To Rent or Buy? | Guest Author: Beth Ann Bone
The home ownership rate in Canada sits at almost 68%, higher than the United States, the United Kingdom and Australia. A generation ago, the answer to the question of whether to rent or buy was simple. Owning a home was on the trajectory for every adult who attained a secure job. It signalled personal and financial success, helped ground families, communities and society at large. Even through the double digit mortgage rates of the 1970’s and 1980’s, people valued owning homes and considered it “good debt”.
Today, the landscape has changed. Property values have appreciated steeply in cities where most jobs exist. The threat of rising interest rates hangs in the air; adults are graduating from post secondary institutions with large student debt and to cap it all, income growth has flatlined with a steady decline in well paid, secure and full time jobs. Home ownership is riskier than it was a generation ago and consequently, renting presents a much better choice for some people.
Benefits of Renting
Our jobs often dictate where we live. With part-time, temporary and contract work on the rise, many individuals rightfully hesitate taking on the commitment of home ownership. Renting offers flexibility and less financial risk, particularly if you are in the early days of your career and your job prospects change. It permits you to easily pack up and relocate to different cities or countries to pursue your interests.
Home ownership is expensive. In addition to the mortgage debt, homeowners incur costs like property taxes, maintenance, repairs and upgrades. Without these overheads, renters can be more successful with paying down debt, saving for annual vacations and preparing for retirement.
Young couples, who also plan to raise a family, must step into homeownership very carefully. The cost of raising children, especially in cities like Toronto, can be very high. Your cash flow could become strained. Consider if all exisiting costs along with childcare, saving for a retirement as well as your children’s higher education will be manageable on your household income. This is often the point where families unsuspectingly spiral into credit card debt or have trouble catching up with payday loans.
All these factors can make renting a less risky financial decision compared to buying a home.
Should You buy?
Regardless, there are legitimate reasons for wanting to own your own home. It can offer you security and privacy. It will allow you to establish roots and build your equity as well as your credit rating. But this is only true if you can manage, financially.
If you are debating whether to rent or buy, then first put a lens on your financial readiness for home ownership. Determine how secure your income is, the size of your existing debt and the amount of downpayment you have saved. First-time home buyers can tap into our federal government Home Buyer Plan which allows you to use your RRSP contributions as downpayment. With these numbers on hand, visit your bank to assess whether you qualify for the new Canadian mortgage rules.
A home will likely be the largest purchase you will ever make. Putting all the costs down on paper will help you visualize whether the cash flow will be manageable. Speak to family members or other homeowners about all the carrying costs you can expect to pay, once you own a home. As a general rule of thumb, your housing costs should not exceed 30% of your income.
In addition, consult a real estate agent to help you summarize closing and moving-in costs associated with a home purchase. First-time buyers who do not plan for these expenses may be in for a rude awakening.
Home Ownership & Retirement
Buying a principal residence with a plan to sell it in the future to fund a retirement was a viable financial planning stratgy over a decade ago, when home prices were low and just at the cusp of rising. Today, this is no longer recommended. Seniors increasingly opt to live in cities to access health care services or to be closer to family. There is no guarantee your home will yield enough retirement cash, particularly if you must also buy another property to live in. Accordingly, ensure you buy a home for the right reason.
Regardless of whether you choose to rent or buy, your decision should help you move ahead financially, and not backwards. In either situation, ensure you are paying down your debts, adding to your emergency fund and taking care of long-term savings, like your retirement.
Beth Ann Bone, a Senior Financial Administrator and Insolvency Counsellor, is guest author for Family and Credit Counselling Services, a blended not-for profit community-based agency offering debt counselling & management as well as family/individual support services within York region.