Buying versus Renting versus Mortgaging
So here are all my numbers.
The place I end up buying will be a condo, which means I need to pay taxes and condo fees in lieu of rent.
WAIT, WHAT?
DOESN’T BUYING A HOME MEAN $0 IN RENT?
Yes and no.
This makes total sense to me because while I am no longer renting, I should really be setting aside money each month for the maintenance of my home (if it wasn’t a condo), and I would still have to pay property taxes each year anyway.
For me, paying condo fees is not a bad thing. It is so I can use the amenities, have the gardens landscaped, building maintained, garbage taken out (I don’t need to haul a single thing), a security guard, etc.
I ain’t mad.
RENTING VERSUS OWNING
Renting would cost me $1150 a month, plus another $700 in basic expenses, so I spend currently around $1850 a month for BASIC expenses.
(I obviously spend more, but that’s just because I want to, I don’t need to.)
If I end up owning outright, you can see I would save about 38.19% a month.
WHY NOT GET A MORTGAGE?
Reader Taylor asked “why not get a mortgage”?
Great question!
It’s because I would pay much more monthly than renting and I would lose a lot more in interest over the long-term.
3 LOANS IN DETAIL
I did the math with 3 major mortgage loans in detail as shown above, with 2 mortgage amounts.
$360,000 for the first and $180,000 for the second and here’s why:
$360,000 mortgage – with my partner
Now, my partner is not planning on getting a mortgage, but let’s say he was and we were in it together.. it would be anywhere from $1649 to $2031 in mortgage payments each month, losing anywhere from $134,627 to $249,212 in interest that I’d be paying to the bank.
$180,000 mortgage – by myself
For the second loan amount which is more realistic, as it would be me getting a mortgage for my half of the amount, I would borrow $180,000.
I would lose anywhere from $67,313 to $124,606 in interest over 25 years and pay anywhere from $824 to $1015 extra a month over my condo fees & taxes.
OWNING OUTRIGHT VERSUS RENTING & OWNING WITH A MORTGAGE COMPARISONS
I did the math below with the $180,000 mortgage by myself as it is the most realistic.
You can see the same monthly budget amounts below for each of the 3 loan amounts of what I would be on the hook for as my new expenses of $1967.50 to $2158.50 a month.
I did the math with 3 rates (10 years fixed, 5 years variable, 5 years fixed) over 25 years (maximum) as amortization.
So if I took a mortgage of 25 years, it would all be more expensive than renting, let alone the cost of just owning the home outright instead.
Now when I look at owning outright, 100% paid versus owning with a mortgage, just the straight numbers alone (not including the total interest lost over 25 years), show that I am spending anywhere from $824.00 to $1015.00 a month extra than if I just owned out right.
Now if I decided to rent instead of getting a mortgage, I would paying $117.50 to $308.50 a month extra for the privilege.
Also not good.
RENT OR BUY IN CASH
Unless I rent or buy outright, it is a fool’s game for me to take a mortgage and not only pay more every month and increase my household expenses but lose $67,313 to $124,606 over 25 years.
It doesn’t seem like a lot, but I hate paying fees and I hate paying banks.
My only options were to continue renting… or buy in cash.
If I had done the math with renting a cheaper apartment, it is still a better deal for me to own outright than to rent as you can see below, I am saving 50% of that rent amount by owning outright and not having a mortgage.
So there you have it. Owning is cheaper if you are able to get what you want in cash for the location and building that you want.
We had been waiting all this time, renting, because we had wanted a deal (some sellers are totally out to lunch with their asking price), the market is low enough now for us to jump on it, and we plan on keeping this place forever.
Or as close to forever as possible.
I don’t foresee us moving, and if we truly needed to, we could always rent it out instead to recoup the loss and make a little income on the side.
*shrug*
13 Comments
-
-
Sherry of Save. Spend. Splurge.
That’s the way I feel too — even if I travel or go elsewhere, I have to pay condo fees, taxes… utilities… it still hurts!!
-
-
tomatoketchup
A few questions:
1) Why are mortgage rates so high in your examples? Maybe it’s a Canada thing, but here in the US you can get a 15 year fixed mortgage for around 3%.
2) You’re comparing interest lost in a mortgage versus cash, but what about taking that extra money and investing it in a stock index fund over the term of the mortgage? Statistically, it’s likely to return more than 3%. It certainly could drop as well, but with mortgage rates this low, most people (from a purely financial standpoint) would do better putting 20% down, getting a 15 year mortgage, and using the extra cash not immediately spent on the house to invest in the market, either in a lump sum or dollar cost averaged over a period of time.
