Many young couples and families are looking to buy their first home. Some are undecided if they want to be life time renters or buy a home. What should you do? There is no easy answer to the question. What I will try to do is break down some numbers and put in a few scenarios to help you the reader decide.
First all it may depend where you live. Many large cities in Canada the average house price is well over 600k. Let’s say you purchased your house for 600k, and with the land transfer tax, and other fees, you have a 500k mortgage. A mortgage rate of 3% amortized over 25 years a monthly payment of $2996.06 would be paid. Assuming no extra was paid off during the 25 years with interest the 300 payments made would total $898,816.97. With property taxes of $187,500.00 over the lifetime of the mortgage.
Assuming at the beginning you will be paying $5,000.00 the first year on property tax, $35,952.72 in mortgage payments, and at least another $2,500.00 a year in heat and electricity, your yearly total of housing would be $43,452.72.
Let us also assume that after tax a couple is bringing home $80,000 a year. That is more than 54% of your income! Which is a very common scenario. This is not even including child care, food or clothing.
Now for renting a home. Assuming you will pay $1,500.00 a month for a nice apartment where the heat and electricity are included. That will equal $18,000.00 a year. Or 22.5% of income based on $80,000.00 a year.
Okay I’m saving all this money on housing but what about my retirement. As a couple if you put $20,000.00 a year annually into RSP’s for 35 years, with a 5% rate of return, you will have well over a million dollars for retirement. Plus if you max out your TFSA, even more. Verses the scenario of only $5,000.00 a year you will have less than 20% of that save up for your retirement. Plus you may have extra money for travel abroad, and or your children’s education.
If you do buy a house and sell it after 25 years you may make a substantial profit of 400k+, but remember by not buying a house and investing the money in RSP’s you are coming out on top of the game. Also house prices are so high at the time of this writing, and mortgages are quite low. This won’t always be the case, and when rates are high for mortgages the housing market slows down a lot. Home prices vary so much in a city, that the same size house and property maybe more than double the price in another part of town.
In the end it is all up to you. Many people don’t like renting and will always want to own a home. Some like being able to decorate however they choose without worrying what a landlord will or will not allow. There is no right solution for everyone. Especially if you live in a smaller town and the housing prices are a lot cheaper. Then you can maybe afford to put more into an RSP and have more for retirement.
