You may be at a stage in your life where you’re wondering whether you should continue renting or buy a home. But with real estate prices soaring in recent years, homebuyers need to consider all the risks. Credit score, financial stability, location and whether or not you want to live in the same place for a long time are just some of the factors to consider when making this decision. And let’s not forget remote working, which has become the norm in many professions. In short, what makes the most sense to Canadians right now? Is it better to continue renting or buying a house or other type of property?
Before determining whether to rent or buy a home, you first need to know your credit score. The credit score is designed to represent your credit risk. This information is available from the two major credit bureaus:
If you have a low credit score, start rebuilding it to prepare for future purchases. To increase your credit rating, follow these tips:
The Financial Consumer Agency of Canada (FCAC) advises Canadians to always check their credit history before considering their purchase or lease options. It’s essential to have an above-average credit rating, because rents in Canada have risen, and you can be disqualified if you have a poor rating. It makes more sense for an owner to choose someone who is financially responsible and appears to be trustworthy.
Once you’ve improved your credit score, it’s time to decide whether you want to rent or buy a home. Of course, leasing is less expensive than buying. But buying is more advantageous if your financial situation is favorable.
You should ask yourself these questions before deciding whether to buy or rent:
These questions will help you make the right decision for you and your family. Don’t rush into things when you’re not yet sure, but rather take time to think.
There are two rules that potential buyers choose to follow: the 5% rule or the 40% rule. Whichever rule you choose to follow will be a personal preference.
When you decide to rent or buy a home, you need to consider all the costs associated with owning a home. This may sound complicated, but in simple terms it involves the following:
Owning a home entails annual sunk costs amounting to around 5% of the property’s value. It doesn’t depend on whether you own a house or not. If you are paying less rent for a home similar to the one you are thinking of buying, it is best to continue renting. If you’re paying a higher rent than a home similar to the one you’re thinking of buying, it’s better to buy.
Sunk costs include the following:
Total sunk costs should amount to 5% of your home’s value per year. If you rent a house and its value is 5% less than that of a similar house (calculated annually), continue to rent. If you can buy a house and the property value is less than 5% of the rental amount, consider buying.
Your housing costs include taxes, heat, principal and interest. The 40% rule states that you must cover your housing costs as well as other debts, such as your credit card, with a maximum of 40% of your gross income. Most lenders in Canada follow this rule. With 50-60% of your net income, you need to cover the rest of your housing costs, such as transportation and food, also called fixed costs. If you can’t afford these percentages, you’ll have trouble paying off a mortgage.
Debt ratios: Also consider calculating your GDS (gross debt service) and TDS (total debt service) ratios. Find out more: What are debt ratios?
Find out about the assistance available to first-time home buyers in Canada. Depending on the province, region or even city, there are numerous assistance programs available. These can help you to become a homeowner. To find out more, consult our guide: Tips for buying your first home in Canada.
And don’t forget that tax-advantaged savings plans are available, including the HBP (RRSP) and the FHSA.
Several calculators are available online to help you decide whether to buy or rent. These include the major Canadian banks and mortgage brokers.
We really like the AMF (Autorité des marchés financiers) calculator, because it’s easy to use and lets you quickly compare the two options based on your data. What’s more, the tool is available in both English and French.
There are many pros and cons when it comes to deciding whether to buy a home. Examine each of them before making any decisions.
Just like buying a home, renting has its advantages and disadvantages.
*Rules differ from province to province.
Before deciding whether to rent or buy a home, you need to analyze your personal and financial situation and reassess your goals. Where do you see yourself in the short and long term? Do you know where you want to live? All of these issues need to be analyzed in depth.
It won’t be easy to convince a lender to give you a mortgage if you don’t have a steady job. You’ll also find it hard to pay your bills without a job, and you may fall behind on your mortgage payments.
The Toronto and Vancouver real estate market is much more expensive for mortgages, while rentals in these areas are less expensive. Before buying a property, it’s a good idea to compare mortgage payments and rental costs in the neighborhood you’re considering. In general, if you pay more than $3,000 a month in rent, a mortgage may be more advantageous.
