When deciding on a new place to live, you need to think about a lot more than rent and mortgage payments.
It seems so obvious: If you can scrape together enough money for a down payment, then it’s time to buy a home and stop renting.
But is that the right decision for everyone?
To figure out which option will leave you with more money in your high-interest savings account, you’ll need to know how much you can expect to spend. That includes all the hidden costs — the bills you don’t think about, or don’t know exist, until they land like a grenade and blow up your budget.
What do the experts say?
Even though almost half of Canada’s millennials say the idea is just a pipedream, 72% want to own a home, according to a poll by accounting giant KPMG.
But the decision to rent or buy shouldn’t just be about how much money you have. As the leader of Canada’s housing agency points out, you also need to consider what your finances will look like in the future.
“Homeownership isn’t the only path to financial security, as some want you to believe,” tweeted Evan Siddall, president of the Canada Mortgage and Housing Corporation, toward the end of 2019.
“Beware those who will stop at nothing, and expose young homebuyers to financial ruin, by selling the myth of the ‘dream of homeownership.’ Renting works too.”
Is owning better than renting?
While renters’ monthly payments end up padding someone else’s retirement fund, a portion of your mortgage payments will reduce the debt you owe to the bank and increase the percentage of the home you truly own. And that home should increase in value over the long term, giving you a tidy return if you sell.
Isn’t renting less expensive, though? A 2018 study from Mortgage Professionals Canada found that, yes, renting is cheaper about three-quarters of the time — and by a hefty $541 per month, on average.
But what if you consider the portion of your mortgage payments that pays down your debt a form of saving or investing? If you remove that from the calculation, now homeownership looks like the “cheaper” option, by an average of $449 per month.
When is renting a better option than buying?
Homeowners need to make a down payment of at least 5% and likely pay more each month than they would renting. But real estate may not be the best way to invest that money.
Investors can expect an annual return of 6.1% for Canadian stocks, according to the most recent forecast by FP Canada, which certifies financial planners.
And over the last 15 years, the hot real estate markets in the greater Toronto and Vancouver areas have barely matched those numbers. Prices in a cooler city, Edmonton, only increased by an average of 3.7% per year, data from the Canada Real Estate Association shows.
At the end of the day, you do need to pay for a roof over your head – but as long as they have the discipline to invest, renters may see larger returns with their excess savings.
6 hidden costs of renting
Of course, you shouldn’t make your decision based on theory alone. You’ll want to compare the actual costs – and that means considering all of the easily forgotten expenses that can skew the math.
1. Unexpected rent hikes
While owners have to scramble to get the best mortgage rates every few years, their lives are fairly stable. Renters are at the mercy of their landlords.
Even in provinces with rent control, like Ontario and B.C., not every unit is covered, and landlords can try to apply for increases above the rate of inflation.
2. Security deposits
Most provinces allow landlords to demand a deposit, equivalent to a month or half-month’s rent, that they’ll get to keep in case you damage something or break your rental agreement.
That’s technically illegal in Ontario, but landlords can demand an additional month’s rent upfront, which will only pay for your last month in the unit if all goes well.
3. Pet fees or deposits
If you’re a pet owner, you may have to put up extra money to cover the wear and tear or mess your furry friend produces. In some cases it’s a refundable deposit, while other times you’re just out of pocket.
Different provinces have different rules about how much landlords can charge or whether the practice is legal at all.
4. Tenant insurance
You may not own the property, but you do own most of the things inside it. You’ll want to pay to protect your stuff. Tenant insurance can also protect you from liability if your washing machine floods the unit next door.
Protection can cost $50 a month or more, depending on your valuables.
Related: Tenant Insurance In Canada: Your Guide To The Basics Of Renter’s Insurance
5. Parking, laundry, and storage
Not every unit comes with these, so you may have to pay for the privilege, either in your building or off-site. Parking in particular can cost $1,000s per year if you’re in the heart of a big city. In Toronto, for example, realtors peg the average cost of a parking space at $150 per month.
