One of the most exciting and frightening stages of a relationship is deciding to move in together. Whether you decide to move into their place, have them move into yours, or move to a new place together, you have some important decisions to make.
It can be tough enough deciding whether you should rent or buy when it’s just you, but adding another person to the mix can make it even more complicated. Before you rush into any decisions, first you have to answer a few questions.
Where do we see ourselves in five years? Is it affordable to live in this city? What are our combined finances like? What happens if we break up? What happens if we get married? All of these questions should, at the very least, be asked before you commit to either renting or buying.
Advantages of Renting
In Ontario, after you finish a contracted lease agreement you can move to a month-to-month arrangement. When you’re paying month-to-month, you must give your landlord 60-days notice when you decide to leave, but you can leave at any time. If you’re under contract, it’s still possible to leave but that requires you to get legal.
With a 60-day notice, you are much more flexible than if you bought a house, which can last for months on the market depending on your location. Not only that, but there are closing costs that have to be considered too. When you finish renting, you can just pack up and leave – there’s no additional cost such as real estate lawyer fees or realtor commissions.
It is almost always cheaper to rent than to buy. Even in Toronto, where the average rent for a 740 square foot condo is $2,206, it can still be cheaper than a monthly mortgage payment on the average $558,000 condo.
Easier to move in
Finding a rental can be as hard, or harder than, finding a property to buy in hot markets like Toronto or Vancouver where the vacancy rate can be as low as 0.7%.
In other markets, the vacancy rate is more favourable. Since landlords are eager to fill their vacancies as soon as possible, you can move in almost immediately upon signing a lease, unlike buying a house, where you might have to compromise with the seller if they want a long closing.
Not only that, but a mortgage requires you to pass the more strict mortgage rules. Renting, at most, only requires a credit check and proof of ability to pay, making it easier to get into a place if you can’t qualify for a mortgage.
Advantages of owning
A sense of pride in your home
While this is not a monetary benefit, life isn’t always about maximizing your own profit in every aspect. Owning a home can engender a great sense of pride in your abode, which can increase your overall happiness.
Often seen as the most important part of owning a home, building equity is a great way to increase your net wealth. You get back all your equity when you sell, and despite Canada’s slow real estate performance this year, prices are still high. Mortgage rates are still near all-time lows despite increasing recently, so more of your money goes to principal than interest.
Ability to leverage
You can actually use that equity, too! By taking out a home equity loan or home equity line of credit, you can use the money you’ve stored in your house on renovations, investments, or debt consolidation. You could also theoretically use your equity on frivolous spending, such as a vacation, but I strongly suggest you don’t do that.
So now that we know the advantages of both courses of actions, which one should you choose?
If you’re worried about breaking up
I’m not saying that you’re going into your relationship with the belief that you’ll break up. Everyone hopes that a good relationship lasts forever. However, you may be a naturally anxious individual who worries about this kind of stuff. In that case, renting is probably better.
Common-law partners are not entitled to equalize family property acquired during the relationship. That means your own investments will be yours (in the provinces of Ontario, Nova Scotia, and Quebec). In other provinces, common-law partners are entitled to half.
Spouses are always entitled to half.
If you think you’ll stay together
If you’re committed to sticking with your partner for life, buying may be better. That depends on the answers to the questions at the beginning of the post.
1. Where do we see ourselves in five years?
If you plan on moving in the next year or two, it’s definitely not worth it to buy a home. You might gain equity, but it’s more than likely you’ll only earn enough to cover the closing costs, leaving you no better off. It’s unlikely that the super hot markets of mid 2017 will return, so you probably shouldn’t bet on seeing an annual return of 30% on your condo purchase.
In the beginning years of your mortgage (or any loan) you spend a larger portion of your monthly payment on interest rather than principal. That means you don’t build equity as fast. If you sell shortly after buying, you may even lose money, as the closing costs will outweigh the small amount of equity you did manage to build.
You can get out of a mortgage even if you aren’t near the renewal of your term or the end of your amortization, but that comes at a penalty. If you know for sure you’re moving in five years, for example, you can get a five-year variable rate, then break the mortgage with no penalty at renewal time.
If you don’t know, but you think you might move, then you can always get an open mortgage. Those have higher interest rates, but come with the benefit of being able to be paid off in full at any time with no penalty.
2. Is it affordable to live in this city?
Don’t stretch your budget to bursting just to live in a home of your own.
The common advice you’ll hear is to not exceed 40% of your income on housing costs + debt servicing. That number can be nudged a little bit higher, but you shouldn’t spend a majority of your income on living expenses if you can avoid it.
Beyond the mortgage payment, being a homeowner has hidden costs as well. Are you prepared to put away another 1% of the purchase price a year for maintenance costs? (This can be less for brand new properties).
Cities with high costs-of-living are often unaffordable unless you’re making a high salary to match.
3. What are our combined finances like?
On that note, combining your finances can be a big boost when trying to buy a place. Two people living together is much cheaper than two people living separately.
If your partner makes as much or more than you, it’s like doubling your income. On the other hand, if your partner makes less than you, or nothing at all, then they won’t be able to help on your mortgage application. In that case, it may be better to apply alone instead of as a couple.
Whatever you decide should be based on what’s best for your relationship and finances, not on what your families and friends think you should do. If you’re looking at renting, take a look at rentals near you. If you’re thinking of buying, look at the available listings.
Not intended to solicit parties under an exclusive contract with a brokerage. MLS®, REALTOR®, and the associated logos are trademarks of the Canadian Real Estate Association. RebateRealty Inc, is an Ontario licensed Real Estate Brokerage TREB® & CREA® The listing data is provided under copyright by the Toronto and Brampton Real Estate Board - TREB® and BREB®. The listing data is deemed reliable but is not guaranteed accurate by the Toronto Real Estate Board nor RebateRealty Inc., Brokerage. © 2017