I believe the math below is correct and the examples reasonable but I have not yet audited the math. There may also be factors I haven’t listed below. This page is a work in progress!
This is a question many people will face. And there isn’t a simple buy/rent answer. It depends on factors going on in your life as well as things going on in society.
Questions to ask yourself:
- How long will I be staying in this one place?
- How much is rent versus mortgage payments?
- Can I afford the costs of ownership that are hidden by rent? (maintenance, property tax, HOA/Condo fees, etc)
- Can I afford the house I want?
- Can I qualify for the mortgage?
- Do I have the down payment?
Long term, real estate appreciates at the rate of inflation. Short term, there is a cyclic nature to housing prices, shaped like an S.
Huffington post reports in Jan 2019 the average Canadian resale house was $455,000.
Property tax rates vary from .25% in Vancouver to 1.35% in London Ontario or 1.785% in Saint Johns. Of the 25 major centers, numbers 11,12,13 ranked 1-25 in rates come out around 0.87% so we will use this rate below.
Most provinces have a Land Transfer Tax. Alberta doesn’t at the time this page is written.
ComFree reports that 28% of homeowners move every five years and that 14% of Canadian homeowners move every year.
At the time or writing this page, the 5 year fixed mortgage rate is 3.29%. For the purposes of this page I am going to assume you take this rate with a 25 year amortization and monthly payments.
On the $455000, this will be $2,221.54 per month, with $69,347.42 paid in interest and 63,944.98 principal pay down over the 5 year term leaving a balance of $391,055.02 . NOTE: Every time you take out a CMHC insured mortgage you pay their fees. So moving lenders means you pay this 4% each time until you have your 20% down.
Property Rebuild insurance (my broker lets you adjust the amount of your contents coverage so you can easily calculate this portion…) is about .5%/year.
In the Calgary region, Realtor fees on the sale is about 4%. (7% 1st 100000, 3.5% after). Legal fees do add another $1500 or around 0.8%.
The Costs for owning a house that renters don’t have
Mortgage Interest + Amortization: = ~7.29%/year
Insurance: ~ 0.5%/year
Property Tax: ~ 0.87%/year
Maintenance or Maintenance Reserve: ~1%
The Costs Renters will have versus a mortgage
For landlords that want to continue being landlords, they need to cover their costs. This means the mortgage, insurance and maintenance costs above need to be covered by the rent they collect.
If you found a house you loved and convinced a landlord to buy it so you could rent it from them, you would be paying them the same costs as if you owned it plus some extra for their time/effort. Of course you wouldn’t need to neither qualify for the mortgage nor come up with the down payment. You would also avoid paying realtor/legal fees if you decide to move a year or two later.
Chances are your landlord has been doing this for more than a few days and will have purchased the property a few years (or decades) earlier. This could mean the costs they have to cover are lower, so it may be cheaper for you to rent than to own the exact same house.
Most landlords will adjust their rent to reflect market rates. Included in the cost of owning a rental is vacancy. If a rental has to be repaired/refreshed between tenants, that could take weeks to months. So 1 month vacant for repairs is 8% vacancy. (It was normal for a 2-3% vacancy rate in the Calgary area a few years ago; I haven’t looked at recent numbers). During this time the other expenses (mortgage, utilities, taxes) still have to be covered, so the landlord will want (need) the rent to be higher than the direct costs on a monthly basis.