The choice between renting a home or purchasing it can be difficult to make. Both options have their pros and cons. However, your decision should be based largely on your own personal needs, life goals, and financial well-being.
However, If you’re still on the fence about whether it would be better to rent or buy your next home, keep reading. Below, we’ve provided a list of advantages and disadvantages that should help you make your decision on whether to rent vs buy.
Key Points Between Renting vs. Buying A House
- Buying a home allows you to build equity and provides you with the freedom to do with your home as you please.
- Renting may be more affordable, flexible, and doesn’t come with the responsibilities of ownership.
- The decision to rent vs buy should be based on your lifestyle, financial situation, and future goals.
Advantages Of Buying A Home
As expensive as a typical mortgage can be, there are plenty of reasons why you might choose to be a homeowner. In fact, for many people, owning a home is their ultimate goal. Here are just some of the ways homeownership could benefit you.
Build Equity
As you pay off your mortgage, you’ll be building equity in your home. Equity refers to the difference between the current value of your house and the amount still owed on your mortgage.
For example: let’s say you currently owe $200,000 on your mortgage and your home’s current value is $400,000. That means you’d have $200,000 in equity ($400,000 – $200,000).
Why Is Equity Valuable?
Home equity is valuable because it can be used as collateral, which can help you get approved for better loans with low interest rates. You can also access your home equity whenever the need for money arises in the following ways:
- Home equity loan. This type of loan uses your home as collateral. You can access up to 80% of your home’s equity in one lump sum, then repay your home equity loan via installments, much like a standard loan.
- Home equity line of credit (HELOC). Alternatively, you can access your home equity through a HELOC, or line of credit. You can dip into this account when you need to cover various expenses, then pay it back over time, similar to a regular line of credit.
Keep in mind that you’ll still need to qualify for a hoe loan, which can be tricky for seniors on a fixed income.
Build Wealth
Depending on the location of your home, it can become a very valuable asset over time. In a lot of major Canadian metropolitan areas, such as Toronto or Vancouver, real estate prices have been skyrocketing over the last few years. Even an empty plot of land in one of these cities can be worth a small fortune.
So, once you’ve paid off your mortgage completely, your home becomes a valuable asset that contributes to your overall wealth.
Use Your Home to Generate Income
Another advantage of owning a house is the ability to lease out a room or whole section, like the basement, to a renter. The rent you collect can go towards paying your mortgage. Once your mortgage is paid off, you can put the rental payments towards other things, like investments.
Make It Yours
You may already have imagined the house of your dreams. The paint colour, the furniture, and the additions you’d like to install. In contrast to renting, where you generally aren’t able to modify all aspects of your living environment, owning a home does not limit your creativity as long as you adhere to local by-laws.
The exception to this is if you own a condo, in which case you’ll have to adhere to the condo association’s rules).
With a home, you’ll be able to make a home that reflects your own personality. Additionally, any renovations you make can boost the value of your home. This may help you increase your equity and even profit margins if and when you decide to sell it. If not, you can always pass it down to your children. Just make sure
Disadvantages Of Buying A Home
While the benefits of becoming a homeowner are numerous, there are also drawbacks to such an investment.
High Costs
As great as it can be, owning a home is expensive. In addition to your down payment and mortgage payments, there are other hidden costs that many homebuyers don’t consider, such as a home inspection, property taxes, and legal fees. These are costs you don’t have to worry about when you rent.
Then there are all the ongoing costs to operate your home, like your hydro bills, gas bills, and other utilities you need to keep your home comfortable. All these expenses can make it hard to afford your other basic necessities.
Ideally, your housing costs should only represent roughly 39% of your income, but this may be quite hard to achieve considering the countless costs associated with buying a home. And if you’re buying a home in a particularly expensive housing market, such as Toronto or Vancouver, staying within this 39% threshold can be even more difficult.
Maintenance And Repairs
Homeownership also means taking on all the responsibilities that come with it, including the property upkeep. Regular maintenance, like servicing your appliances or tending to your landscaping all take a lot of time, effort, and money.
Then there are repairs that you’ll inevitably have to deal with as components of your home start to age. At some point, you may have to repair the roof, fix cracks in the foundation, or seal leaks in windows and doorways.
While these unexpected costs shouldn’t deter you completely from the idea of homeownership, it’s best to realize how significantly they impact your budget before you sign any contracts.
Inflexibility When Moving
Another element that some would consider negative is the act of putting the home up for sale and waiting for another homeowner to buy it. Unlike renting, which only requires a certain amount of notice to your landlord, moving when you own a home is much more involved and time-consuming.
Plus, listing your home for sale and selling is very expensive. The costs that come with paying a real estate agent to help you sell your home are astronomical, especially when considering the rising cost of housing in Canada. A 5% commission on the sale of a $500,000 home, for instance, will cost you $25,000 plus tax.
In addition, depending on the temperature of the market, you could be waiting weeks before finding a willing and interested buyer. This can make it even more difficult and complicated to move.
Advantages Of Renting
If the idea of being responsible for your own home is too nerve-racking for you, there’s also the option of renting your next space. Renting may not be the best choice if you want to build equity or make renovations, but it may be the right option for the following reasons.
Limited Responsibilities
One of the biggest perks of renting is that your responsibilities are relatively limited when it comes to maintenance and repairs. Your landlord will be responsible for the majority of these time-consuming tasks.
