As Realtors who have witnessed market booms and busts – we’ve always held strong to the belief that real estate can be an excellent long-term investment for most people. So now that prices are easing off and there is talk of higher interest rates, we are seeing some people pull their money out of their homes with plans of renting. As always, there is no one size fits all here. However, if we are going to compare apples to apples – let us look at buying versus renting over a 25 year period.
For the purpose of this example, we are not taking into consideration the annual rent increase or any adjustment in mortgage rates. Keep in mind, every five years, a new rate must be negotiated with the bank however also remember, that every 5 years you will be financing a much smaller amount. We are assuming the rate goes up and your loan is reduced, thus the payments may remain the same (if rates stay stable, your payments actually go down). As well, note landlords can legally increase your rent each year at a rate stipulated by the Ontario Landlord Tenant Board and this increase runs about 2% per year. We did not include those increases in this comparison.
First, we have Bob. Bob purchases a home for $600,000.00 with a 15% deposit of $90,000.00. (I’m guessing there are renters out there screaming about how they will ever find $90,000 for a down payment. Well, this in itself is proof that it’s hard to save money when renting, but we will come to that again later). Bob’s mortgage of $510,000 at 3.75% will cost him $2,615 a month in principle and interest. This works out to $31,400 per year plus $4000 annual taxes is just under $36,000 per year. Now, at the same time, Sue is renting for $3,000.00 per month. This works out to $36,000 per year in rent. Twenty-five years later, Bob has paid $784,000 plus his initial $90,000 down payment for a rough total of $874,000.00. In the same time period, Sue has paid $750,000 for her rent.
On first glance, one might say that Sue paid less and has therefore saved money – but a closer look reveals that Sue has not built any financial wealth and has nothing to show for her $750,000 expense. (I wonder if Sue even thought to put the difference of $134,000 away for a rainy day…)
After 25 years, Bob owns his home. Assuming it hasn’t gone up in value – he is still sitting with a $600,000.00 asset and he is done paying his mortgage. In reality, the home would have likely doubled in price over a 25 year period, so Bob may actually be sitting on a $1.2+m tax-free asset. After 25 years, Sue doesn’t own anything. Sue is still paying rent. In reality, that rent would be well higher than the $3000 she was paying per month 25 years ago… Perhaps Sue made some other investments, yet she will always have to pay for that roof over her head.
There are other perks to owning your own home:
1. The independence that comes with owning your own home and decorating as you wish.
2. Peace of mind that the ‘landlord’ won’t sell your home and force you to move.
3. Selling your primary residence is about the only tax-free gain available.
4. You are paying off your own loan – and not someone else’s.
One of the best advantages of home ownership is the ability to leverage the equity you have earned to make other investments or help the family with theirs. Now, we’ve heard the story about ‘saving and investing elsewhere’ however, Sue still must pay for a roof over her head so how much is left over to invest? And any investment Sue makes will be taxable at some point. Bob’s is built right into his investment and his gain is tax-free.
The bottom line is that after 25 years, Sue would have spent over $750,000 towards someone else’s mortgage payment. If market prices did not move a bit, Bob could sell his home and take $600k back. Realistically, the home price would have doubled and Bob could sell his home and earn all his money back plus some – and did we mention it would be tax-free?
Most importantly, your home is your sanctuary. It is your own little place in the world where friends and family gather. Where memories are made and where life happens.