There is a lot of conflicting information out there about whether it is better to rent or to buy. It wasn’t that long ago that it seemed that it was the dream of every Canadian young adult to purchase their very first home. But now, with real estate prices on the rise, some are wondering if buying a home is worth it.
In this article, we will look at two different scenarios that compare renting to buying a home in Toronto which will hopefully give you a clearer picture of what is the right option for you.
Let’s start by imagining that you are renting at a rate of $1800 per month but have been pre-approved for a mortgage of $600,000 with a 5% down payment. If you were to go ahead and purchase a condo, your all-in fees (mortgage, taxes, and condo fees) would be $2800 per month - $1000 more per month than you are paying on your rent.
And first glance, it might look like the smart decision would be to save that extra $1000 per month so that you could put down a larger down payment in the future.
But let’s examine this a little further.
Scenario 1 – Keep Renting,
The longer that you continue to rent, the more presumably you should be able to save up for a down payment right?
In 2 years, you would be able to save up $24,000; and in 5 years you would be able to save up $60,000.
Keep in mind however that over the next few years, your rent is likely to increase – but for the sake of simplicity, we are not going to factor this in.
Scenario 2 – Buying a Property
Now say you were to purchase your $600,000 property. Over the course of 2 years, you would pay down the principal on your mortgage and you would have $542,900 still owing. You would also have $57,100 build-up in equity – that’s $33,100 more than you would have saved while renting.
In 5 years, your mortgage would be down to $499,865 and you would have $100,135 in equity. That’s $40,135 more than you would have saved while renting.
Property Value
Now you may look at these scenarios and figure that they are really not that much different from each other. But thinking this way is a mistake. It is important to remember that over time, property values go up.
On average, properties in Toronto increase by about 6-7% per year. But let’s be really conservative here, and estimate only 3% annual growth.
At this rate, the potential resale value of your property would be $635,540 in 2 years. So, with $542,900 left on your mortgage, you would see a profit of $92,640.
And if you sold your property after 5 years? At 3% annual growth, the property would be worth $695,564. So, with $499,865 left on your mortgage, your profit would be $195,699.
So, is it better to buy or to rent?
Going back to our original scenarios. In 2 years’ time, you can either continue to rent and save $24,000 toward a property that will continue to rise in price and be worth $635,540 instead of $600,000. Or you can purchase at $600,000 now and in two years' time, you will have gained $92,640 in equity between the amount you have paid off on your mortgage and the amount of value your property has gained.
In 5 years’ time, you will have either continued to rent, thereby saving $60,000 toward a property that will be worth $695,564, or you will have purchased your property for $600,000 and gained $195,699 in equity between the amount you have paid off on your mortgage and the amount of increase in property value.
Renting or buying is a decision that you will have to make for yourself – but by our math, the answer is clear. If you are ready to jump into home ownership, contact us today to get started.
