We are currently in a place where mortgage rules are crushing people’s dreams of home ownership and higher interest rates are putting their dream homes out of reach due to unaffordability. Some landlords are capitalizing on that but is the rising rent making homeownership the affordable alternative? If you are able to rationalize this and you can extend your dream a few years ultimately resigning to ad an extra stage to your home buying plans – home ownership is still the best plan.
When comparing the expected costs by those intending to rent and those who chose to own, of course for those that are in a position to do so and are able to but a home; that home ownership still costs less than renting today and is even more cost effective over time. It makes sense that the money renters are spending on monthly rent, if used instead to finance a home, would be a very beneficial investment over time. What’s best is that this segment of the market is investing in themselves and their own net worth albeit a little slower than they had planned.
The costs of owning and renting continue to rise across Canada. However, rents continue to rise over time whereas the largest cost of home ownership, which is 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.
How much could you as a buyer save you ask? That’s a great question…
By looking at the comparative costs, if mortgage rates remain at about 3.25%, in 10 years the cost of ownership will be lower than the cost of renting for almost 98% of cases. The saving for owners vs. renters would be $1,295.
If rates were to rise 1% after 10 years, the cost of ownership is less than the cost of renting in 92% of case studies, with an average saving of $1,014 per month.
A rate of 5.25% (let us pray we don’t see this) would still make home buying a lower cost option in 82% of case studies with a monthly saving of $726.
Using these conservative expectations for rental increases over time, there seems to be a financial benefit of owning a home vs. renting a home. While all of the recent changes to mortgage rules and qualifying have made the barrier to entry higher, those who can qualify should seize the opportunity to do so. This will put them in a much better position in the long term.
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