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Intro to "Buy a Home or Rent and Save?"

 

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Buy a Home or Rent and Save? We are all confronted at one point in your life between renting a place and buying a house. There are many advantages and disadvantages for both parts; some of the arguments are qualitative and others quantitative. Many people dream to become home owners and this is taking a huge place in the decision, but as for quantitative arguments, Credit Finance + give you the correct tools.

There is a way to calculate within a determined period if it's financially more beneficial to buy or to rent. At first, many will say that renting is a waste of money and that a mortgage payment is better since you make a payment to acquire an asset, which is also seen as an investment. We need to dig in this reasoning because almost half of what you pay for your mortgage is bank interests. At the end of the term, the total interest can be very close to the total payment made in capital.

Even if many consider that paying a rent is wasting your money, buying a home also needs similar costs such as bank interests, notary services, welcome tax, municipal taxes, condo fees and of course, the unpredicted costs related to being an owner and responsible of a propriety (problems related to plumbing, electricity, renovation,…)

The "Buy a Home or Rent and Save?" Calculator

We have to put things in perspectives and quantitatively measure the two scenarios in order to make a clear judgment. As an example, if a $1,500.00 mortgage payment is, at one point during the term, $700.00 of capital and $800.00 of interests (this portion fluctuates in time but you are paying a greater amount of interest at first), it would be similar to paying a rent of $800.00 and save $700.00. On both cases, you acquire an asset: a house or savings.

This $700.00 saving can be invested in low risk titles, such as the government bonds or the money market, which the rate and the risk is comparable to the $700.00 of capital paid on the real estate. It is important to search for titles paying interest every month (compound interest monthly) in order to gain the interest on the interest. The savings grow and fructify every month, because you add an amount saved and capitalize the interests. In that way, we can build an asset by renting, which can be used further on as a down payment for a house.

The goal of this table is to analyse quantitatively the two scenarios in order to know which transaction is financially better, without considering qualitative arguments. We consider in this table that the person who wants to rent and save, invest his savings every month in a low risk title with interest compound monthly. The assets are real estate or invested money, and they both gain in value with time.

Equity Chart

In this chart, we remove from the value of the house the cumulated costs (interests, taxes and fees) and the balance left on the mortgage on a particular year. To compare, we also remove the cumulated rent from the value of the savings. We then see the net evolution of the two investments, which is the equity realised on the transaction. The greater the equity the better the choice is.

Buying

  • Value of the house – (cost from the house acquisition + balance on the mortgage) = Equity buy
  • Cost from the house acquisition:
    • Cumulated interests
    • Cumulated taxes
    • Cumulated fees

Renting

  • Value of the investment – cumulated rent = Equity rent
 

Important aspects

An advantage of buying a house is that its value is quite high at first and its appreciation is based on adding a % on the past year, which makes the appreciation bigger from the start. On the opposite, an investment on titles is slow to start because the appreciation is made on the earlier value, which is not very high at first.

Also, an important down payment on the house contributes to strongly reduce the interests. Since the interests are calculated on the balance of the mortgage and the down payment is 100% a deposit on the capital, the total interest that you have to pay will drop, but the value of the house stays the same.

 

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Numbers in our calculators are rounded to two decimals.
The same calculations made in an Excel spreadsheet may differ slightly.

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