Rounding it up
Buying a home can be a great financial milestone and even an investment for many but it’s not true for everyone.
When considering if buying a home is the best decision for you, it’s important to consider if you are financially ready to make a home purchase and all the pros and cons of buying versus renting.
Depending on where you live in Canada, it may be best to continue renting.
Cities with a lower cost of living tend to be the better places to buy a home, whereas areas where the cost of living is high, are generally suited to renting.
Unless you yearn for a life of nomadic adventure, buying a home is probably on your radar and one of the biggest financial milestones you’ll ever reach. Of course, it’s no easy feat. It usually requires a great deal of financial stability and preparation, which includes building your credit, saving for a downpayment, and deciding where you want to settle. Even then, it may turn out that buying a home is not the best financial decision after all.
There are both benefits and downsides to owning a home but these benefits and downsides are unique to the area where you reside. This means that in some parts of Canada, it’s actually better to rent. Either way, there’s a lot to consider when thinking about finding a place to live.
First, consider the financial steps to take before buying. Then, consider the general pros and cons of owning a home. Finally, consider whether you live in a city where buying a home is indeed the best decision compared to renting.
Are you ready to buy?
When you think about buying a home, it makes sense to first consider if you are financially fit enough to buy in the first place. What does it take to be financially ready? You need enough money for a downpayment and closing costs, a good credit score, and a reliable source of income.
Save money, have a stable source of income
Before buying a home, you’ll need a job or proof of a steady stream of income, if you’re self employed. A reliable paycheque from a job (or earrings from self-employment) give you the financial freedom to consider making such a life-changing decision. A good job allows you to pay your bills, pay off debt, and manage other day-to-day expenses. It can also allow you to save enough for an emergency fund. This type of fund is extra money set aside in a savings account for a time when the unexpected happens, such as a necessary car repair or dental bill. While these are short-term considerations, you can also consider saving money in accounts that are more suited for longer-term savings, such as a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP).
All in all, if you are considering buying a home, it’s important to have a job that enables you to save money for unexpected expenses, occasional luxuries, and retirement. Extra money allows for the financial wherewithal to consider buying a house. Whereas most Canadians can qualify for a mortgage with only a 5% down payment, you might want to consider putting down 20% in order to avoid mortgage loan insurance.
Unless you’re sitting on a pile of cash or just super great at saving money, it’s almost guaranteed you’ll need to take out a loan to purchase your home. This type of loan is called a mortgage, and it will most likely be the largest loan of your lifetime. Getting a mortgage is a privilege and one that you must prove yourself worthy of to a potential lender by building your credit score.
A credit score ranges anywhere from 300 to 900, with 700-800 considered excellent creditworthiness. A good credit score indicates you’re someone that a lender can trust to pay back a loan. Good credit is established through a consistent history of paying bills (such as cell phone, utilities, car insurance, rent, etc.) and debts (school loan payments, mortgages, car payments, credit cards, etc.) on time. Building credit can take a long time, and perhaps unfairly so; a bad mark can often cause your credit score to decrease much quicker than a good mark can cause it to increase. Lucky for you, if you’re wanting to build your credit or you need to build your credit in order to qualify for a mortgage, KOHO offers a quick and easy credit-building tool.
Pros and cons of owning a home….
Assuming you have a stable income, enough savings for a downpayment (with some money leftover), and an excellent credit score, you’re ready to start looking at properties and shopping around for a mortgage! But the question is: do you really want to?
Being a homeowner comes with some disadvantages. Though there are many advantages to owning a home, the disadvantages may not be convenient for you, such that it may make more sense to continue renting. Whether owning is really the best decision for you depends not only on where you want to live but also on your lifestyle and your goals.
One of the greatest pros of owning a home is that a home is a financial asset that can help you move towards greater financial security in a variety of ways. Owning a home allows you to build equity. Mortgage payments help you further improve your credit and, consequently, provide easier access to additional loans later on, whether that’s for more property or for school, for instance. Owning a home can also act as a potential investment because real estate is more stable than other forms of investments, with the price of real estate generally staying steady and even increasing over time.
Aside from the practical potential financial benefits, owning a home also allows for stability. So if you’re certain that you want to remain in a particular area, owning a home is for you. There’s no landlord to answer to, and you can decorate the space any way you want!
The downsides of owning a home are the most applicable if you’re not financially ready to buy a home. Buying a home requires a large lump sum payment as a downpayment, which can drain your savings. This is a con if you don’t have much savings to begin with.
