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Renting vs Buying

Home Sweet Home with VMBS

If you’re on the fence about whether you ought to rent or buy a home of your own, this article is for you. Let’s take a look at the three questions you should ask yourself to determine which works best for you.

  1. What do the numbers say?

    Each property has a number, known as the ‘break-even horizon’ which is the number of years it takes for buying your home to become a better value than renting because you begin to earn return on your investment. If you plan to live in a house for just a couple years renting is a more practical option because selling a house soon after you get it will mean paying transfer taxes and real estate commission and there won’t yet be any equity earned on the property. But if you’re planning on sticking around for a while it’s time to start crunching the numbers.

     Rent tends to increase by 2-5% each year depending on the demand for housing solutions in the area. Let’s look at a hypothetical scenario, in which rent is $95,000 monthly and increases by 3% each year, and the cost for an identical home is $15M at a lending rate is 10%, having paid a $3M deposit and received a $ 12M loan, the estimated monthly payment is $105,300. The $105,300 remains fixed over the time of the loan but rent steadily increases.


    Year

    Rent payment

    Mortgage payment

    Yearly difference for home owner

    Cumulative difference for home owner

    1

    95,000

    105,300

    -10,300

    -10,300

    2

    97,850

    105,300

    -7450

    -17,750

    3

    100785.50

    105,300

    -4514.5

    -22,264.5

    4

    103,809.07

    105,300

    -1490.93

    -23,755.43

    5

    106,923.34

    105,300

    +1623.34

    -22,132.09

    6

    110,131.04*

    105,300

    +4831.04

    -20,301.05

    7

    113,434.97

    105,300

    +8134.97

    -12,166.08

    8

    116838.02

    105,300

    +11538.02

    +628.06

    9

    120343.16

    105,300

    +15043.16

    +15,671.22

    10

    123,953.45

    105,300

    +18653.45

    +34,324.67

     Buying a home is about more than just lodgings, it’s making an investment in a property based on the projection that the property value will increase. Because the homeowner in our example has locked in a payment of $105,300, they pay the same each month as the value of the home increases. That increased value, known as equity, goes into the home owner’s pocket.


    The renter, on the other hand, is dealing with increased rent as the landlord’s property value goes up and the law of supply and demand kicks in. By year 5, the homeowner has started to pay less each month than the renter, and by year 8, we cross the break even horizon and start earning return on investment. Your home is now an ‘asset’ and you’ll gain increased wealth each year that goes by. You can even borrow against it.


  1. Have you deposited your deposit?

    If you’re sticking around long enough to put down roots, it’s time to answer question 2. You should have 20% of your target home’s value in the bank. Plus the 3-5% required to pay closings costs like the property valuation, title transfer, legal fees, stamp duty and other taxes. You should also put down 1% of the value of the house to cover moving and maintenance expenses. And don’t forget about monthly insurance.

    If you aren’t there yet, it’s time to come in and talk to us about our iSave account. It will encourage disciplined saving and offer you interest rates you won’t get from your regular transaction account.

    But, if you have that covered it’s time to get off that fence and ask yourself question 3.


  1. Ready for responsibility?

    Owning property is both reward and responsibility but if you don’t feel ready to juggle mortgage, maintenance, taxes, insurance, and responsibility for home repairs, then rent for a little while longer.

    Don’t confuse a few butterflies in your tummy with not being ready though. If you were motivated enough to get through steps 1 and 2, then give step 3 some serious thought. Studies have shown that homeowners feel a greater sense of stability and community, and that’s great news, because it strengthens our society and is integral to nation’s economy.

    Pros and cons of Buying vs Renting at a glance

    BUYING

    RENTING

    Pros

    Pros

    - Payments remain the same over time

    - Lower long term monthly costs

    - Property earns equity

    - Sense of stability and community

    - No landlord restrictions on décor and pets

    - Easier to move

    - Little responsibility for maintenance

    - Lower short term cost

    Cons

    Cons

    - High initial cost

    - Responsible for maintenance

    - Property taxes

    - More steps and expenses to move

    - Higher long term cost

    - No control over rent increase

    - Landlord restrictions on décor and colour

    - No equity accumulated

    - Possibility of eviction


    Buying a home is a significant investment which comes with an incredible sense of fulfilment and pride, but choosing between buying and renting is not so clear cut. Each of us should ultimately ask ourselves, ‘What makes sense for me?’. Fortunately, no matter the answer, our team at VMBS has the expertise and the information you need, as well as savings, investments and loan products to suit you.