Despite deteriorating housing affordability across Canada, purchasing a home is still the more affordable option when compared to renting one. The benefits of home ownership were reaffirmed in a new report from Mortgage Professionals Canada which has determined that, despite the rapid rise in home prices, those who are able to invest in a home would end up “significantly better off” in the long term compared to renting. The report, authored by the mortgage broker association’s chief economist Will Dunning, found that while upfront monthly costs are in fact cheaper in most locations, the “net” cost of ownership is less than the equivalent cost of renting in a majority of cases, and becomes even more cost effective over time.
“The costs of owning and renting continue to rise across Canada,” Dunning noted. “However, rents continue to rise over time whereas the largest cost of homeownership, the mortgage payment typically maintains a fixed amount over a set period of time, usually for the first five years. The result is that the cost of renting will increase more rapidly than the cost of homeownership.” Additionally, the costs of ownership include considerable amounts of repayment of the mortgage principal. “When this saving is considered, the ‘net’ or ‘effective’ cost of homeownership is correspondingly reduced,” Dunning added.
On average, the monthly cost of owning exceeds the cost of renting by $541 per month. But when principal repayment is considered, the net cost of owning falls to $449 less than renting.
Interest Rate Scenarios
The analysis compared the cost of renting vs. owning both five and 10 years into the future, with higher interest rates factored into the equation. In all cases, owning comes out ahead:
Scenario #1: If interest rates remain the same (using an average of 3.25%), after 10 years the average net cost of owning is $1,014 less than the monthly cost of renting.
Scenario #2: If interest rates rise to 4.25% after five years, the average net cost of owning falls to $1,295 less than the monthly cost of renting.
Scenario #3: If interest rates rise to 5.25% after five years, the average net cost of owning is still $726 less than the monthly cost of renting.
The report adds that by the time the mortgage is fully repaid in 25 years (or less) the cost of owning will be vastly lower than the cost of renting, noting that the cost of owning, on average, would be $1,549 per month vs. $4,655 for an equivalent dwelling.
Renting a condo or house may offer a more flexible option, but you put down roots when you make the decision to buy a home.
Home ownership is also a built-in savings account. Month by month you pay down the mortgage and increase your equity. Over a lifetime, home ownership helps to build wealth.
Source: Steve Huebl