6. Lack of programs
Governments have a slew of programs to help first-time buyers crack into the harsh Canadian housing market. Those include:
- the Home Buyers Plan for tax-free saving withdrawals,
- the Home Buyers Amount tax credit,
- land transfer tax rebates, and
- the First-Time Home Buyers Incentive purchasing scheme.
Renters don’t get to take advantage of any of that support.
10 hidden costs of owning your home
Even if you own your home, there are many hidden costs you’ll need to take into consideration as well.
1. Maintenance
Renters get to call up their landlord whenever the furnace breaks, but it’s not so simple for owners.
If you own a condo, repairs for common areas will be covered by your maintenance fees, but you’ll have to pay for infestations or clogged toilets unique to your unit. And if the condo’s reserve fund isn’t flush enough to cover a big repair job, you could be slapped with a one-time special assessment.
In Toronto, the average monthly maintenance fee is about $0.64 per-square-foot, according to Condos.ca.
People who own a house pay for everything and also have to buy gadgets like lawn mowers and snow blowers. A common rule of thumb is to budget 1% of the value of your home for annual maintenance, though some recommend as much as 5%.
2. Mortgage default insurance
If you’re unable to put down 20% or more of a home’s purchase price, your lender is required to buy insurance that will protect them if you stop paying.
That cost, shifted on to you, will add between 2.8% – 4% to the total cost of your mortgage, says Ratehub. On a $500,000 mortgage, that would be between $14,000 and $20,000.
3. Lost job opportunities
Being rooted to one place means you won’t be able to look far in search of better paying work. If a lucrative job pops up in another part of the province, you’ll be forced to pass it up or eat the cost (and hassle) of selling your home.
4. Utilities
If you own a condo, some of these might be integrated into your maintenance fees.
Otherwise, you’re ponying up a few hundred per month separately for heat, air conditioning, water, and electricity – not to mention cable and internet, which are sometimes included for renters.
Plus, if you’re a new customer, you may have to pay a refundable deposit of up to $300 for each new service you sign up for.
5. Property tax
Homeowners bear an extra burden that helps pay for things like garbage pickup and road maintenance.
The average annual property tax in Canada is $8.82 per $1,000 of a home’s value, according to a 2019 study by the real estate company Altus Group.
6. Home insurance
Any asset this big needs adequate protection. Home insurance will project your property from threats like fire and cover you if someone slips and falls in your kitchen. The average home insurance premium across Canada was $95 per month, according to a J.D. Power study.
Those are the ongoing costs, but don’t forget about the one-time fees associated with buying or selling a home.
7. Home inspections
If you’re going to sink thousands into a piece of property, you should probably get an expert to make sure it’s in good shape. That can cost $250 to $400 per inspection, according to Genworth.
8. Closing costs
Buying a home isn’t a simple transaction.
BMO says you should expect to spend:
- $500 or more on legal fees,
- $300 or more for an appraisal,
- about $400 on title insurance, plus
- an additional $100 for an estoppel certificate if you’re buying a condo.
If the seller prepaid for utilities or property tax, you’ll also be on the hook for those adjustments.
9. Land transfer tax
Every province except Saskatchewan and Alberta has one, and even those places charge hundreds in similar fees.
In Ontario, land transfer tax will cost between 0.5% to 2% of a home’s purchase price – and in Toronto, you’ll pay thousands more for a bonus municipal land transfer tax.
However, first-time buyers in Ontario, British Columbia and Prince Edward Island can get a rebate that may cover the entire cost.
10. Sale costs
Are you planning to keep this home for the rest of your life? If not, you’ll need to pay up to 7% of the property price in commission to realtors, and possibly thousands more to your lender if you decide to break your mortgage early.
What do you think?
In the end, there are a ton of other variables that can make either an owner or renter come out ahead.
You’ll never be able to calculate your options to the dollar, but by thinking about these hidden costs, you’ll have a far more accurate picture than the guy who’s only comparing rent and mortgage payments.
Kevin Hamilton is an associate editor at MoneyWise. An award-winning graduate of Ryerson University’s school of journalism, Kevin has made his mark at a number of publications including Metro, the Toronto Star, the Huffington Post, Toronto Life and the National Observer.
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