Owning a home in our society today is a much simpler task, than it was twenty years ago. There are many mortgage options, Realtors, mortgage brokers, financial institutions and other services, eargerly waiting to get your business. It’s common knowledge, that owning a home is a better solution than renting. Right? I think so. There are arguments from both standpoints. Renting is a better option, some will say. Whichever way you may choose to go, one way or another, you will have to pay to have a roof over your head.
If you own a home or are entertaining the idea of home ownership, I’m sure you’ve heard statements such as:
“Home ownership is a great way to build wealth”
“If you are renting, you are just throwing your money away”
“Owning a home, can be a forced savings plan”
I purchased my first home almost two years ago and personally, it was one of the best financial moves I’ve ever made. I chose to buy my first home for a number of reasons, such as; 1) Independence 2) Building Equity 3) Being the Boss 4) Privacy. Despite the fact that I had an excellent life at home, where there were 4+ freshly cooked daily meals, laundry washed and folded, warm and welcoming home and all the entertaining options one could have, I still decided to buy a home.
Real Life example (my home ownership costs):
900 sq. foot condo, 2 bedroom condo/1 washroom in an average neighbourhood (Toronto)
Principal & Interest – $245 (bi-weekly)
Property Tax – $120 monthly ($1200 annualy)
Monthly Property Maintenance – $440 ($5280 annually, includes heating, water, electrical, pool, parking & cable)
Condo Insurance: $150 Annually
Total Monthly Cost: $1062.50
Real Life Rent Example (Friend’s Condo):
Aprox. 800 sq ft, 2 bedroom/1 washroom condo
Included: Water, Electircal, Heating, Pool
Monthly Rent: $1200
Home Insurance: $40 monthly
Total Rent & Insurance: $1240
As you can see above, from the two real life examples, I am better off owning a home. We both live in the same nighbourhood, have the same type of condo (give or take), yet I am getting more value from mine. My premium cable is included and it’s still cheaper than my friend’s condo. Yet the kicker to all of it, is that I am building some equity, while the friend pays a monthly rent, with gaining noting in return.
The upside to the friend’s scenario, is that they are not locked in for five years. I am locked in with my bank on a five year mortgage term, so my obligation is bigger. This is true, but you can’t have one without the other. I am happy to be locked in, obligated for my term of five years, rather than throwing away money on rent. That being said, it’s a personal choice, it works for me.
I am sure you’ve heard this:
“Buying a home, you are pre-paying your shelter for life”
I have to disagree with the above. In essence you are pre-paying for rent too (first and last), just that you are not locked in. One way or another, one needs shelter and you get that only via rent or home ownership, that’s unless you have a wealthy family, that will buy you a home or pay your rent, which is not the case here, but I like my self independence.
Home Ownership a way to build Wealth:
This is true and it’s a conservative (lower risk) way to build wealth. There are many out there, who will argue, that stocks are a much better way to build wealth. They might be, but what if one is not comfortable with stocks. They don’t like investing. Don’t want to pay a broker, broker fees or a financial advisor. Also, let’s not forget what happened in the latest recession, where in some worst case scenarios, lifetime of investments were wiped within a day. There are positives to both sides, home ownership or stock investing (example) are both investments at the end of the day, it just depends what is right for you and which way you want to build your wealth.
Owning a home is forced savings:
Home ownership is not a savings plan, but rather an investment. Yes I know that I am paying interest on my home (mortgage rate – 3.5%), but how else would I be able to own a home? It would be impossible, so the bank, needs to get it’s cut as well. It’s called business and in any business, everyone needs to get a slice of the pie, in order to make it a successful transaction. Without pain, there is no gain. If one is looking at a savings plan (strictly savings), they should sign up with ING Direct and get 4% paid in interest on their savings.
I am well aware that out of my $245 monthly payment (principal & interest) that I pay nearly 80% of it towards interest, rather than the principal of the home, for years 0 to 5. As mentioned above, without a lending institution, there would be hardly any home owners or a Real Estate market at all. It’s part of business. Furthermore, like I mentioned, without pain, there is no gain, you have to give some, to get some. In this case, I am paying interest to have a place where I’m the boss and to take a shot at gaining equity through the market.
Home ownership is not for the faint of heart. It takes a lot of planning and discipline, yet a lot of courage. To most people, owning a home, is a single biggest investment they will ever purchase. I love being a home owner. I like being the boss to my own home, so that I get a chance to decorate it the way I want to and make it feel warm, the way I like it. Further, I enjoy my privacy. As much as I love my family and have a super awesome relationship with them, I enjoy just kicking back and relaxing in my own privacy, having who I want, when I want over.
Prior to buying my home, nearly 2 years ago, I ran all the numbers and it made total sense. Not to mention, I took advantage of the, Home Buyers Program and got a nice tax return and was able to use my RRSP savings as my down payment. I am happy and so grateful that I made the move then.
Nearly two years later, I have about $35K worth in home equity (based on market value), after some upgrades, money invested and after Realtor fees. I firmly believe that owning versus renting, is a far better choice and as you can see, from my live examples above of home ownership versus rent. Also in my case it’s a cheaper option too. If you are ever in doubt or are thinking about buying your first home, do the math of rent versus buy.