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How to know when to rent or buy.

While there are some good reasons to rent, buying a place (if you can afford it) often seems like a good investment when looking for your next address—but what about during volatile pandemic times? COVID-19 has changed the real estate market in ways that no one imagined—not even the experts—and it can be tricky to know what to do during an uncertain future. “There are lots of factors at work including historic low-interest rates,” says Robb Engen, a fee-only financial planner who runs Boomer and Echo, a popular Canadian personal finance website. “But the pandemic has certainly caused a shift in housing trends.”

On the one hand, buying could be in your favour since interest rates are at historic lows, making it easier to afford your dream home. However, the real estate market has been on fire, mostly fuelled by Canadians who can now work remotely from anywhere and have less of a need to be confined to big cities. The numbers don’t lie: The average selling price of a Canadian home sits at $688,000 as of May 2021—that’s 38 per cent higher than the same time the previous year.

“There is a significant population whose jobs were not negatively impacted by the pandemic, and who are able to save money and work from home,” says Engen. “There’s also a limited supply of houses for sale. So when limited supply meets increasing demand, we see prices rise. This gets exacerbated with home buying because it’s such an emotional purchase, and that’s where we see the bidding wars and bully offers come into play,” he continues.

So what happens when bidding wars, bully offers, and soaring prices are the norm in the market? Opportunity knocks for renters. With job losses and the urban exodus, the demand for rental units has decreased in certain cities—and so have the prices.

So, back to square one, should you buy or rent your next home? There’s no simple answer. But here’s a deep dive into the pros and cons, as well as essential information to guide you in your decision-making.

Buying benefits (the pros)

Got buying on the brain? These four considerations could make it worth your while:

  • Stability: You’re putting down roots. As a homeowner, you don’t have to worry about an unexpected rent hike or a vacate notice from the landlord.
  • Autonomy: You can paint, renovate, and decorate to your liking—you’re the boss. With renting, you’ll likely have to ask permission from the landlord to do any of these things.
  • Long-term appreciation:In all likelihood, your property’s value will appreciate over time, making homeownership a solid investment. For example, national price data from the Canadian Real Estate Association shows an average annual gain of 4.5% nationally from 1993 to December 31, 2018. Down the road, you have a great chance of selling your home for more than the original purchase price—which will allow you to make a profit. Meanwhile, you can’t get back what you paid in rent.
  • Home equity: In a nutshell, home equity is the current market value of your home, minus what you owe. So, if your home is worth $850,000 today and your mortgage is $500,000, your equity (or the amount of the house that you actually own) would be $350,000. Your equity increases every time you make a mortgage payment (thereby paying down what you owe) and as your home appreciates in value over time. This benefit doesn’t apply to renters—your monthly cheque goes towards paying the landlord’s mortgage (and building their equity).

Buying busts (the cons)

There are also some important factors to buying a home that could make you want to hold off. Note these five considerations before taking the plunge:

  • Steep startup costs: Have your chequebook ready. To get into the real estate game, you’ll need to drum up a down payment—a lump sum of money that you pay upfront towards the home purchase. The minimum down payment in Canada varies by the home’s price tag, but you can expect to put down at least 5% of the purchase price. For example, on a $350,000 home—you’re looking at a down payment of at least $17,500. But don’t just look at the asking price. Mortgage loan insurance will also be required if your down payment is less than 20% of the purchase price. Plus, factor in one-time closing costs(legal, appraisal, house inspection fees, and more). And don’t forget about land transfer tax—a hefty, one-time tax paid upon purchasing a property. The amount is calculated as a percentage of the cost of your home and varies by province and municipality. It’s a lot of dough to drop all at once. In contrast, renting may only require putting down a deposit.
  • Red-hot real estate market: If you’re house-hunting in a high-demand market, expect bidding wars and sky-high prices. The current seller’s market puts buyers at a distinct disadvantage (especially if you’re on a limited budget), making it hard to get your foot in the door. Meanwhile, the demand for rental units has declined in some areas of Canada because of the impacts of COVID-19, making it much easier and more affordable to secure housing.
  • Added responsibility: Whether you’re shovelling snow or fixing a clogged sink, homeownership brings responsibility. With renting, the landlord or property manager typically takes care of regular maintenance.
  • Unrecoverable extra costs:Aside from your mortgage payment, owning a home comes with unrecoverable “holding costs”—extra, ongoing expenses for things like property taxes, condo fees, insurance, utilities, landscaping, snow removal, and more. Plus, as a general rule, plan to sock away roughly 1% to 3% of your home’s value each year for ongoing maintenance and repairs. Whereas with renting, the landlord typically covers these bills, unless otherwise stated in your rental agreement.
  • Long-term commitment: With a property purchase, you’re saying yes to staying put for a prolonged period if you want to reap a decent return on your investment. Selling your home can be expensive and take a lot of work. Even if you sell and turn a profit, a portion goes towards paying realtor’s fees, staging costs, land transfer taxes, legal fees, and more. Renting isn’t as intricate: Once the lease is up, you’re free to move.

