The “rent versus buy” choice is indeed a life changing decision for you and your family to make. There are many pros and cons on both sides. Some of you may be struggling with the 5% down payment requirement to qualify. Others may have a blemish on their credit bureau report that prevents a lender and the insurer (CMHC/Genworth) to approve you. These are both challenges which we are often able to find solutions for, or at least provide our clients with a game plan going forward to resolve these issues.
But the real question is…should you be even considering a purchase instead of continuing to rent? I will try to answer this question from strictly a financial point of view only, but would add that most home owners do indeed enjoy the pleasure of being the actual owner instead of being the tenant (privilege of changing wall colours, upgrading bathrooms and kitchens to their preference, etc). However, what are the differences in payments (mortgage versus rent)? Will you be better off to buy rather than rent? Is the timing of the real estate market right? In this blog, we will answer this in regards to financing.
Say you rent a top portion of a house that rents out for $1200. The basement suite rents out for $800. Therefore, the landlord receives $2,000 a month for rental income. How would it look if you were to own a property like this?
Purchase Price of a similar home: $320,000
5% Downpayment: $16,000
Using a rate of 3.04% and amortized over 25 years, your monthly mortgage payment is: $1,484.65
With property taxes roughly $200 a month, your total PIT (Principal, Interest, Taxes) is: $1,684.65
This would be roughly $485 higher if you were to occupy the whole house:
($1,685 mortgage payment – $1,200 rent) = $485 difference.
However, what if you had someone renting YOUR basement suite that rents out for $800…
($1,685 mortgage payment – $800 rent) = $885
Your new monthly costs would be $885. Your tenant not only pays you $800 in rent, but allows you to pay less too! Want some more good news? If all you did was pay your monthly payments (no lump sums, etc.) you will have paid down your mortgage by $45,167 after 5 years! That is an average of $752 every month paying off this debt!
Generally, if your rent is higher than a mortgage payment, the decision is pretty clear. But in the example above, a house with a “mortgage helper” and understanding that your mortgage payment is not all interest (average over 5 years, about 50% of your mortgage payment is principal reduction and reduces debt) makes it even more worthwhile and a great investment over time. Interest rates are near all time lows and house prices here in the Okanagan today favor buyers. The choice to rent or to buy is ultimately yours to make!