Making the Right Move: Renting vs. Buying

As interest rates fluctuate, prospective buyers are encouraged to weigh the advantages and disadvantages of renting versus buying. When interest rates are high, renting might be more favourable for some as they can avoid long-term mortgage commitments and higher borrowing costs. On the other hand, when interest rates are low, buying might be the better option since homeownership might be more financially viable.

Let’s take a look at the other considerations that come into play when comparing renting and buying.

Considerations for Renting vs. Buying

The duration you plan to stay in a home is one key consideration. Long-term stays may make purchasing more cost-efficient, as property values tend to appreciate over time, and transaction costs are spread across a longer period. Conversely, if your stay is short-term, renting may be a more suitable option.

For example: if you invest in a $400,000 property with a 3% annual appreciation rate, the home's value could reach $970,905 after 30 years. Selling the property after 30 years, with assumed closing costs of 5%, would entail expenses of $48,545. However, the property's value has risen by $570,904, covering the closing costs fully.

In contrast, purchasing the same $400,000 house with a 3% growth rate results in a value of $412,000 after one year. Selling after a year, with assumed closing costs of 5%, would mean expenses of $20,600. The home appreciated by $12,000, not enough to cover the closing costs incurred during the one-year ownership.

Now let’s take a closer look at the advantages and disadvantages of buying a house versus renting

Advantages of buying a house

Stability

Owning a home provides stability, unlike renting where eviction risks exist. In certain provinces like Ontario, landlords can evict tenants for reasons like renovations, selling, or personal use. As a homeowner, you avoid these uncertainties and can lock in a consistent mortgage payment with a fixed rate for up to 10 years.

Long Term Investment

Owning a property is a smart long-term investment. If the property value increases over time, you can benefit. If it's your main residence, you usually don't pay tax on the gains when you sell.

Extra Income

Homeownership allows you to rent spare rooms or floors, and all the rent goes directly to you. This extra income can help you pay off your mortgage faster.

Disadvantages of buying a house

Home Maintenance Costs

As a homeowner, you're responsible for all maintenance expenses to keep your home in good condition. This includes routine upkeep and repairs. In a condo, you might face special assessments for unexpected repairs like fixing the roof or increased insurance costs. For a house, you'll need to cover expenses like lawn care, winter maintenance, HVAC, roofing, and appliance repairs.

Limited Flexibility

Compared to renting, owning a home offers less flexibility. While owning property is an asset, it lacks liquidity. Selling your home can take time, and accessing your home's equity without selling often requires qualifying for financing. Also, there might be tax implications of gains when selling your residential home.

Reduced Disposable Income

Owning a house is a significant responsibility that often involves taking on substantial debt. This can limit your ability to invest money elsewhere and leave you with less money for other needs and desires. Homeownership may also lead to additional expenses, such as buying new furniture, upgrading appliances, or making home improvements, all of which contribute to reduced disposable income.

Advantages of renting

Flexibility

Choosing to rent provides flexibility and ease of movement. After your lease term, giving a standard 60-day notice is typically sufficient, and you can relocate without facing financial penalties, unlike a mortgage commitment. Renting is ideal for those who anticipate frequent moves due to factors like school, work, or personal preferences.

Affordability

Renting is often more cost-effective as you only need to pay the first and last month's rent and a possible security deposit. Rent may also cover utilities, hydro, cable, and internet expenses. Rental fees are generally much lower than a mortgage down payment, making renting a budget-friendly choice, especially if you don't plan on staying in the same area for an extended period.

Maintenance Responsibility

Renting appeals to some because maintenance and appliance repairs are the responsibility of the homeowner or property manager. This arrangement saves both money and time, as you don't have to deal with the hassles of upkeep.

Disadvantages of renting

The Landlord is the Decision Maker

When you rent, you're essentially a guest on someone else's property, and they have the authority to make decisions. Landlords have the final say on renovations or changes to the home, and they can evict tenants within reasonable limits.

Potential Instability

Renting carries the risk of eviction, and depending on provincial laws, landlords might have the ability to increase rent, with varying limits on how quickly they can do so. This unpredictability can lead to financial challenges for tenants, making it difficult to plan for retirement, especially for those intending to rent for a lifetime.

Lack of Equity Building

The monthly payments you make as a renter contribute to someone else's mortgage, and you don't gain equity in the property. This means you won't have an ownership stake or an asset that can appreciate over time.

Whether you opt for renting or buying a home, achieving a financially stable lifestyle requires careful budgeting. Your decision should align with your unique circumstances, considering factors such as commuting costs, location, and unforeseen emergencies. While high interest rates may impact the attractiveness of buying, and low-interest rates may influence the appeal of renting, everyone's financial situation is different. It's important to do your own thorough research and analysis, taking into account your short-term and long-term goals. Remember, your financial journey is unique, so tailor your decisions to suit your individual needs and goals.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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