Renting vs Buying a House - The Great Debate

It’s the age-old debate. Do I rent or do I buy?

Renting

Paying rent is often the first step for someone after they leave their parents’ home. Whether it’s in a university dorm or a room in a house full of friends, most of us get our feet wet in the real world by paying somebody else for a place to live.

And there’s absolutely nothing wrong with that.

In fact, renting is a good way for people to live within their means, should they find a suitable place for the right price. Although it’s true you are paying, or helping to pay, somebody else’s mortgage, too many times people see this as the sole reason to buy their own home and become house poor in the process because there’s more to home ownership than mortgage payments.

By renting within your budget you avoid the ‘hidden expenses’ that come with home ownership, like higher refinancing mortgage rates, property taxes, and on-going upgrades and repairs. In some cities in Canada, renting is about the only option for people because of high housing prices in urban areas and their ever-expanding suburbs.

But renting does have its pitfalls. The saying is 100% true – you are paying someone else’s mortgage by renting their house or apartment. You also don’t build a credit rating by renting, nor do you have any say in the actions of your landlord/property owner, who could literally sell the house out from under you, leaving you in a tight spot and possibly in search of a place to live in a housing market that has skyrocketed since you were last on the market, throwing your budget for a loop.

If you are secure financially and have a higher standard of living than your average college student, you may want to explore home ownership, because there’s a chance you’re paying the same in rent as you would for a decent home in your neighbourhood.

Buying

Many people dream of owning their own home. Some rush into home ownership before they’re financially ready, although those days have probably come to end with the implosion of the ‘zero down’ mortgage, which gave many people a false security of thinking they could afford more house and therefore a bigger home loan because nothing was coming out of their pocket before they were handed the keys.

There are a lot of positives to home ownership that are fairly obvious – a secure place to live, a personal asset, a possible source of income whether through renting or resale – but a person must be prepared for the extra expenses like property taxes, repairs, etc., that are ever-present with home ownership. If you take on too much house – a mortgage your income can barely afford to pay – you run the risk of becoming house poor, and suddenly you’re living a life of much higher stress than somebody who is paying their rent each month and sleeping soundly every night. One financial hiccup – a broken furnace or the need to buy a new car – could put you over the top and in danger of not meeting your mortgage requirements.
It is important to budget accordingly for these costs when deciding how much you can spend on a home. The financial institution you choose will be able to help you with this.

Things to think about

Do you plan to move a lot in the future? If so, renting poses less risk than buying because you have nothing tying you down once your lease is up, if you even are required to sign one

Can you pass up these microscopic interest rates? The Bank of Canada, and the major lenders in turn, have cut interest rates in an attempt to spur homebuyers to take out mortgages. This February, the interest rate in Canada is a shocking 1%, down substantially from last February’s mark of 4%. Since 9/11, interest rates have stayed below 5% to stimulate spending, and the highest mark they’ve hit in the past decade was October, 2000, at 5.75%

How stable is your employment? Times are tough these days and most people could be downsized from their job at a moment’s notice. People without mortgages have much more flexibility because they can always reduce their monthly expenses by renting a smaller apartment, while people who own homes will have the same mortgage payment whether employed or not and will likely struggle to sell their home if it comes to that, during this economic downturn

Can you take advantage of a depressed market? The Canadian Real Estate Association said the number of houses sold through MLS in January, 2009, (16,343) was down a staggering 40.9% in January, 2008. As the economy continues to sputter, the more manufacturing jobs are lost, and the price of oil stays below $50 per barrel, the better the chance of much lower housing prices. People are going to need to sell, and if you’re in the position to buy, chances are good you’ll be able to capitalize on the buyer’s market

Are you over-extending yourself by buying? There are a lot of hidden costs aside from your mortgage – taxes, condo fees (where applicable), repairs – that may leave you ‘house poor’. Not only will this affect your way of life now, it could also hamper your ability to save for retirement. Renters have only two main housing expenses - rent and utilities