To buy or to rent? It's one of the most hotly debated questions in any city - and nowhere more so than the Lower Mainland. Here, expensive housing means that buying is often a big trade-off between your money and your lifestyle.
While many believe that the benefits of owning your home far outweigh being beholden to a landlord, others argue that more money can be made over the long term by investing the savings made from renting.
So what are the pros and cons of renting versus buying - and which choice is ultimately going to offer the best long-term financial outcome for you?
1) Live where you want.
When you find a neighbourhood you love, you can probably afford to live there as a renter, even though buying there might be out of the question.
And if you're new to town, renting is a terrific way to test-drive a neighbourhood. Decide you don't like the local shops, length of the commute to work, traffic noise, or view? No sweat at least, it's no more sweat than packing your stuff and moving somewhere else.
2) Stay flexible.
Let's face it, if your job or your round-the-world travel plans mean you'll only be in town for a couple of months or even a year, it makes sense not to be tied into a mortgage. Renting is also far more cost-effective than living in hotel even when you pay the extra for a fully furnished suite plus you get the convenience of extra space.
3) Maintenance? Not your problem.
When you're a tenant and something breaks, help should be no more than a phone call away, with no cost to you to fix it. Consider the expense associated with a leaky roof, water damage from a burst water pipe during a cold snap, or even replacing the shrubbery that expired in an heat wave while your were on vacation.
These are the kinds of sudden expenses home owners face and renters don't. And owners also have to factor the ongoing costs of maintenance into their budget, on top of their mortgage payments. Those are all included in your rent.
4) Avoid the extra costs of buying.
Aside from maintenance costs, buying a home involves a host of extra expenses that add thousands of dollars onto the purchase. These include legal fees, property transfer tax, inspections, sometimes GST and more. Renters escape these up-front costs entirely. (See our infographic on the extra costs of buying.)
5) Know what you'll pay.
And there's the stability of knowing exactly what your monthly outlay will be. In BC, 2014 rent increases are limited to 2.2% by law. Mortgage rates aren't. Although we've enjoyed historic low interest rates for a number of years, there's nothing to protect home owners from a return to higher rates in the future a particularly scary thought for anyone who's paid only a minimal down payment.
6) Invest the difference.
Many owners are stretched and have no room for savings. Smart renters invest the money they save by renting, and make sure their RRSP and TFSA savings are at the maximum so they take full advantage of tax refunds and tax-free growth. It requires discipline and attention (and a trustworthy financial advisor), but the returns over the long term are very close for owning a home and investing in the stock market. John Andrew of the Queen's University Real Estate Roundtable did a study that found TSX annual returns from 1981 to 2012 were 5.45 per cent, excluding dividends, compared to 6.43 per cent for Vancouver housing over the same 30 years. Another study, quoted by Rob Carrick in the Globe and Mail cited stock exchange gains of 8.5 per cent over thirty years.
1) Enjoy the fact it's all yours.
It's a cultural thing with Canadians to want to buy a home about 70 per cent of us do. Pride of ownership, the ability to decorate how you like (even if your favourite wall colour is purple), and the stability of knowing no landlord can force you to move are big motivators.
2) Put your money to work.
Typically the biggest motivator is dollars and cents. Renting means every penny of your monthly payment is spent gone for good period. On the other hand, a portion of each month's mortgage payment goes to reducing your principal it's like putting cash into your own savings account rather than someone else's.
And with time your home's value will probably go up. Historically, housing values continue to rise steadily over time, thus creating a solid investment in your future. As they say in real estate, it's not timing the market, it's time spent in the market.
Then there's the leverage factor. Let's consider a hypothetical $400,000 apartment. A 20% down payment would mean an actual investment of $80,000. As your property value increases, however, you reap the benefit on the entire $400,000 so an annual increase of just 2.5% in property value translates to $10,000 or a whopping 12.5% return on your initial investment. Of course, you could always settle for something closer to the current return of 3% or less on a term note.
Most insiders agree that today's historic low mortgage rates show no sign of bumping up any time soon. And while a 25-year amortization on a mortgage may sound like a long time, it goes by fast and suddenly you're mortgage free with only property tax and maintenance to pay. Rent, on the other hand, never ends it only increases.
3) Benefit from competition for your dollar.
In today's competitive market, developers are offering increasingly innovative incentives for buyers considering a brand-new home. No strata fees for a year or more, legal expenses, exotic vacations, upgrade packages, custom vintage wines, even cars have made appearances as no-cost buyer incentives.
4) Make tax-free profits.
Final thought to ponder. Although an RRSP should be part of every retirement plan, you will always need a roof over your head. You're also forced to convert an RRSP at age 71 and begin withdrawing funds and paying tax on them. But only you choose when to sell your home. Best of all, when you do sell, that profit is tax free on your primary residence and after all, who doesn't like to get a tax-free windfall?
Vancity Mortgage Calculators
Investor Education Fund Buy or Rent Calculator
Let's do a sample calculation from the Investor Education Fund website, taking the example of a person trying to decide between purchasing a two-bedroom West End condo for $500,000 or renting a similar condo for $2,000 a month.
We plugged in the buying scenario of:
$500,000 purchase price;
a 20 per cent down payment;
buying costs of $7,500 (waived Property Transfer Tax as the assumption is this would be a first-time buyer);
a $400,000 25-year mortgage at 5 per cent (monthly payment would be $2,326, according to the Vancity calculator);
strata fees of $5,000 a year;
property taxes at $5,000 a year;
home insurance at $1,200 a year; and
various other standard parameters such as price growth and inflation.
Then we compared this with renting the same apartment:
$2,000 a month rent;
2 per cent annual rent increase; and
the renter investing all the savings (money not spent up front and on monthly fees such as strata fees and taxes, as well as the difference between rent and mortgage payments) into a 3 per cent return investment.
The graphic results below indicate that after 19 years, this particular person could be better off buying than renting.
However, this calculation makes some huge assumptions - such as a mortgage rate that averages 5 per cent over 25 years, and this person being a first-time buyer. A few adjustments in down payment, mortgage rate, strata fees, taxes, investment return and so on can make massive differences to the results. It is essential to work out what is best for you based on your individual factors.
How to Buy a Home and Keep Your Lifestyle
How Much Can You Afford for a New Home
7 Pragmatic Steps to Buying Your First Home
Infographic: Costs You'll Encounter when You Buy a Home
RRSP vs TFSA: Which is the Better Way to Save for a Home?