Renting rally (the pros)

At some point in your life, someone has probably warned that renting is “throwing your money away.” Well, here’s the good news: That’s not necessarily the case. Read on for the positives:

  • Flexibility: You’re not tied down. Once your lease is up, you can move.
  • Minimal startup costs: There’s no need to fork over a five- (or six!-) figure down payment plus closing costs to snag a place. Usually, all you need is a deposit.
  • Affordability: Depending on where you live, you can likely get a deal on rent due to the effects of the pandemic. Plus, homeownership sucks up a lot of cash for unrecoverable holding costs. By contrast, you won’t have to deplete your savings to get into the rental market. Instead, you can put those dollars saved towards your TFSA or RRSP—or a down payment for a home down the road.
  • Less hassle: If the toilet leaks or the fridge breaks, your landlord or property manager is on the hook for the fix.

Renting woes (cons)

There are excellent reasons to rent. But, like anything, there are some downsides to consider, too:

  • Instability: The landlord can increase the rent, change the rental terms, or even evict you when the lease expires.
  • Lack of equity: Owning your home can be a good investment and a wise financial move. But in this instance, you’re handing over a big cheque every month that goes towards paying someone else’s mortgage.
  • Landlord: You may be living there, but you can’t rip out that ugly carpet without the landlord’s permission. Also, some landlords do the bare minimum when it comes to property upkeep.

Ready to decide? Ask yourself these key questions first

Deciding whether to rent or buy is a personal choice—despite market conditions or global impacts. Before making the final call, make sure you can answer the following questions about affording a home:

Are you financially ready?

First and foremost, assess your financial readiness to buy a home. Start with a budget forecast to see how your cash flow will be impacted before and after buying a property. Factor in ongoing homeownership costs—utilities, insurance, maintenance and repair, condo fees, property taxes—which can swallow up a big chunk of change each month. If you find yourself in the negative after adding in these costs, consider holding off on a home purchase.

Next comes a financial fitness check-up. Got debt? Get it paid off ASAP. Check your credit score, and if it’s in the dumpster, take steps to repair it immediately. Identify your short- and long-term financial goals and create a comprehensive plan to achieving them. You can even enlist a financial planner to help. These small steps will benefit you big time when applying for a mortgage and get you one step closer to homeownership.

How long will you live there?

Real estate is an investment—and that means holding on to the property for several years to reap a return. A home is a very valuable asset: besides being able to put down roots and decorate your house how you want, you’re building equity and increasing your net worth with every mortgage payment you make.

As the saying goes, timing is everything. Take the time to break out the costs, and take a good look at your current situation and the next five years. If you only plan to stay for three years or less, renting may be the better choice.

What can you afford?

Before house hunting, figure out what you can afford. As a general guideline, the Canadian Mortgage and Housing Corporation recommends spending no more than 32% of your gross (pre-tax) income on housing. So, if your before-tax monthly income is $5,000, the maximum you should be paying for rent or a mortgage is $1,600. And then there’s the downpayment to consider.

“It’s challenging when you’re saving for a down payment and ready to buy, only to watch prices rise faster than you can reasonably save,” says Engen. “For example, if you’re targeting a 20 per cent downpayment on a $600,000 home, then you know you need to come up with $120,000. But if that $600,000 house is suddenly selling for $720,000, then you need to save $144,000. It’s not easy. ”

In doing the math, you may realize that buying with your current salary, downpayment, and location would make you “house poor.” In that case, renting may be the right choice. However, if rent is sky-high and interest rates are low, paying a mortgage may be the more affordable option.

“In markets where home prices have increased dramatically, it’s probably best to rent unless you have a significant source of funds for a down payment,” says Engen. “In lower-priced markets, houses are still very affordable. The key is knowing what you can afford. If you do decide to take the plunge and buy a home, go into it with eyes wide-open to the other costs involved, such as property taxes, home insurance, and maintenance.”

Crunch (and compare) the numbers

Do a comparison of how much you could potentially save by renting. Here’s an example: consider the average cost of buying in a hot market like Toronto: The average price of a home is $1,089,536, which is roughly a $3,607 monthly mortgage payment.* That does not include any ongoing and unrecoverable holding costs, such as property taxes or condo fees. Meanwhile, the average rent in a prime downtown Toronto neighbourhood sits at $2,212 per month. Based on these estimates, renting could cut your monthly housing costs by $1,300 per month or more, depending on the size and location of the property.

“Rent vs. buy is very much driven by your local housing market and your personal financial situation,” says Engen. “We’ve seen housing prices rise 20 to 40 per cent in many areas across the country, but rents are also on the rise in some areas. Other areas, like Alberta, Manitoba, and Newfoundland, have not seen prices rise much at all.”

You can use our mortgage calculator to estimate your monthly mortgage payment and how that figure compares to rent. You can also use the Coast Capital mortgage pre-approval application online to find out in 10 minutes how much you can borrow.

*Based on a 20 per cent down payment, a 25-year amortization, and a five-year term at 1.80% interest.

Remember to trust your gut

Weighing the pros and cons, assessing your financial readiness, and reflecting on your short- and long-term goals are excellent first steps to choosing whether to rent or buy. But most important, it’s also about how you feel about the decision. If owning a home is a life-long dream, there’s nothing wrong with pursuing that goal.

At the same time, you shouldn’t feel you are wasting your money renting—it’s a perfectly reasonable choice that allows you to focus on investing and other financial goals instead. And when the right time comes, you’ll be in a great position to pursue ownership if you so wish. “This is an emotional decision as much as a financial one,” says Engen. “If you have a partner, make sure you’re on the same page with your goals and your budget.”

Whatever your path, Coast Capital is here to help. Book a chat with a Coast Capital financial expert, who can help you create a plan to achieve your financial goals. You can also check out our Guide for First-Time Home Buyers.

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