Home ownership can have lasting implications on your lifestyle, savings and disposable income. Whether you choose to rent or buy, both scenarios come with tangible benefits as well as risks.
January 18, 2021 in Life
You may have heard the theory that paying rent is like throwing away money every month. This is a myth, since you need a roof over your head regardless. Renting can often be cheaper than owning a house, and it comes with more predictable expenses, less regular maintenance and fewer hidden costs.
Monthly rent payments are typically lower than what you would pay towards a mortgage, insurance, and property taxes on a home. They could also include the cost of utilities, hydro and sometimes even Internet or television. Additionally, as a renter, you don’t have to assume property maintenance fees, pay for services like plumbing or landscaping, or invest in increasing the home’s equity.
If you travel often for work, you can come and go from your rental unit as you please without worrying about maintenance issues or leaving the lawn unmowed in your absence. If you’re not sure how long you’ll be staying in the same location, renting will help you avoid the added complexity of having to sell your home before you leave. You will also feel freer to accept new opportunities or relocate because you won’t be tied down to your physical location.
If something breaks down at your rented home, you usually won’t have to fix it — or pay for the repairs — yourself. Being a renter means keeping the property well-maintained is the responsibility of the landlord. So, you won’t have to spend hours shovelling the driveway from the snow or cleaning gutters.
There are downsides to renting as well. Though predictable, your landlord can decide to hike up your monthly rent payments when it’s time to renew your lease. You also won’t be able to claim your home as an asset.
You can’t earn equity when you rent a property. That equity could benefit you if you are trying to qualify for secured loans, as a home is not only a tangible asset but it can also provide a stronger measure of your financial health than being a renter. When you’re ready to move, you also wouldn’t be able to sell the home and receive money from any available equity.
If you don’t benefit from rent control, your landlord could suddenly decide to sell your unit. If you’re not financially secure, getting an eviction notice could be a huge problem as you have to suddenly search for a new place to live. And while leaving repairs and maintenance to your superintendent can make your life easier, you won’t always be able to modify your home as you like nor can you always rely on your landlord to promptly address issues that are bothering you.
Owning your own home comes with a lot of intangible benefits like stability and feeling like you are part of a community. Being able to set down roots might make you feel less transient and more settled in your life. Committing to home ownership can also come with financial benefits.
Every time you make a mortgage payment, the portion of your home that you actually own increases. As you pay down the balance, it brings you closer to full home ownership. Your home could go up in value after some time, which also increases your equity. Owning a valuable asset can help you secure loans or sell the home at a profit.
If you get a fixed-rate mortgage, you will have greater control over your monthly expenses and know exactly what your payment will be from month to month. In addition to this financial stability, you would also enjoy the emotional benefits of being part of a community long-term and being able to build relationships with the people in it.
Once you have finally paid off your mortgage, a house is something you can say you own with pride. Since you will be rent-free and have more disposable income at your fingertips, you might be able to take a trip, purchase a big-ticket item or even afford to retire. You could also sell your home in the future to pay for other life events or pass it down to your loved ones.
Buying a home doesn’t always lead to building wealth. The additional costs that come with home ownership could tie up your savings and leave you with little to no discretionary spending in case of an emergency. And while property values often go up over time, they can also decline, leaving you with a significant loss on your investment.
In addition to your mortgage payment, you will also have to shell out for other costs like property taxes, trash pickup service, water and sewer, and different types of insurance, among other expenses. If something major breaks down that you have to repair or replace right away, you will have even less disposable monthly income to put towards your savings or spend on discretionary items.
If you choose the right neighbourhood, your property value could soar by the time you’re ready to move. However, something could happen to make your neighbourhood decline. Your home might be worth the same amount that you bought it for, meaning you will have lost money due to inflation. You might also struggle to sell it. When the amount of your remaining mortgage loan is greater than the value of your home when you sell it, your home is “underwater,” preventing you from recouping the home’s original value.
Making the decision to buy a home should not be taken lightly. It comes with a commitment to a lifestyle that may or may not be right for you. Consider not just your financial health and spending habits but also your long-term vision of the future and where you want to be several years from now.
● How stable is your employment situation? To buy a home, you’ll want to have job security and a steady income.
● Are you thinking about going back to school, changing careers or travelling the world? If you’re anticipating travelling or relocating, renting may be the better short-term option for you.
● Will your job or lifestyle require you to move or stay in a certain location? If relocation isn’t on the table for your job, you might be ready to settle down and buy.
● Where do you want to live? Will your rent or mortgage payments and property taxes be cheaper there? Whether you’re buying or renting, make sure it’s in a location you can afford — and that makes sense for you.
● What is your current monthly rent payment? Can you afford to pay more than this amount? Are you willing to take on a more frugal lifestyle? It’s important to consider your monthly budget and lifestyle, and how those might change if you were to buy instead of rent.
● What is your credit score? You’ll need a decent credit score to get approved for a mortgage, and a strong one to make sure you don’t break the bank for the down payment. Consider using a no annual fee credit card – by avoiding an annual fee, it may be easier to pay your balance in full each month. This can help boost your credit score.
● How much debt do you have? A mortgage is debt. If you’re already drowning in debt, it may not be the best idea to add to it before you have an effective payoff plan.
● Do you have enough saved for a down payment? The more money you can put down upfront, the less interest you’ll have to pay over time on your mortgage. The amount required for your down payment depends on your credit.
● Will your home’s value be maintained or improved in 10 years? The housing market is a crucial factor to consider when buying a home, especially if you’re looking to settle down long-term.
Evaluating your answers to these questions can help you understand when renting is a better option than buying a home and vice-versa.
If you are ready to buy a home, research the neighbourhoods to understand how your potential neighbours value their home. If home values see a consistent uptick, it could be a signal that your investment will bloom.
A larger sale price on your home than what you paid can allow you to earn a profit on your home investment. If you choose to sell, you can buy a new home or even go back to renting.