples are for learning purposes only.
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