As a homeowner, you’ll also be responsible for property taxes, condo fees (if applicable), homeowners insurance, and repairs. This can add a lot to the overall cost of homeownership and may detract from any financial benefits. With that considered, it’s prudent to be sure to be financially stable prior to buying a home and really think about whether the long-term financial commitment of owning a home is the right choice for you.
Cities where it is better to rent
In cities with a notoriously high cost of living, it may make more sense to continue to rent. Why? Because it may be cheaper both in the long and short term. Buying a house in any market requires hefty savings for a downpayment. In markets where housing is especially expensive, the average required downpayment may be so large that it turns out to be impossible for the average person.
For example, in a city such as Toronto, the average downpayment for a house is $200,000 and $100,000 for a condo. Vancouver is known to be similarly expensive, and so saving for a down payment may be just as pricey, if not more, depending on the neighborhood you want to live in. If you do not see yourself as being able to save that sort of cash to put towards a downpayment, then it may be best to continue to rent.
As a renter in one of those especially high-cost, in-demand cities, you would be spared having to contend with the additional expenses of homeownership. Areas with higher-priced homes are generally not only more expensive to live in but also to maintain. Owning a home in such an area would of course be more expensive than in a low-cost, less in-demand area. Homeownership in a high-cost area would undoubtedly come coupled with high property taxes, high housing association fees, and high maintenance costs.
In the past, Vancouver and Toronto were not the only cities with hot real estate markets. Hamilton and Victoria also made the list. There are a few factors that contribute to the high cost of real estate in a given area. These factors include overbuilding in a city, price overvaluation, price acceleration, and price overheating.
A gauge to determine whether your city is better for renting or buying is the price to rent ratio (PTRR). The ratio is also useful to analyze a particular area of a city. The PTRR is calculated by dividing the total cost of buying a property divided by the average monthly rent. A higher number, of 21 or more, usually means that it is cheaper to rent in a particular area. In general, areas with a higher cost of living tend to have a higher PTRR ratio and are thus better to rent in. This includes, as mentioned above, the most expensive cities of Canada: Toronto and Vancouver, as well as many other popular cities with a high cost of living, such as Ottawa and Victoria, just to name a few.
Cities where it may make sense to buy
Whether you’re renting or buying, housing costs in Canada have been high (even though they’re showing signs of slowing), especially during the peak of the Coronavirus pandemic. But if you are financially secure enough to buy a home in Canada, and you live in an area where it is practical for you to do so, you may want to start looking around for that perfect home. The question is: Where?
If you live in one of the more expensive cities and you are so financially comfortable that a large downpayment won’t put a dent in your pocket, then of course you can consider buying. That is if you take into account all the pros and cons of buying versus renting. But if you live outside of the more expensive centers of Canada and are not sure if it makes sense to buy, it’s alright to take your time and really think about what is one of the biggest decisions of your life. Consider all the pros and cons, including whether your location is better for homeownership than it is for renting.
Cities with a lower cost of living yield a lower PTRR. If you live in one of those cities, it would be more financially practical to buy a home, over renting. Assuming that you already live outside one of the most expensive areas of Canada (or are able to relocate there), over time, it might actually be cheaper to buy than it is to rent.
Some of these places are not as well-known as the more popular ones. These cities include St. John’s, Newfoundland, Montreal, and Edmonton. While these cities may not necessarily be cheap, they are certainly more affordable than the most expensive cities in Canada because they offer a PTRR that is more favorable towards buying than renting, while also offering access to many cultural activities. Generally speaking, the less in-demand the area, the cheaper the overall cost of living and home prices. Canada is a massive landmass, and so there are many areas that may be less chartered and thus, more affordable for buying a home.
To buy or to rent? That is the question.
Buying a home is the goal for many. It’s a major financial milestone, but depending on your personal and financial circumstances, it may not be the most practical option. To be ready to buy, you need to consider all the pros and cons of owning a home. If buying a home is what you want, then you also need to ensure that you are financially ready to do so.
If you’re looking to buy a home, there are some cities in Canada that are more conducive to buying a home. As a general rule of thumb, those cities offer a lower cost of living, which translates into a lower price to rent ratio, or PTRR. Those cities may not be as hip or popular as the better-known cities in Canada, but may nonetheless be worth considering. Alternatively, if your lifestyle requires flexibility and you happen to be stuck in a city that is traditionally known for being one of the more expensive ones in Canada, then it probably makes more financial sense for you to rent.
Yekaterina Galanova enjoys writing about personal finance, as well as aesthetic topics, though she is open to discovering new niches. She enjoys reading, traveling and beautiful landscapes.