Are you planning to live in the same house for a long time? The longer you live in a house, the more attractive the investment becomes. This is due to the total costs involved in the transfer of real estate.
For example, here is a non-exhaustive list of initial costs (excluding recurring costs) that will not be recovered, regardless of how long the property is held:
What’s more, if you have to move sooner than planned, you’ll have to pay a penalty to break your mortgage. Which, in most cases, is very costly!
Buying a home is expensive, because you have to pay for home insurance, utilities, property taxes (municipal and school taxes), a mortgage, maintenance, improvements, renovations and so on. It’s for the long term, and you need to be ready for it.
Before you make a final decision between renting or buying a home, you may want to consider another approach, such as renting with an option to buy.
More specifically, rent to own allows you to rent a house or condo with the option of buying it at the end of the rental period. This is an interesting approach for those who want to buy, but have difficulty obtaining a mortgage or saving the money required for a down payment.
During the rental period, you have the same rights and responsibilities as tenants*. If you decide to buy at the end of the rental period, then you must follow the normal rules for buying a home.
There are risks for both sides:
If you’re ready to settle down and not move for at least the next five years, it could be a sign that you’re ready to buy. For example, buying is generally a good option if you want to start a family and stay in the same place.
If you have a steady income and don’t plan to change careers anytime soon, you may be ready to buy. If you are self-employed, know that you need two years of proof of income using the Notice of Assessment (NOA) from the Canada Revenue Agency (CRA). You need financial stability and responsibility to take care of your mortgage payments, utilities, repairs, and more.
Don’t hesitate to consult a mortgage broker or a mortgage brokerage firm such as nesto or neo. These have fully digital mortgage application platforms that will make the process much simpler.
A mortgage broker is an intermediary between a borrower and a mortgage lender. He negotiates the best mortgage for a customer by comparing offers from several lenders.
Finally, find out about the assistance available to first-time homebuyers in Canada, and about tax-advantaged savings plans such as the HBP (RRSP) and FHSA.
If you’re not ready to settle in one place for the long term, renting an apartment or house may be preferable in your situation. If you want to travel a lot or change careers soon, these may be signs to put your home-buying plans on hold.
Also, having a lot of debt can work against you when applying for a mortgage. Instead, focus on bringing your bills up to date and improving your credit score before making any major purchases, such as a house.
If you don’t have a sufficient down payment, it’s best to continue renting. Save for a few years and once you have a good amount saved, you can approach a mortgage lender.
If you don’t have a permanent job, or if you’ve been self-employed without sufficient income for two years, buying is generally not an option. In this case, save for a down payment and accumulate proof of income to make yourself more attractive to a mortgage lender.
In short, renting or buying a home is a personal choice. In other words, you’re the only one who knows whether home ownership is right for you. Take the time to weigh up the pros and cons of each option before making a decision.
As we saw in the article, leasing offers greater flexibility. Buying a house, on the other hand, allows you to stay in the same place for a longer period at a lower cost. And, of course, to create long-term wealth with forced savings.
If you still can’t make up your mind, don’t hesitate to meet with a mortgage broker. He or she can answer all your questions and help you make the right choice for your situation and objectives.
Renting or buying a home is a personal choice. For each of these options, there are advantages and disadvantages. Take the time to evaluate all these options before making a decision. Then, don’t forget that factors such as your credit score, financial stability and the location you wish to live in are important considerations in your decision.
Rental with purchase option lets you rent a house or condo with the option of buying it at the end of the rental period. This is an interesting approach for those who want to buy, but have difficulty obtaining a mortgage or saving the money required for a down payment.
Renting out your home can be an attractive option for generating passive income and accumulating long-term value. However, renting out your home involves management responsibilities, risks and possible wear and tear on the property. In Canada, rental laws vary from province to province, so it’s important to understand them. One way to set a competitive rent is to analyze the local market.
Rent-to-own is an approach that lets you rent a house or condo with the option of buying it at the end of the rental period. If you want to buy a home, but don’t yet have the money for a down payment, then renting with an option to buy is an approach worth considering. During the lease, you’ll have the opportunity to save to build up your down payment.
Savings are here:
