Lets have an in-depth look at this the question “should I rent or should I buy”? together lets analyze the cost of borrowing, the expenses of a home and the surrounding factors that influence this decision. Before I begin, my purpose here is to illustrate the truth behind the numbers and to better educate people to peel back the onion and make educated decisions about their future. You should note, that I am a millennial and have suffered with consequences of not being educated in making good financial decisions, I encourage you all to reach out to certified financial planners and investigate these questions with them. I recommend you always get multiple oppinions before making decisions that might affect you for a long time. What a lot of people don’t consider when deciding to buy a home is the interest. Allow me to demonstrate how the numbers operate in this situation.
First lets ask the question:
How much does it cost to borrow?
The average Canadian mortgage will have you paying more interest than principle for over 5 years or more, simply put: if you buy a $400,000 home at a 4.5% interest rate,you will be paying $1400 a month in interest and only $700 in principle, my numbers may not be 100% accurate, but hopefully I’ve given you some context for this article and what i’m about to explain.
If we know that $1400 is just the interest payment, we have to look at this as an expense, lets take moment to add up all the other expenses associated with a home purchase.
- Property Tax $3200/yr
- Water + Garbage $1000/yr
- Heating $1800/yr
- Power $1200/yr
- Internet $600/yr
Total: $7800 per year
Divide that by 12 (to give us a monthly payment) and our payment is $650/monthly, this means that you will be paying 2050/month for “renting your house from the bank” over the next 5 years. Lets add-in the principle amount being payed of 700 dollars gives you a grand total of $2750 for the home.
Most people bank on inflation increasing enough to justify this expenditure, but given the calculation of inflation vs the expense of owning a house title, you really have to be careful planning your personal financial forecast, also be prepared to stay in the home for a longer period.
Now looking at that math, lets talk about savings and income as it relates to renting an apartment
lets say you found a place to rent for $1300 that included everything, then with our average Canadian take home income of $3333 minus our rent of $1300 gives you the ability to save $24000 at an interest rate of 2% with a bank GIC (I know that you won’t save all of that, I’m just saying…but lets say you did, it would equate to:
$24480 x 5 years = $122,400 in savings at the end of 5 years
Now let use a similar example if the person bought a home
your average income being $3333 – and your mortgage payment and utilities and heating property tax = $2750 = which leaves $583 left for your savings account monthly, giving you the ability to save $6996 in one year for a total savings amount of $36780 include the GIC interest rate of 2% over 5 years.
now lets not forget your equity being paid towards your home of 700 monthly with equals 8400 yearly and over a 5 year period = $42000 towards your home equity.
now lets take a look at your home value, if home prices are steady and they rise with inflation that gives you a boost of .78% a year = $3120. round it to $3300 ( to account for the home value increase per year and inflation percentage) and multiply it by 5 = $16500 increased home value.
puts your a total personal equity amount of $98280
now lets look at some of the risks of owning that home
- Your furnace broke ($4000)
- You need a new roof ($8000)
- Our water heater just quit ($2000)
We have $84280 in total personal equity
and what if the oil economy crashed and houses lost an average of 7.7% in value. Take our home for example.. being worth $400,000 – 7.7% = another $30800 thousand in equity
our total equity now is $53480 and the bank just increased our interest rate to compensate for income there losing from you paying more principle
now thats a dark picture to paint, but whats scary.. is this a realty for some people… the banks will always make their money, the people are the ones who lose, so when faced with renting or buying a home what will you do in our current economic climate.