If you have talked about real estate with just about anyone, then for sure the following comments have come up
"Renting is basically throwing away your money!"
"When you rent, you are paying down your landlord's mortgage"
But it's not quite simple as that, is it? While owning a home is a dream for many, sometimes there's no option until you have the money saved up.
Moreover, there are many personal factors that go into making the decision such as future career and family plans.
If you aren't sure of quite what to do...read below to understand whether you should rent or own a home in Toronto.
THE LOWDOWN ON RENTING: PROS Vs. CONS
RENTING PRO #1: Lower Deposit
You don't need much savings to get started with renting. Usually, you only need first and last month's rent as a deposit and voila you're ready to rent a unit.
RENTING PRO #2: Short Term Commitment
There are a lot of reasons why you may want a short term commitment.
- You are new to the city and want to explore a bit before deciding which area you want to live in
- You might be changing jobs which may require you to move
- Your family situation might change soon. Perhaps you plan on getting married or having kids in the near future.
If you only plan on staying somewhere for a couple of years, then it's viable to rent. Maximum commitment in most units is one year.
RENTING PRO #3: No Headaches
Landlord takes care of all property taxes and other expenses like repairs, condo maintenance fees etc
RENTING CON #1: Rent Money Is Lost Forever
Unlike home buying, where a portion of your mortgage goes towards paying off your home, rent money will never come back to you. However, it is unfair to say that "you are throwing your money away". That money is still going towards the fact that you now have a space to live in.
RENTING CON #2: Landlord Restrictions
Not your house = not your rules. Landlord can impose restrictions such as noise levels, guests, pets and renovations.
RENTING CON #3: Not Guaranteed Long Term
The landlord may decide to sell or move into the unit, which means you'll have to vacate it within 60 days.
OWNING A HOME: PROS Vs. CONS
HOME BUYING PRO #1: The Pride Of Ownership
You feel a sense of accomplishment and owning a place that you now call home.
HOME BUYING PRO #2: Equity
Owning your own home helps you to build equity and long term wealth over time. Part of every mortgage payment goes towards your home; known as the principal. This increases the amount of money you've paid towards your home, known as Equity.
Example: You buy a home worth $500000. The monthly mortgage payment is $2000.
$900 of that will be your principal, which goes towards your mortgage. The remainder $1100 will go towards interest. That's almost $11000 a year that's added to your equity. What's even better? With every payment, the amount of principal will increase, thus saving you more and more over time!
NOTE: The numbers above are rounded for simplicity.The mortgage payment above was based on a 20% downpayment on a mortgage with 3.25% interest rate.
To check out what different mortgage amounts would be based on home price, downpayment, interest rate and other factors, try our Ontario Mortgage Calculator.
HOME BUYING PRO #3: Appreciating Value
Not only is some of your monthly payment going towards your equity, the value of your entire property usually appreciates over time. In the Toronto area, let's assume that property values will rise at least 4% over the next few years (we are bring extremely conservative; this number has been much higher historically).
Assuming a 4% appreciation on a home worth $500000, your value in 5 years would be $608,326!
What a lot of people don't realize about real estate is the power of leverage when it relates to appreciation. Your investment into your home is only your downpayment. However, the appreciation is on the value of your ENTIRE HOME, not your investment.
BONUS: You can use Equity and Appreciation towards a Home Equity Line of Credit (HELOC). To put it simply, a bank would look at how much money has gone towards your home payments, along with the appreciation.
Based on the example above, you may be eligible to borrow as much as a $100000 from the bank at a very low interest rate!
A lot of investors use this strategy to grow their investment portfolio.
HOME BUYING PRO #4: Freedom
Your house = Your Rules. You have the freedom and luxury of changing your appliances, doing renovations, changing out the carpet, etc
HOME BUYING CON #1: Longer Time Commitment
A general rule of thumb is to buy a home if you plan to stay there for at least 5 years. There are a lot of expenses involved in the buying and selling transactional process. There are Realtor commissions, lawyer fees, home inspection fees, moving expenses. 5 years gives you enough time to build some equity and appreciation into your home, to compensate for any expenses that come up when you move again.
HOME BUYING CON #2: Large Downpayment Required
You do need to have a significant amount of money saved towards your downpayment. This usually ranges from 5% to 20%.
PS: If you don't have enough money saved up, but do think that you will within the next few years, there are a couple of ways you can lock down today's price but still buy your home down the road: Preconstruction Homes or Assignments! To learn more about this, click below
=> READ: 7 Benefits of Buying a Pre-Construction Property in Toronto
SUMMARY: RENT OR OWN?
As you can see, renting is a good idea if you're looking for a short term commitment without a lot of financial investment. It keeps your life simple until you are more set up.
However, if you have built up your savings (or are getting there soon) and know where you want to stay for the long-term, you are ready to buy a home. In Toronto specifically, rent has increased to more than the mortgage cost. So, if you have the downpayment ready, it does not make sense to rent.
Toronto home prices are rising. The more you wait, the less your money in the bank is worth.
There are a ton of benefits to owning your own home and it is a proven long term strategy to increasing your wealth and net worth.
Are you ready to take that next step? Here are a few options:
=> READ: The Ultimate Guide to Buying a Home In Toronto
=> READ: 7 Benefits To Buying a Pre-Construction Property In Toronto