-
sherry@savespendsplurge.com
1. It is definitely a Canadian thing. We get screwed royally on rates EVEN THOUGH the Bank of Canada has the Prime Rate in the NEGATIVE the last I heard. -0.5% It is ridiculous. The banks have NOT lowered the rates for the consumer and are just pocketing the money. These are the best rates I can get.
2. Great point. Statistically it would return more than 3% but if my mortgage rate doubles after 5 years, I’m done. Average mortgage rates here I think have been 7%, and have gone as high as 13% in bad times. I’d rather go with the “safe” investment and pay for it in cash. I’d rather be free and clear.
-
tomatoketchup
Wow. Yeah, with those numbers I think you made the right call.
-
sherry@savespendsplurge.com
I’m just going to see it as making 2.70% to 4.69% on my money (5 year variable to 10 year fixed rate).
We also can’t deduct the mortgage interest from our taxes either. We don’t have so many homeowner loopholes.. I haven’t looked deeply into it but the whole business turns me right off.
-
-
-
-
C
In Canada, could you also choose a shorter mortgage term, with lower interest rate? That was what I thought you were doing at first with the 5- and 10-year mortgage rates, but then you said they were 25 year loans. My husband and I were able to refinance from a 30 year fixed to a 15 year fixed and we save a boatload on interest due to quicker payoff and a lower interest rate, even with the refinance fees. Plus, we are prepaying aggressively and should have it all paid off in ten total years from purchase.
Although I’m not big on debt and hate financing the bank fees, I do really like the flexibility of not having so much of my money tied up in the house quite yet – I’ve been using the cashflow to invest regularly in a brokerage account.
The math may still not work out for you (plus those rates seem higher than what I’d expect post Brexit!) but it may be worth considering if you haven’t already done so.-
sherry@savespendsplurge.com
In short, not really. As I understood, The shorter the mortgage term, the higher the interest rate. The mortgage term has to be long for the rate to be short.
I did think about it but in the end, I just want to be free and clear. I am OK with all my money tied up there, as long as I have money to live until my next contract 🙂
-
-
Taylor Lee @ Yuppie Millennial
While I agree your monthly cashflow is worse off with mortgage, I do think your calculation ignores the fact that after 25-30 years you have a paid off property (imputed rent, ftw!). When comparing non-recuperable housing expenses (i..e. everything but principal payments) I would suspect your mortgage < rent. That said, if you are content doing all cash and it works out for your financial plan that is all that matters.
-
sherry@savespendsplurge.com
Sure, but I have a paid off property NOW if I buy outright. Didn’t miss that part.
Also, it’s a principal residence, not an investment one. I’d have to live SOMEWHERE.
And also you asked me why I would buy outright instead of getting a mortgage, not whether or not renting was better than a mortgage.
-
Taylor Lee @ Yuppie Millennial
Sorry if I was unclear. What I was responding to was in a previous post when you mentioned the math only worked out if you paid in cash. I took that to mean your monthly unrecoverable housing related outlays were higher than rent (because that’s how in my brain I would compare the two). It’s great you can pay up front with cash and you should do what works best for your family. Congrats on the house!
-
-
-
-
Jenerra
Mortgages do have extra benefits. 1) Interest paid on a mortgage in the US can be deducted for tax purposes (assuming you aren’t impacted by the Alternative Minimum Tax). I’m not sure if the same holds true in Canada. 2). By taking out a mortgage, especially with rates as low as they are right now, that money you would have spent in cash could be sitting in an investment account and earning interest that, in many cases, would outpace what you’re paying in interest on your mortgage. Just something to consider 🙂
Post a comment
You may also like
What made me decide to give up 90% of my things, live in a hotel and travel?
About 6 months into my job right out of college, I decided that I would live in a hotel full-time an
How minimalism can help you afford a house
The key word here? DOWNSIZE. It is far easier to get rid of your huge couch, your armoire, your furn
Immortality and the Fountain of Youth: You can keep all of it, thank you very much!
I was reading through my Harry Potter books the other day, and it started a train of thought about d
Leif Kristjansen
Having a mortgage isn’t all bad. 😛 There is some risk that rates will skyrocket and you could get screwed but it’s not likely to really be a problem if you are working to pay down the mortgage along the way. You’ll pay it way down before it kicks in and worst case you would just be paying your normal+extra anyways.
Having said that if you can buy a house in cash or just rent forever life would be so easy.
I’m in Toronto and own a house. It made me a lot of money but I don’t even know that I’m happy about it. Now I have a house and travel is a pain since I have to keep paying mortgage/taxes/utilties while I’m gone. 🙁
Having a fully paid house would be nice but all the taxes and HOA fees aren’t going anywhere 😐