Whether you should rent or buy a place to live is one of those eternal personal finance dilemmas – but it’s not just about money.
“Lifestyle is a factor in buying,” said Desirae Odjick, the mind behind Half Banked, a popular website with money-management advice for Millennials.
Of course, the decision does involve a lot of financial considerations. But owning a home is generally a long-term commitment that will affect your choices, habits and career as much as your wallet, she noted. Before you even get to the math of renting vs. paying the mortgage, you may want to think about what you really want out of life.
READ MORE: Could you pass the mortgage stress test? Here’s how to find out
Sean Cooper, who paid off his $255,000 mortgage in three years at age 30 and wrote a book about it, has three lifestyle questions he likes to put to people who can’t decide whether they should take the plunge into homeownershp. You could call it a homeownership personality quiz.
SIGN UP FOR ERICA ALINI’S NEW MONEY123 NEWSLETTER
The homebuyer’s personality quiz
- Do you check your grocery bill? If not, you may be ‘leaving money behind’
- Tim Hortons customer sues for $500K after being burned by hot tea
- First home savings account: Banks say they’re not ready for an April 1 launch
- U.S. banking system stabilizing, situation ‘very different’ from 2008 crisis: Yellen
Here are Cooper’s three questions to help you figure out whether you’re a renter or homeowner at heart.
- How long are you going to live there?
You might not even want to consider homeownership if you think you’re going to move in less than five years. Selling a house is a costly affair, Cooper noted.
Paying for land transfer taxes, real estate agent commissions, and lawyers, to name just a few, could easily wipe out all or most of the price appreciation gains you might see over the span of a few years, he added. Transaction costs generally amount to between 1.5 per cent and four per cent of a property’s purchase value, so if you know you’re going to have to sell it soon, buying a home is probably not worth it.
At the same time, the last thing you want to do is let your mortgage dictate important life choices.
READ MORE: 3 tips that could save you thousands on your mortgage, as interest rates rise
“Don’t turn down a great job opportunity because you’re tied down by the house,” Cooper said.
And trying to have it all – by taking the job and renting out your property – may backfire, he cautioned. Being a landlord when you’re living at the other end of the country (or the planet) can be a headache, he noted.
READ MORE: New mortgage rules 2018: A practical guide
- What are your long-term plans?
For the reasons mentioned above, you want to buy a house that will fit your needs for the foreseeable future. So if you’re planning to add children, a German shepherd and a couple of cats to your life, try to aim for a property that will be able to accommodate everyone. Moving to a bigger place when you’re renting is easy – selling your home and buying a new one much less so.
WATCH: Sean Cooper, who wiped out his $255,000 mortgage in three years, shares some tips on how to reach mortgage freedom
- How will owning a home affect your cash flow?
This sounds like a money issue, but it is also a lifestyle question. The math may well show that you can afford to buy a house without becoming financially overstretched. But renting a comparable property is generally cheaper, which means you’ll have more spare cash for things like vacations and dinners out.
“If you’re a foodie or a travel bug, you may be better off renting,” Cooper said.
“I’ve definitely heard of people who bought a house and then went back to renting after a few years because of the sacrifices they had to make with homeonwership,” he added.
Odjick agrees. A mortgage “is something that is going to be a truth in your monthly money situation for years and years and years to come.”
WATCH: Thinking of buying your first home? Here’s what you need to know.
The next step. Can you afford to buy a house?
Once you’ve figured out whether you want to buy, you can start thinking about whether you can buy.
Odjick offers two financial rules of thumb to figure out how much house you can afford. The first is keeping the purchase price of the house to about three times your household income. If you’re making $100,000 a year, you’re looking at a property going for roughly $300,000.
“That is a really controversial and aggressive rule right now, especially in hot housing markets like Toronto and Vancouver,” she told Global News. “But it will protect you from taking on what ends up becoming a crushing mortgage.”
READ MORE: The deal hunter’s guide to getting the lowest mortgage rate
The second rule is keeping your housing expenses — mortgage, property taxes, utilities — within 30 per cent of your take-home pay.
Home insurance, maintenance and repairs also add considerably to the ongoing expenses you’ll face as a homeowner.
Cooper suggests getting pre-approved for a mortgage before you go house-shopping to get a ballpark idea of what you’re going to be able to buy. There is no commitment to sign a mortgage with the lender who provided the pre-approval, he noted.
Still, whether you decide to rent or buy, think of your home simply as “a place to live,” Odjick said.
True, a paid-off home is a valuable asset. But to free up that equity, you’ll need to sell it and find somewhere else to live, she noted.
And while a mortgage is a “forced savings vehicle,” if you’re disciplined enough, you can set aside and invest the money you’re saving by renting instead of owning, Cooper said.