BY RON BARLAY
With today’s low mortgage interest rates, buying can be a viable option for many individuals. Gone are the days of double digit interest rates. Instead, home ownership is not only possible, but also viable and worthwhile. Owning a home is such a great way to save for your future and build equity. It doesn’t have to be scary and it doesn’t have to cost you more than your monthly rent does.
Consider the example below:
Buying a condominium for $400,000. We put $20,000 down and we arrange a 3% mortgage based on a 5-year, fixed term with a 25-year amortization (pay out). Our monthly payment, including principal and interest, is $1,798 and we will make 300 monthly payments over the 25-year pay out of the mortgage. We also assume property taxes starting at $3,000, with an annual increase of 1%, and condo maintenance fees starting at $250/month, with an increase of 1% per year.
Renting a condo for $1,800 a month. Suppose you rent an apartment over the same 25-year period. Suppose, our monthly rental is $1,800. We have assumed an average annual rent increase of 3%. Rent increases would not be 3% every year. In some years, they could be less than 3%, and in other years they could be more than 3%. (It should be noted that the Ontario Rental Housing Tribunal sets the maximum annual rental increases.)
Over 25 years, the total cash required to purchase the condo would be $708,859 including mortgage payments, maintenance fees and property taxes. Over that same period, rent would cost $787,520 over 25 years. In terms of only cash flow, over the long term, the cost to buy your own home, based on today’s low rates, is actually cheaper than renting a home.
Furthermore, this cash flow example does not include the equity you acquire with the purchase of a home or appreciation. In the case of renting, all the money you spend each month must be considered as an expense. The entire $787,520 is gone, just like buying groceries with nothing to show at the end.
In the case of purchasing, a large percentage of the money you spend is buying you equity. This investment is in your own property, which is also appreciating.
Buying a home is such a great way to save for your future. It is like investing, but you also reap the benefits of living in your investment at the same time. The time has never been better to own a home; with such low interest rates and such great home appreciation.