In the fourth episode of our Open Money podcast, Bridget Casey and Melanie Rousseau share their views on the age old question of “to rent, or to own”.
Home ownership has historically been considered a rite of passage into adulthood. But, with the average price of a home in Canada is more than $600,000, many young people are wondering if they can ever afford to buy and maintain a home. They also worry that they haven’t fully entered adulthood until they do.
Is home ownership the right choice for you?
How does one get into the housing market today and does it always make financial sense?
“Real estate is not for everybody. The expectation of owning real estate is what society ingrained in people: If you have owned real estate, you have succeeded. But that might not be true for you. It might be travelling, it might be completely something different,” says Melanie Rousseau, a single mom, mortgage agent and founder of Money Mama.
While Melanie found growing wealth through real estate made financial sense for her, she knows that path is not as clear for others.
“We have what are called cognitive distortions or automatic thoughts that are all or nothing,” says Jenn Betts, a psychologist and CEO of the Calgary and Edmonton Institutes of Counselling. Jenn says we often think that we should own a home, because if we don’t that automatically means we are not successful in life.
One root cause of this dissatisfaction today comes from social media, which leads us to engage in what Jenn calls the “comparison game”. She hears from clients who feel behind in life because they see on Facebook these happy portrayals of people who own their homes. But those messages are usually idealized.
Rather than falling into the trap of such comparisons, Melanie and Jenn say it’s important to dig deep into your own values and consider what it is you really want.
Renting is okay, too
Bridget Casey, an Alberta-based investment expert and columnist for The Globe and Mail, makes a good case for renting.
“Renting is still more affordable on a monthly cash flow basis and maybe you have a lifestyle where you want to live in an urban centre and renting is the only way that you can afford to do that,” Bridget says.
It is hard to ignore society’s messages, however, especially those coming from parents. Baby boomer parents were able to buy their homes for very affordable prices in the 1970s and 1980s. Then with unprecedented appreciation on those homes, they were able to secure a retirement nest egg. What they might not realize is that younger generations such as millennials are facing a completely different landscape.
“We don’t know if we’re going to continue to see those gains that we’ve had in the housing market for the next 30 years,” Bridget says. “I feel every young adult encounters this. For a long time I actually experienced a ton of family pressure to buy a home even though I was much more comfortable as a renter.”
Not only can people be pressured into home ownership but they can be steered away from renting, Bridget says. There can be stigmas – some people see renting as less safe because of fears of bad landlords and being “renovicted” – but Bridget points out that home ownership comes with many expenses that can actually put someone in a more precarious situation.
“I think renting is actually a great choice,” she says.
Do your homework
Opting out of home ownership also does not mean opting out of growing your wealth, Bridget says. “I think if you’re a renter and don’t want to be a homeowner or you can’t afford to access the real estate market in your city, then you can build wealth in investments like TFSAs [Tax-Free Savings Accounts] and RRSPs [Registered Retirement Savings Plans] invested in the stock market.”
It is said that knowledge is power and, especially because a home is likely to be the single largest purchase of your life, it’s important to go in with eyes wide open.
“There are lots of misunderstandings of just how expensive they are, how much down payment you have to put down, and also how our mortgage terms work.” Bridget says. “The math should be first.”. Use Servus’s mortgage calculator to help.
If you're interested in home ownership – sit down with a mortgage broker and understand what mortgage products are out there and any of the associated costs.
Jenn says people should also realize that home ownership is not only a big financial commitment but has an emotional cost as well.
“No one talks about the emotional toll of being a home owner – it is an incredibly stressful time for homeowners, especially at the beginning when you're putting the down payment down, when you are financing and mortgage rates are so high right now,” she says.
Still feel that home ownership is for you? If so, you need to understand the interest rate landscape and housing prices in your market of choice, and you really need to focus both on your income and putting together the down payment.
“People don’t actually realize how much your income matters,” Brenda says. “If you want to buy a home, focus on increasing your income first, not only to help your mortgage application but because that gives you more money to save the down payment.”
When it comes to the down payment, the bigger it is the better because you’ll have lower mortgage payments and will pay off the home faster. A down payment of 20% of the home’s purchase price is ideal, the minimum is usually 5% and most experts advise striving for at least 10%, as well as having the cash for closing costs.
The government has made a number of tax-sheltered accounts available that can make it easier to save for a down payment or access funds. One is the Home Buyer’s Plan (HBP) that allows first-time buyers to withdraw from their RRSP to help buy a home. New for 2023, Brenda says, is the First Home Savings Account (FHSA), which lets first-time buyers save for a home tax-free. Both of these programs have conditions and limits on withdrawals and contributions, so it’s best to sit down with a mortgage broker or financial advisor to see which options are right for you.
Stuck deciding between whether to rent or own, see how the math breaks down with our rent vs. buy calculator. And if you want to know more about how you can gain confidence in making financial decisions and find solutions you can feel good about, talk to a Servus Credit Union advisor.
Illustration by Emily Chu