Compare Renting a home with Purchasing a home.
The criteria above is used
to calculate what the average annual increase in home value must be to reach a
financial break even point - if you anticipate a lower % increase in home value, this means renting may be the better option.
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The rental alternative will allow you to save and invest both the downpayment of
$ 25,000 and the monthly rental savings, initially at $ 26.
At the end of the 36 month term your before tax
investment will have grown to $ 26,508, assuming the savings rate of 0.75 % per annum.
After paying annual income taxes at 0 % on the investment interest gain, the investment will have grown to $ 26,508.
In order for the home purchase alternative with a mortgage interest rate of 4.75 % to perform as well as the rental option,
the annual rate of property appreciation must be at least 0.49 % .
Total property appreciation of 1.49 % together with principal repayment would result in homeowners equity of $ 31,582 in 36 months,
less the 5 % cost to market the home of $ 5,074, for a net gain of $ 26,508.
If the home value increased by more than $ 1,488 ( 1.49 % ) in 36 months, purchasing would be a better financial option than renting.
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RENT
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OWN
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Canadian Calculation - Compounding Semi-Annually
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Down Payment (25 %)
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$ 25,000
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First Mortgage Amount
(Includes Ins. Fee of $ 0)
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$ 75,000
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TOTAL PRICE
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$ 100,000
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Monthly Costs
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Mortgage Payment
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$ 426
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Property Taxes
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$ 0
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Condo Fees
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$ 0
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Other Costs
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$ 0
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$ 0
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Rent Payments
($ 400 Month 1 to $ 400 Last Month)
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$ 400
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Total Monthly Payment
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$ 400
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$ 426
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Monthly Cash Savings
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$ 26
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RENTAL cost always lower than Monthly OWNERSHIP cost in example. |
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Future Value at Term ( 36 months)
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Down Payment Saved (@ 0.75 %)
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$ 25,569
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Monthly Cash Savings (@ 0.75 %)
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$ 939
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Taxes assumed to be paid annually (12th period) on interest.
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Required Home Price at Term End
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$ 101,489
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Less : Mortgage Balance
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( $ 69,906 ) |
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Less : Sales Commission (@ 5 %)
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( $ 5,074 )
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Equity at Term
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$ 26,508
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$ 26,508
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Less Income Taxes on gain ( @ 0 % )
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( $ 0 )
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$ 0
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NET After Taxes
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$ 26,508
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$ 26,508
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Required ANNUAL Home Price Increase Rate
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0.49 %
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Required TOTAL Home Price Increase % (36 months)
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1.49 %
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Required TOTAL Home Price Increase (36 months)
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$ 1,488
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It is always difficult to forecast home price increases, but if the likely Annual Increase is higher
than the above %, then buying a home would be the better option. If home prices do not rise by the
above %, then renting would be a better option. Note that other factors with home ownership
may impact the financial decision including the potential to borrow funds at lower rates if you own a home.
Input a 0% commission rate
if a sales commission is not payable. The savings rate is the percentage return on funds saved.
The Mortgage Insurance Fee (Insur. Fee - ie. CMHC) is usually required for down payments less than 25%.
Other factors to consider include heating costs - are they included in rent ? Home Insurance costs may also be factored in
as another cost. Additionally, maintenance costs should be considered as part of home ownership and may be added to
"other costs".
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