With interest rates near historical lows and housing values continuing high, the allure of buying a home versus renting is understandably strong. But is it right for you now? Here are some guidelines and tips to help with this decision.
The first tip is to not speculate with real estate. Flipping a home in hopes of a profit is like trying to time the equity markets. Not even the experts can do so with consistency. What is certain are the high transaction costs of buying and selling: close to 10% of the property value, according to one rule of thumb.
On a purchase you’ll have land transfer taxes (up to 4% of the home value in Toronto), along with other closing costs estimated at 1.5% to 3% of the purchase price. And you’ll pay 5% commissions on a sale, plus legal and other fees.
Ownership costs are often underestimated when, in fact, they typically exceed rental costs for the same residence. It’s recommended you budget 4% of the value of the home for annual costs like property tax, condo fees, utilities, maintenance and periodic renovations.
In terms of mortgage, even if you lock in a low rate, you face the risk of renewing at a higher rate in the future. It’s a good idea to “stress-test” affordability by doing projections at various interest rates.
Historically, housing prices have increased more or less at the rate of inflation. You need to consider the missed opportunity of earning higher returns on your money – enough to grow your purchasing power for the future.
Not just about numbers
After applying these general assumptions to real estate conditions today, renting is likely to come out on top from a financial perspective. However, this assumes that you invest the savings of renting over buying. If you don’t have that discipline, owning a home may be preferable as it serves as a form of forced savings through the equity you build up over the long term. Also, families may have more limited choice when it comes to renting a suitable home and may require the stability that home ownership offers.
The buy or rent decision is a big one that should ideally be made in the context of your overall financial plan, goals and other investments. Call us for an appointment to discuss your personal situation and guide you in selecting the right “home sweet home” option for you at this time.
