I’ve been working as a realtor in Vancouver for over 6 years now, so I’ve certainly learned about how different types of Buyers think throughout the process. As you can imagine, first time buyers are the most nervous of the bunch, and for good reason – it’s a huge purchase and something they’ve never done before! The worry that it will be the biggest mistake they’ve ever made overwhelms the fact that it will likely be a great decision.
One of the most overlooked details about buying is the financial aspect. Most people understand that it will cost more than renting, but they don’t always consider the amount you’re forced to save in the process. At the end of the day, if you can afford a higher monthly cost of living (combining two incomes is a good way to mitigate the higher cost), then buying is a good idea since you’ll be forced to save money for your future, while your property hopefully rewards you with a higher future value.
The Numbers on Rent vs Buy
Here’s an example for you. The numbers are based on an actual scenario, though keep in mind that current rent, size of down payment, mortgage terms, strata fees, etc, will all make a difference in the calculation.
Say you’re currently renting a property for $1200/month, paying hydro and internet on top of this amount. This entire amount is money that you won’t ever get back, so consider it “lost”.
Say you want to buy a property for around $525,000.
Your down payment will be 10%, which is $52,500.
Your mortgage payments
will be about $2150/month, of which about $894/month goes to interest. The portion that goes to interest is money you won’t ever get back, so it’s “lost”. The portion that goes towards your equity (i.e. your savings) is $1256/month, which is great! Keep in mind that the amount of interest you pay decreases over time, while the equity portion grows, so it gets better. Contact our recommended mortgages brokers
if you want to work with mortgage brokers who can detail your future payments, effects of different interest rates, and more.
Your property taxes
will be about $90/month, before the Home Owners Grant
. The Home Owners Grant can offer up to $570 back, which would make the taxes about $42.50/month. Even though this money goes towards city services, assume its “lost” money.
The strata fees will be about $300/month. Even though this goes to the maintenance of your investment, assume it’s “lost” money.
You may or may not have been paying tenant insurance while you were renting, but you definitely need home owners insurance when you buy. A typical policy will be about $50/month, though this includes the cost of insuring your possessions, which is a cost you should’ve been paying as a renter (so some of it would be moot). Regardless, we’ll consider $50/month for insurance is “lost” money.
You will still be paying hydro and internet yourself, so consider this a moot cost since it would have been the same with the rental.
Total “Lost” Money Renting: $1250/month
Total Saved Money Renting: $0/month
Total “Lost” Money Owning: $1286/month
Total Saved Money Owning: $1256/month
If you include the cost of property transfer tax, which would have been $8540 in total, averaged out monthly over 5 years, it’s another $142/month in “lost” money.
Of course, you’re monthly costs are a lot higher if you own, so you have to be able to afford the option of paying more every month, but if you can, it’s a worthwhile investment.
If your property goes up in value, then you’ve done very well with this investment. If your property goes down in value, then don’t sell at that point! Real Estate is cyclical and will rebound at some point. In the meantime, you’ll enjoy the opportunity to live in a property of your own where you can set down some roots without the worry that you may be kicked out. You may have to pay for some maintenance projects (i.e. new windows, a new roof, etc) but these projects have proven to given home owners a bigger increase in value compared to the cost of the project, and you’ll be maintaining your investment.
If you decide not to buy, you should to start considering other investment opportunities for your savings every month so you can start building some equity in one way or another.