When it comes to housing decisions in the bustling city of Toronto, one size definitely doesn’t fit all. The choice between renting and buying is not just about bricks and mortar; it’s about your lifestyle, financial goals and your future aspirations. With the current volatility in the market, one should always keep an eye on systemic risks like interest rates and inflation before making any decision. It might sound rocket science, but you needn't worry as we’re here to help you navigate through this challenge keeping in mind your emotional investment as well :)
First of all, I would like you to ponder these questions before jumping the gun!
Do you have the right financial means to afford a down payment?
Do you want to buy a house for investment or residence purposes?
Do you have a good credit score, i.e., 690+?
What proportion of your monthly income are you setting aside for rent/mortgage?
Can you afford higher interest rates beyond the mortgage stress test in case your calculations go for a toss?
How will you pay in case you get laid off or fired?
Do you value flexibility, or are you someone looking to build equity and settle in one place?
Are you a downtown person or a more relaxed city one?
Do you have any plans of pursuing a business idea, taking a sabbatical or a long vacation in the near future?
Are you aware of the saying that ‘rent is the maximum amount you pay vs mortgage is the minimum amount you pay per month for your shelter?
It’s important to ask yourself the right questions before taking a position so that you’re aware of your financial stability and do not end up becoming ‘House poor’. It's worth noting that while you might have the means to spend $3,000 per month on housing, studies suggest that many individuals find greater joy in allocating $2,500 to their housing costs and having an extra $500 to indulge in their immediate desires.
Let me walk you over the financial aspects of your decision, taking into consideration two different scenarios
Renting vs buying in Toronto downtown (2 Bed one bath condo)
Renting a 2 bed one bath downtown condo vs buying a 4 Bed 2 bath house in the west or east within 1-1.5 hrs. distance from downtown
Before delving into the numbers, it's essential to ensure that you're well-versed in the nuances of mortgage down payments and loan insurance. Understanding these aspects lays the groundwork for making an informed choice. The minimum amount you need for your down payment depends on the purchase price of your home!
In case your down payment is less than 20% of the price of your home, you will need mortgage loan insurance (from the Canadian entity CMHC). Remember, this insurance protects the lender in case you can’t make the payment; it doesn’t protect you.
| SISTERLY ADVICE- unless you have very good reason to pass on mortgage loan insurance - your lender will try to push hard to sell this to you because they make a lot of money from this product. There is almost no benefit to you. |
Now coming back to analyzing scenario (A),
Suppose you’re taking a 2 bed 1 bath condo in Toronto Downtown. The purchase price is approximately $700,000 with a 30-year mortgage payment and a 5-year fixed rate of 5.95%.
As per our market research, your figures will look like
We have used this Link to calculate the mortgage payment with the assumption that 20% of the purchase price is paid as the down payment and there is no mortgage insurance taken (we recommend saving for an upfront down payment before buying a house to minimize your debts).
As you switch from being a renter to an owner, there is a change in the monthly maintenance and repair expenses that you will have to bear on your own now. If you want to understand the intricacies involved with it, you should read about the maintenance guide. Owning a condo downtown will come with additional costs; a condo fee, and an annual property tax rate of 0.61%, which, added up, will cost you roughly $1,800 more per month than renting a condo but will give you the benefit of having your own equity asset.
Analyzing scenario (B)
Now let’s look at the difference between renting a 2 BHK downtown condo vs buying a 4 Bed 2 Bath house in the west (Mississauga) or east (Pickering). According to market research, the average price for the property in Mississauga is $1M, and Pickering is $900,000 with a 30-year mortgage payment and 5-year fixed rate of 5.95%.
I’m here to ‘Untangle’ the financial aspect of these considerations for you.
Owning a detached family house in the suburbs will cost you approximately twice as much per month compared to renting downtown. And this doesn’t include increased transit costs if you need to commute downtown. However, you will get three times the space compared to what you would get in downtown Toronto. Prices in Pickering are less than in Mississauga, but the property tax in Mississauga is 0.82%, whereas in Pickering, it is 1.1%. Property insurance premiums are double in the west compared to the eastern side of Toronto. Overall, we estimate that you would end up paying 6% more per month if you decide to buy in Mississauga.
Apart from the financial aspects, housing has other elements to be considered when deciding on your position. Let’s delve into these non-financial considerations now by pointing out the unique selling points for each location. Pickering is famous for its picturesque waterfront, parks and recreational facilities. It has a smaller population which makes it a close-knit community place. Mississauga, on the other hand, offers city life and is a good hub for educational institutes like the University of Toronto, which can be an essential factor for families with kids. Living downtown provides proximity to the hub of Canada, and you’re always surrounded by a variety of events and activities. Every city has its own charm, and the ultimate decision comes down to your priorities and the environment you want around for your family.
Balancing the double-edged sword is important
There is no standard operating procedure for this decision. It depends a lot on your overall priorities and your personality. There’s a multifaceted way to look at every scenario, and the strengths and weaknesses of each choice change according to each individual. As you grow old and if you decide to have children, the consideration of proximity to schools and hospitals will become an important factor, while those who choose not to have kids will not have to worry about it. Hence, it is very subjective, and we would be in a position to give an exact opinion according to your personal situation only once we know you more.
Renting provides financial flexibility and lower risk in the short run because there is no upfront extra down payment required (it may be less desirable to commit to a hefty debt in a fluctuating job market). On the other hand, buying will give you access to the growth in equity value, and there are tax benefits for the homeowner as the increase in value of your principal residence is not taxable when you sell. Ultimately, whether you choose to rent or buy, the key is to align your housing choice with your financial situation and long-term aspirations; by carefully weighing the pros and cons, you can make a well-informed decision that sets you on a path to being house rich.
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