Buy or Rent: What to do?

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Photo: J. Potoma

Photo: J. Potoma

This is a regular question that comes up time and time again for realtors – and is a real concern prospective buyers. The news is full of doom and gloom about the real estate market, but what is happening is that volume is down – but prices are not. Last week 17 percent of the Oakville homes sold – sold at list or above – that means bidding wars.

Now, the homes have to be in perfect condition and a great location – but bidding is not uncommon. The inventory of properties is still only 1 percent of total inventory, a low figure. Toronto housing market is continuing to experience homes selling at substantially above list. What is expected is not a correction, but rather a return to normal price increases for real estate.

A local mortgage broker with RBC Scott Kirkwood  provided the costs associated with buying a home vs renting one. The property that was used was 610 – 40 Old Mill Road, a two bedroom with den 1100 sq ft condo listed at $415, 126.00. A similar property leased last year for $1875.00 per month. The monthly condo fee for unit 610 is $471 and the taxes are $242.

So here is the math based on the posted 5 year rate: 3.09%.

 Selling Price $415,000
With 10% Down With 20% Down
Down payment $41,500.00 $83,000.00
Mortgage $1,820.00 $1,587.00
Taxes $241.67 $241.67
Condo Fee $471.00 $471.00
Total Monthly Cost $2,532.67 $2,299.67
photo: J Potoma

photo: J Potoma

According to Scott, the reduction in your mortgage is between $800 to $750 per month, because  you are saving that much. True you must have it before you can spend it.  If you take into account that housing prices will likely not be rising by more 2.5%,  an owner would be adding in another $700 to $800 per month to account for the increase in the  unit’s value.

Now, if you invest the deposit conservatively, you might realize a potential return of 5% – so on a $40,000 deposit; it would grow by $2,000 or $175 per month for 10% down, and $350 per month for a deposit of 20%. If you subtract that from the increase, then the opportunity cost per month of  purchasing unit 610 with 10% down would be $1,208. So renting at $1875 per month means that the renter is spending $668 per month more than the purchaser. For the buyer who is putting down 20%, it is costing the renting about $875 per month more.
So is it better to rent or to buy depends on a few factors: household income and the available down payment. For a 10 percent mortgage CMHC charges 2% on the amount borrowed – which in this case would be $7,470. If you are able to purchase, the potential return in the first two years would be $8562.00 for a 10% down payment, and $21,000 for a 20 percent down payment. What decision are you going to make: Rent or Buy?
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Readers Comments (1)

  1. […] By comparison let’s look at a home that was listed for $415,000. The first thing to take into consideration is “How much can you spend on a down payment?” If you can put down 10% ($41,500) your monthly payments are going to be $2532.67 a month. With 20% down ($83,000) you’re going to be looking at a monthly payment of $2,299 (See the full breakdown of the cost on this Oakville News article). […]

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