Understanding the pros and cons of buying and renting Canadian real estate

·2 min read
A realtor's for sale sign stands outside a house that had been sold in Ottawa, Ontario, Canada, May 27, 2021.  REUTERS/Patrick Doyle
Principal payments on a mortgage can be seen as forced savings (REUTERS)

Buying a home in many parts of the country is a tall order, but if you can afford it, you'll be better off financially compared to renting.

A new report by noted housing analyst Will Dunning, sponsored by Royal LePage, looked at 278 scenarios and assumed a buyer had a 20 per cent downpayment. It measured the net cost of ownership, the total ownership cost minus the saving that occurs through principal payment.

It found that buying was financially beneficial in 91 per cent of them.

"For many people, buying a home - especially the first - is a landmark event and one of the most challenging decisions we'll make in our lives," said Dunning, who is president at Will Dunning Inc.

"It is a decision that is usually based on a lot of hard work. This research tests a belief that is held by a lot of Canadians, that owning is better financially than renting. And, it finds that this belief is very often correct."

While it's true that total monthly costs for owners may be higher than renters, it's where the money goes that makes the difference. Mortgage payments go towards the principal and interest. Dunning says the principal component is a form of forced savings so it isn't a true cost.

The effect is even more profound the longer one owns a home because interest is the largest component in the first month and gradually goes down during the course of the loan.

Also See: The latest real estate news for housing prices, mortgage rates, markets, luxury properties and more at Yahoo Finance Canada.

If mortgage rates rise and home prices fall

Mortgage rates were already low, but fell to rock-bottom levels amid the pandemic. But even if rates rise dramatically, Dunning says buying is the way to go. The report looked at various scenarios, including a mortgage renewal in five years at 3.62 per cent interest rate — the highest rate since 2014 — and ownership still wins.

It also found that even with a 10 per cent drop in home prices, about half of the homeowners would still see a positive return on their investment.

The analysis included buying and selling costs like fees, closing costs, and taxes as well as ongoing costs like utilities, repairs, and insurance.

The nine per cent of scenarios where renting was beneficial were concentrated in luxury homes in expensive neighbourhoods. But even in those cases, the extra cost was minimal.

Karen Yolevski, chief operating officer, Royal LePage, says homeownership has other benefits beyond the monthly savings.

"Owning a property allows more freedom and stability than renting. As a homeowner, you do not have to worry about the landlord hiking the rent or forcing you to move," said Yolevski.

"And homeowners have the ability to make a place their own, with renovations or decor."

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.

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