Relatively Low Costs
Over recent years, rent prices across Canada have soared, right along with housing prices. As such, rent prices are often comparable to monthly mortgage payments. That said, monthly rent may still be much lower than mortgage payments, especially when considering the hefty mortgage amounts many homebuyers take out and the sky-high interest rates attached to them.
You can make renting even more affordable by finding a roommate to share the costs. Some landlords may even throw in perks, like one month of free rent or free basic digital cable packages, for instance.
Lower Barrier Of Entry
Renting is a more accessible option, since there’s no need to come up with a down payment. Plus, there are far fewer requirements compared to getting a mortgage.
While many rental agreements require a credit check, you won’t be held to the same standards as applying for a mortgage with a bank or other prime lender. At a bank, if your credit score or net worth isn’t up to their standards, your mortgage application could be denied, costing you time and points off your credit score because of “hard inquiries”. Landlords, on the other hand, only want to know that you can pay your rent, and any credit check they perform is a “soft inquiry”.
Utilities (Often) Included
If saving money is at the top of your list, renting can be a great option, as some landlords offer utilities included in your rent. This can make budgeting easier.
More Flexibility
When you rent, you don’t have to go through the hassle of putting your house up for sale and dealing with finding a buyer, negotiating a sale, and processing all the legal paperwork. Instead, renting allows you flexibility if and when you decide to move. As long as you give your landlord enough notice before vacating, gather your belongings and move into your next rental unit.
Disadvantages Of Renting
While renting has many advantages that outweigh homeownership, as with any real estate transaction, it’s important to learn about its drawbacks.
No Equity
When you’re renting, you’re not building any equity. Every rent payment you make is going toward paying someone else’s mortgage. You’ll be left with no asset of value, and no equity to tap into if the need for extra money ever arises.
Dependent On Your Landlord
While your landlord being responsible for the maintenance of your rental property can be a benefit, it can also be a burden. If your landlord is not the type to take immediate action or is only available at inconvenient hours, you may end up waiting longer than you want for something that should be an easy fix.
No Guarantee
Unfortunately, there are also no guarantees when it comes to renting. The cost of your rent may increase whenever your landlord is legally allowed to raise your rent in the area. Further, your building could be sold to a new owner or your lease may not get renewed. This will leave you looking for a new home, even if you would have preferred to stay put.
However, keep in mind that many laws in Canada protect renters from issues like this. If you feel you’re being mistreated as a renter, refer to your province’s laws concerning these problems.
Who Should Rent?
You should consider renting if …
- You don’t have enough for a down payment. A down payment is required for a mortgage. Even if you can secure a “no down payment mortgage“, you still have to get the money from somewhere for the down payment (ie. borrow the money or receive a monetary gift).
- You can’t afford a mortgage or the ongoing operational costs. Paying a mortgage and covering all the ongoing bills and property taxes can add up to tens of thousands of dollars every year. If you can’t afford these costs, or simply don’t want to pay these expenses, renting may be a better choice for you.
- You want the freedom to move frequently. If your job requires you to relocate every so often. Or, you simply like the idea of being able to pick up and leave when you want (within reason). In these cases, renting offers much more flexibility (and cost savings) when moving and finding someplace else to live.
- You don’t want the responsibilities. If you like having someone else tackle all the maintenance and repairs of your home, renting may be the way to go.
Who Should Buy?
You should consider buying if …
- You can afford a down payment and mortgage. If you’re financially capable of paying a mortgage and are content staying put for at least a few years, then buying makes sense.
- You want to build equity and wealth. Rather than paying your landlord’s mortgage, you could be paying your own and putting money into something you possess. As the value of your home appreciates and your equity accumulates, you’ll have something of great value over time that you may even be able to borrow against or use as collateral for various financial ventures.
- You want freedom in your home. You don’t need your landlord’s permission to paint your walls a certain colour or even get a dog. As the owner, you can make these decisions on your own.
- You want a place to call yours. There’s something about buying your own home. It’s yours. You’re not living in someone else’s place. Plus, your home is also something you can pass down to your kids if you so choose.
How To Make Buying A Home More Affordable
Several government programs are available to eligible borrowers to make buying a home less expensive, including the following:
Home Buyers’ Plan (HBP). The HBP allows first-time homebuyers to borrow up to $60,000 from their RRSPs for a down payment on a home.
First Home Savings Account (FHSA). This program helps qualifying homebuyers save as much as $40,000 in a tax-free FHSA account. The money can be used toward the purchase of their first home.
First-Time Homebuyer Tax Credit (HBTC). First-time homebuyers may be eligible for the non-refundable HBTC, which can be claimed up to a maximum of $1,500 within the year that the home was purchased.
GST/HST New Housing Rebate. You may qualify for the GST/HST New Housing Rebate if you purchase a new home. If you live in Ontario or BC, you can also claim the provincial portion of HST.
Multigenerational Home Renovation Tax Credit (MHTRC). If you have extended family living in your home and need to make changes to accommodate them, you may qualify for the MHRTC. This credit provides you with up to $7,500 to cover the cost of these modifications.
Home Accessibility Tax Credit (HATC). Seniors who update their homes to make them more accessible may qualify for the HATC, a non-refundable tax credit of up to $3,000.
Final Thoughts
Renting and owning have plenty of pros and cons to each. Your decision on which route to take should be based on your financial health, future aspirations, and lifestyle. If you choose to make a home purchase, Loans Canada can help find you the right mortgage lender that meets your needs and wants, regardless of your credit.
Rent vs. Buy FAQs
What’s the average cost to rent in Toronto?
What’s the minimum down payment needed to buy a home in Canada?
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