Is It Better to Buy or Rent a House: How to Decide

When it comes to the buy vs rent debate, neither option is inherently "better." Each person's financial situation and lifestyle requirements are vastly different, so it ends up being a highly individualized decision. In fact, the two options work together nicely. Buying your first home is an excellent financial goal, and renting an affordable place can be a great strategy to help you save for a down payment. By understanding the pros and cons of renting vs buying, along with the costs associated with each option, you can set yourself up for success in your perfect home.

5 Things to Consider About Renting & Buying

• Understand the Financial Commitment: Renting typically involves lower upfront costs and fewer responsibilities while buying a home costs more upfront but builds equity.
• Consider Where to Live Long Term: Renting offers flexibility; owning a home provides stability and peace of mind.
• Market Conditions Matter: Home prices will influence whether it's better to buy or rent.
• Weigh the Pros and Cons of Control: Homeownership provides control over the property, allowing for renovations and customizations. Renters have less control over their living space but are typically not responsible for major repairs.
• What Are Your Savings Goals: Because of the equity you build as a homeowner, each monthly mortgage payment can be considered a form of savings. If you choose to save money by renting, you can reinvest the extra funds in a savings account.

Renting vs Buying: Pros & Cons of Each

Renting a home offers flexibility and lower upfront costs, making it an attractive option for those who prioritize mobility or who are not ready for the financial commitment of homeownership. Renters are generally responsible for monthly rent and utilities but are not burdened with property taxes, maintenance, or large repairs, which are typically the landlord’s responsibility. This can lead to lower overall costs and less stress about unexpected expenses. However, renting does not build equity, and rent payments can increase over time, making it a less stable option financially in the long term. Renters also lack control over the property, meaning they have limited ability to make changes or improvements to their living space.

Buying a home, on the other hand, allows individuals to build equity and potentially benefit from property value appreciation over time. Homeownership provides stability, as fixed-rate mortgage payments remain consistent, and owners have the freedom to modify their property as they see fit. When you buy a home, you're also free to make almost any home improvements you like.

However, buying a home requires a significant upfront investment, including a down payment, closing costs, and ongoing expenses such as property taxes, homeowners insurance, and maintenance. Homeownership also ties individuals to a location, making it less flexible for those who may need to move frequently. While it can be a sound financial investment, the financial responsibilities and market risks make it crucial for potential buyers to assess their long-term plans and financial readiness carefully.

Is It More Expensive to Rent or Buy a Home?

Whether it is more expensive to rent or buy depends on various factors, including location, housing market conditions, personal finances, and long-term plans. Generally, renting can have lower upfront costs.

While the costs of buying can be higher than renting in the short term, homeownership allows you to build equity over time and potentially benefit from property appreciation. In the long run, if you stay in the home for many years and the property value increases, owning can become more cost-effective compared to renting. However, this depends on factors like interest rates, how long you plan to stay, and whether the property’s value appreciates or depreciates.

Costs to Rent a Home

• Monthly Rent: The primary cost, paid monthly to the landlord or property manager.
• Security Deposit: An upfront payment, usually equal to one or two months’ rent, refundable at the end of the lease if the property is in good condition.
• Renter’s Insurance: A policy that covers personal belongings and liability, usually required by landlords.
• Utilities: Costs for electricity, water, gas, trash, and sometimes internet and cable, depending on lease terms.
• Application Fees: Fees charged by landlords or property managers to cover background and credit checks during the application process.
• Pet Fees/Deposits: Additional costs if you have pets, which may include a one-time fee, a refundable deposit, and/or a monthly pet rent.
• Parking Fees: Charges for designated parking spaces, which can be a flat fee or included in the rent, especially in urban areas.
• Late Fees: Additional charges incurred if rent is paid after the due date specified in the lease agreement.
• Lease Renewal Fees: Potential fees for renewing a lease agreement or for the convenience of paying month-to-month after the lease term ends.

Costs to Buy a Home

• Down Payment: A significant upfront cost, typically ranging from 5% to 20% of the purchase price, depending on the lender’s requirements and whether the buyer is a first-time homebuyer.
• Mortgage Payment: Regular payments that include both the principal and interest on the loan used to finance the home purchase.
• Property Taxes: Annual taxes paid to the local municipality based on the assessed value of the property.
• Home Inspection Fees: A fee paid to a professional inspector to evaluate the condition of the home before purchase, usually a few hundred dollars.
• Appraisal Fees: A fee for a professional appraisal of the home’s value, often required by lenders, typically costing a few hundred dollars.
• Closing Costs: Various fees due at the time of closing, including legal fees, title insurance, land transfer tax (or property transfer tax), and other administrative costs; these generally range from 1.5% to 4% of the home's purchase price.
• Home Insurance: Required by lenders, this insurance protects the home and its contents from risks like fire, theft, and natural disasters.
• Mortgage Insurance (CMHC Insurance): Required if the down payment is less than 20%, mortgage insurance protects the lender in case of default and is typically added to the mortgage balance.
• Utilities and Maintenance: Ongoing costs for utilities (electricity, water, gas) and routine home maintenance, such as repairs, landscaping, and upkeep.
• Condo Fees (if applicable): Condo fees cover building maintenance, amenities, and other shared expenses.
• Renovation Costs: Optional costs for updating or customizing the home, which can vary widely depending on the scope of work.

