Rent vs. Buy

Cost of Renting vs. Buying

The cost of living rises fairly steadily (or very rapidly in the last 5 years – 27.1%), and housing costs are especially high, making homeownership harder to reach for many — a trend that often delays young couples from buying a home and starting a family. This has given rise to an increase in lending from the “bank of mom and dad” or in some cases, generous gifts from mom and dad. Although there is usually an emotional aspect tied to such lending/gifting (ex. we want grandkids already!), there is a business case to be made for the investment and below we compare the costs of each scenario.

Renting Costs

Short-Term Impact

Renting a reasonable home at $3,000 per month (plus the usual utilities) means predictable monthly expenses and no large upfront mortgage down payment. Over the first year the rent paid amounts to $36,000. You avoid maintenance, property taxes, and homeowners insurance responsibilities, but you also forgo building equity. In addition to that, renting offers flexibility for households who aren’t ready to commit or anticipate job or location changes.

Long-Term Impact

Over five years, rent totals $189,225 (assuming the 2.5% annual increase allowed in Ontario). There is no forced savings through mortgage principal repayment, and renters remain vulnerable to rising rents. While tenants can invest saved funds elsewhere, the opportunity cost of not owning—missed home price appreciation and principal paydown—can be significant over time.

Buying Costs

Short-Term Impact

Buying a comparable $1,000,000 house with a 20% down payment requires $200,000 down plus closing costs and immediate expenses. With a 30-year fixed mortgage at 3.89% (rates will vary over time) on an $800,000 loan, the principal-and-interest payment is about $3,779 per month. Barring any major renovations, it is necessary to add estimated property taxes, insurance, and maintenance—commonly 1–2% of home value annually. This brings up the total annual housing costs up between $55,350-$65,350. Upfront costs and these monthly obligations can strain budgets in the short term. However, these costs start getting offset by the principal payments from the monthly mortgage along with home value appreciation. Assuming a modest 1% growth in value, this amounts to $10,000 in annual gains plus another $14,430 in principal repayments. These offsets bring the annual costs down to a range of $30,920-$40,920.

Long-Term Impact

Over time, ownership amplifies the increase in equity through principal repayment and any home appreciation. In the early years, a large share of payments is interest, but as amortization progresses equity accelerates. Just in the first 5 years, assuming the same modest 1% home value growth, the increase adds up to $51,000. In that same period, the principal paid grows to $52,000 which brings the total savings over $103,000. If we take the same annual range, which varies significantly and takes into account price increases for property tax and insurance, the net costs come in between $173,750-$223,750.

Cost Comparison

• 1 year: Renting = $36,000 ; Buying = Net $30,920-$40,920 (incl. taxes/insurance/maint.)

  • Net Impact = (Savings)/Costs of $(5,080)-$4,920

• 5 years: Renting = $189,225; Buying = Net $173,750-$223,750

  • Net Impact = (Savings)/Costs of $(15,475)-$4,920

• Over time, this gap starts to widen quickly (ex. 10-years: $(67,485)-$32,515)

• Please keep in mind that this scenario does not factor for mobility, flexibility, renovations, remodelling, spikes/drops in the market, horrible landlords, etc. which are all a part of life.

Final Thoughts

With the long-term benefits and potential to speed up the family planning, it’s easy to see why more and more parents are stepping in to help their adult children with down payments or co-signing mortgages to bridge affordability gaps. To learn more about the different ways you can help, have a read of our article on Helping Your Kids Buy a Home.

Free Professional Consultation

If you have any unanswered questions, uncertainties or would like to go over your specific financial needs and goals, please contact me at mike.a@reversemortgageportal.ca to set up a call. As a CPA, Chartered Professional Accountant, of over 20 years, I know the importance of understanding the full picture before making recommendations. I look forward to learning more about you and your financial needs so I can help you make the best decision.

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