This question comes up more times that I can count. Canadian society has ingrained into our heads that home ownership is the ultimate goal, and should be secured at any cost. However, I am writing this post to challenge that, and provide some insights to the readers to help them make their own informed decisions.

Isn’t Renting Throwing Money Away?

No, it is isn’t. You are getting a service, shelter for you to live in for a month. This misconception, along with it’s closely related cousin “Why pay the landlord’s mortgage for them?!” need to be examined further.

As a tenant, your costs are limited to the monthly rent you pay each month. Think of this as you paying the landlord for the money that they have invested in purchasing and maintaining the house. On the other hand, a landlord has to pay:

• Interest on the money that they borrowed to buy the house (the mortgage)
• Property taxes
• Condominium fees (if applicable), and any special assessments
• Any repairs / replacements
• Maintenance outside the house (snow clearing / lawn maintenance)

The landlord also has to be compensated for the lack of return that they could have obtained by investing their money in another type of investment, plus the expenses of buying (land transfer tax) and eventually selling that house (realtor commissions).

As you can see, there are a lot of hidden costs that landlords have to pay.

How does separation complicate the decision?

In the past, when deciding on renting vs buying, you could count on a double income to cover the costs of being a home owner. Now, you are relying solely on your income. Any unforseen hiccups (roof leak, cracked foundation, electrical fault, medical expense) could drive a precarious financial situation into one that is unbearable.

Since you are considering home ownership, I will assume that you have a sizable sum of money coming to you from equalizing the marital assets. You can either use that money for a down payment and buy a house, or you can invest that money, and generate a monthly return that makes life more comfortable. For example, if you have a $240,000 equalization payment from your separation, you can invest that in a 5% GIC (completely risk free), and generate an extra $1,000 per month in income, without ever touching the original $240,000 nest egg.

What are the Benefits of Home Ownership?

Not surprisingly, there ARE benefits to home ownership. As a home owner, the biggest benefit (in my opinion) is that you cannot be evicted for personal use by the landlord. This sense of security, especially when you are newly separated, is immense. Some of the other benefits include:

• Any growth in value of your personal residence is tax-exempt. No other investment choice has that benefit in Canada.
• Only part of your mortgage payment goes towards paying interest. The rest of the payment is used to pay off the balance owing, which in a way is forcing you to contribute to savings
• If you invest your equalization payment, any returns will not only be taxed, but the extra income will increase your Line 15000 income, reduce government benefits, and reduce any support payments received, and increase any support payments that you make.

So How do I Decide Whether to Rent or Own?

A good rule of thumb is called the “wasted money calculation”.

1. Take the purchase price of a house that you are looking to buy, and multiply it by 5%. This is a rough approximation of the wasted money that is spent annually on owning a house. Divide that result by 12 to get a monthly amount.
2. If your rent is more than that amount, it is better to look at purchasing the house.
3. Example: You are looking at buying a house with a purchase price of $600,000. Multiplied by 5% = $30,000, divided by 12 = $2,500. If your rent is more than $2,500 per month, it would make sense to look into home ownership.

You can also do the same analysis in reverse. Let’s say you are renting at $3,000 per month, and you want to know what price a house would make sense to look at buying…

$3,000 multiplied by 12 = $36,000, divided by 5% = $720,000. Therefore, you should only look at houses priced under $720,000.

As with any “rule of thumb”, there are many more considerations to take into account. Please reach out to me, and we can do a more in-depth analysis of your financial health to determine which path makes more sense, as well as developing a plan to achieve the goals you want to in the long-term!