May 25, 2017
Should You Rent or Buy Your Home? 4 Things to Consider
Trying to decide whether to make the leap from renter to homeowner? Investing your hard-saved cash in real estate and building up equity can be a great financial move – but it’s not the right choice for everyone. Here’s what prospective home buyers should consider, before swapping rent payments for a monthly mortgage.
1. Weigh Your Lifestyle Needs
Buying a home isn’t just a financial commitment – it will have implications for your lifestyle, too. Generally, once transactional costs and initial interest payments are factored in, most buyers need to hang on to their home purchase for about five years before they’ll be in a position to sell and see a return on their investment.
That means, you’ll need to stick around for that length of time to make a home purchase worth your while. If you’re unsure about your employment or family situation, for example, it may be better to hold off on putting down real estate roots. Or, if you suspect you’ll need to move but want to buy regardless, consider a home with rental income potential and become a landlord yourself while you aren’t occupying the property.
2. Is Real Estate the Right Investment?
The adage that a home is likely the largest financial investment you’ll ever make is true – and it’ll be the longest, as well. While some types of mortgages will allow you to make aggressive payments and shorten your overall repayment timeline, the typical amortization for a mortgage is 25 to 30 years. That’s a long time to wait to realize the full potential of your investment, so ensure you’re truly willing to tie up your money for the long haul.
3. What Can You Afford?
The first step in the home buying process is determining how much you can afford – and if you’re currently renting, how your budget may differ month to month. Using an affordability calculator that crunches your income, ongoing debt commitments, bills and utilities is a great starting point to see whether your budget has additional wiggle room for increasing shelter costs.
Next, it’s time to call in the professionals. Working with a mortgage broker to get a pre-approval for a mortgage rate will provide more insight into how much you will be able to borrow, and will help set a budget range for your home purchase. Wondering how much your mortgage payments will be? Try out a handy mortgage payment calculator, which will crunch your payment costs based on your desired home’s purchase price, down payment amount, and potential mortgage rate. If you’re comfortable with the amount you see, it’s time to connect with a real estate agent and start the hunt for your dream home.
4. Factor in Surprise Costs
You’re responsible for repairs
As a renter, you’ve got considerable peace of mind in knowing that should anything go wrong in your home, your landlord is generally on the hook for any maintenance or repairs. That’s not the case when you’re a homeowner – and it’ll never be more apparent than when your sink suddenly springs a leak, or your furnace gives out.
It’s important to financially prepare for these potential surprises with a rainy day fund, and it’s also smart to keep them top of mind as soon as you start your home search. If the home and major appliances aren’t brand new and under warranty, be sure to inquire how long it has been since they were serviced or replaced and factor that into your plan. For example, a roof that will soon need to be replaced, or a crumbling foundation, should have their own dedicated savings plans.
Condo fees and assessments
This may differ if your home is a condo as parts of your unit may be considered “common elements”, such as load bearing walls, HVAC unit and your front door. However, you’ll need to pay monthly condo fees, which could vary widely depending on the age and management of the building. Condo owners may also be required to pay special assessments on occasion should the building require large emergency repairs or maintenance – definitely a nasty shock for any homeowner.
Changing mortgage rates
Depending on rent control rules in your province, your rent will likely rise by a certain percentage annually, or it may be exposed to free market rent factors. For example, prior to April 20, 2017 in Ontario, only rental units built prior to 1991 were subject to rent controls while all others could be increased at the landlord’s discretion. Following new legislation that passed on May 18, all rents – even those in Toronto condos – in the province may only increase by 1.5 per cent annually. This helps give renters additional predictability in budgeting their housing costs each year.
However, mortgage rates aren’t always so predictable. Those with fixed-rate mortgages could face a higher interest rate when it comes time to renew their term, and variable-rate mortgage holders are always subject to the interest rate set by the Bank of Canada. It’s important to keep this in mind when establishing your home buying budget and to pad in at least a 1 per-cent buffer to protect your affordability should rates rise during your mortgage term.