Once you close on the loan, you will also have a mortgage, which may be fixed or variable in monthly payment. Keep in mind that whichever loan you have at the beginning is only effective for the first term, which could last from 6 months to 10 years. After that term is concluded, you will refinance the loan or pay it off. If you have accrued significant equity during that initial term, you may have better mortgage options for the second term.

Ongoing Expenses of Owning a Home

Ongoing expenses differ significantly between renting and buying a home. Renters generally have lower ongoing costs, which typically include monthly rent, utilities, renter’s insurance, and possibly additional fees like pet rent or parking. These costs are usually predictable and don’t include major repairs or maintenance, as these responsibilities fall to the landlord.

In contrast, homeowners face a wider range of ongoing expenses, including mortgage payments, property taxes, home insurance, and utility bills. Additionally, homeowners must cover maintenance and repair costs, which can vary widely and include both routine upkeep and unexpected issues.

Homeowners in condos or certain communities may also pay monthly fees for services and shared amenities. While renters may see rent increases over time, homeowners can build equity through their mortgage payments, potentially offsetting some of the higher ongoing costs associated with owning a home.

How to Lower Expenses of Home Buying

Fortunately, there are ways to lower the overall costs of buying a home, especially if you have the ability to make choices. People with higher income and better credit can often select from a variety of mortgage loans, so they can pick the one with the most favourable terms. You might decide that a variable rate mortgage affords you a lower interest rate and payment that you can manage. If you have a Registered Retirement Savings Plan (RRSP) and you qualify as a first-time home buyer, you should research the Home Buyers' Plan. An HBP gives you the option of withdrawing up to $25,000 from your RRSP to put toward a down payment. You are expected to pay it back, but that initial sum may make it easier for you to get into your first home.

Choosing to rent or buy a home is an intensely subjective decision based on your finances and your future plans. If you intend to stay in place for several years and are financially prepared, buying is a wise financial investment.

Questions to Ask Before Transitioning from Renter to Homeowner

Am I Committed to the Location?

When renting a home or apartment, it's possible to pack up and move as soon as your lease ends. Buying a home, however, trades that flexibility for stability, and homeowners can expect to live there quite a bit longer. The average time that an owner lives in a home is about 13 years. Although many people decide to sell much sooner, it is wise to plan to live in a home you buy for at least five years before selling. That way, the home's appreciation should be enough to cover the money paid in closing costs, plus the money needed to pay for the services of a real estate agent.

Is My Credit and Income Appealing to Lenders?

If you have a solid credit history and a good, predictable income, you may be considered a viable candidate for a mortgage loan. Keep in mind that lenders prefer you to have several years of responsible use of various kinds of credit, and consistent income for at least the past couple of years. Take a hard look at your credit report, and clear up any inaccuracies before you start the process. If you have great credit and consistent income, you can certainly apply to a lender and see what they say.

Can I Afford the Additional Costs of Homeownership?

Advertisements often compare the costs of a mortgage to a rent payment, but homeownership has more costs involved. The biggest upfront expense is often the down payment, which is typically about 10 percent. After you make the down payment and pay closing costs for the loan, you will pay for the mortgage and property taxes, and possibly for private mortgage insurance as well. This does not include upkeep or improvements to the property. Factor these estimates into your calculations to determine if you can reasonably handle the regular costs.

When Is the Best Time to Buy a Home?

The best time to buy a home depends on market conditions, personal finances, and individual circumstances, but generally, late fall and winter are considered good times to buy. During these seasons, there is typically less competition from other buyers, which can lead to more favourable prices and more room for negotiation, as sellers may be more motivated to close deals before the end of the year. Interest rates and personal financial readiness, such as having a stable income, good credit, and a sufficient down payment, are also critical factors.

Additionally, market conditions such as buyer’s markets, where there are more homes available than buyers, can provide better opportunities. Ultimately, the best time is when you are financially prepared, the market conditions align, and you are ready to commit to the responsibilities of homeownership.

Rent vs Own: Which Is Right For You?

Deciding whether to rent or buy a home is a significant financial and lifestyle choice that depends on various personal and market factors. Renting offers flexibility, lower upfront costs, and fewer maintenance responsibilities, making it ideal for those who prioritize mobility or are not ready for the financial commitment of homeownership. On the other hand, buying a home provides the opportunity to build equity, benefit from potential property appreciation, and have full control over the property, but it comes with higher upfront and ongoing costs. Understanding the full scope of costs and responsibilities involved in each option, along with assessing your long-term goals, financial stability, and current market conditions, will help you make the best decision for your unique situation. Ultimately, there is no one-size-fits-all answer; the choice between renting and buying should align with your financial readiness and lifestyle preferences.