Buying vs. Renting

Canadians, in general, regard a home as their best investment. After all, conventional thinking has always insisted that renting is like burning money. Buying a home and paying off a mortgage means that a portion of your payments increases the equity you have in the home, increasing your net worth. There are pros and cons to both strategies, which this section will address.

The heart of the matter is how much you pay in rent versus how much you pay in shelter costs, including mortgage interest payments, property taxes, building insurance and maintenance expenses. A handy rule of thumb is the 0.6 per cent rule: if you can rent a home for anything less than 0.6 per cent per month of its purchase price, you are likely to be further ahead as a renter, if your rent is above that 0.6 per cent level, the balance shifts in favour of owning.

However, this rule only works if one gives it enough time. In the short term, renting always outpaces buying because land transfer taxes plus legal and closing fees are sunk into the initial purchase and have to be paid off over time. When the house is sold, the seller usually pays the real estate agent commission fee.

Over the long term, the advantage of renting stagnates. Renters can expect to pay rent payments that will move upward at roughly the rate of inflation so their costs for accommodation never decrease in real terms. To make matters worse, they can't recover any portion of their costs - once paid, their rent is gone.

In contrast, homeowners can expect to shell out less and less money in real terms as mortgage payments and inflation reduce the amount of the principal they still owe. Over the long run, more and more of their monthly payments become recoverable since that money goes to pay down their principal and can be regained when the house is sold.

At what point does buying come out ahead of renting? A general rule of thumb is 5 years. Over this period of time, the amount of principal paid off from the mortgage exceeds the expenses associated with buying, selling, and maintaining a home. As well, one can expect housing prices to remain stable or increase over that period of time. Anything shorter adds an element of speculation to whether the home will increase in value.