Renting vs. Buying
A time old question: Should I rent or should I buy?
There are a thousand cases that can be made for both sides so let’s break it down from a financial perspective and see where things end up!
Let’s make some basic assumptions as we work through this Rent vs. Buy budget.
- Every day costs will remain constant (ex. food costs, internet, telephone, fuel, car insurance, etc.).
- The size of the home/rental unit are similar (which applies to heating and electricity costs).
- Heating costs (we’ll use gas/propane in this situation) will have minor fluctuations, but will mostly stay constant (the responsibility of the tenant).
- Electricity will have minor fluctuations, but will mostly stay constant (the responsibility of the tenant).
- Tenant insurance is something that is purchased when renting vs. home insurance when purchasing.
We’ll work with a 2 bedroom, 1 bathroom home in Ontario, Canada as the home that you’re renting/purchasing.
5% down payment (insured mortgage example):
Rental (approx.): $2,500 per month
Purchase Price (approx.): $500,000
Let’s say that you, as a buyer aren’t willing to put a down-payment anymore than 5% of the purchase price. That means that you would be required to purchase mortgage insurance, which is a percentage of the purchase price.
- Price: $500,000
- Down payment: $25,000 (5%)
- Purchase Financing: $475,000 (LTV 95%)
- Mortgage Insurance: $19,000 (4%)
- Total Mortgage: $494,000
- Interest rate: 5.30%
- Amortization Period: 25 years (only option with an insured mortgage)
Using the above figures the monthly mortgage payment is $2,958.07.
So, in this particular case: Renting vs. Buying = $2,500.00 vs. $2,958.07 = $458.07 extra to purchase PLUS Property Taxes $250/month (approx.) = Total extra $708.07/month.
Having said that, when you’re paying $2,500/monthly in rent you aren’t building any equity. When you are paying down the mortgage on your home purchase at $2,958.07/month the following principal gets paid off the mortgage in the first 5 years:
- Year 1: $9,544.50 (monthly avg: $795.38)
- Year 2: $10,062.83 (monthly avg: $838.57)
- Year 3: $10,609.31 (monthly avg: $884.11)
- Year 4: $11,185.46 (monthly avg: $932.12)
- Year 5: $11,792.91 (monthly avg: $982.74)
While at first the $708.07/month might be daunting, as it increases monthly payments from the rent the reality is that through paying down your mortgage you’re actually acquiring an investment every month (in equity in your home).
20% down payment (insurable mortgage):
For this example we’ll use everything from the above example, but instead of a 5% down payment we’ll use a 20% down payment. Here is the information used for the calculations:
- Price: $500,000
- Down payment: $100,000 (20%)
- Purchase Financing: $400,000 (LTV 80%)
- Mortgage Insurance: $0 (Because 20%+)
- Total Mortgage: $400,000
- Interest rate: 5.30%
- Amortization Period: 25 years (only option with insured mortgage)
Using the above figures the monthly mortgage payment is $2,395.20.
So, in this particular case: Renting vs. Buying = $2,500.00 vs. $2,395.20 = $104.80 extra to rent PLUS Property Taxes $250/month (approx.) = Total extra to purchase $145.20/month.
So, again, looking at the mortgage and the equity you’re gaining as you pay into the mortgage, the principal being paid off for the first 5 years are:
- Year 1: $7,728.34 (monthly avg: $644.03)
- Year 2: $8,148.04 (monthly avg: $679.00)
- Year 3: $8,590.53 (monthly avg: $715.88)
- Year 4: $9,057.06 (monthly avg: $754.76)
- Year 5: $9,548.91 (monthly avg: $795.74)
It’s plain to see, especially in this example, that the additional $145.20/month is well worth the strain when it comes to the gains in equity!
Any mortgage broker, or Realtor, should be able to walk you through these types of scenarios. The above are only to be used as illustrations, but very much reflect what could happen in a real life scenario!
