rent / mortgage (home)

CAROLYN DECIDES TO BUY A CONDO

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​Carolyn's life-style arguments:

  • She wants to buy a place of her own as she is planning to live there for a while.

  • And she needs to feel secure. She knows that when you rent, landlords can decide not to renew the lease, forcing you to move.           

        

Carolyn's financial analysis:


COSTS


​​​1. Upfront

  • DOWN PAYMENT. ​Carolyn saved enough for a minimum 5% down payment required.

  • CLOSING COSTS. She also accounted for closing costs - she expects to pay 3-4% of the condo's purchase price.

  • ​MOVING & RENOVATION COSTS. And she budgeted for moving costs, additional furnishings, and a small renovation and clean-up of her new place.

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2. Ongoing budget

  • MORTGAGE PAYMENTS. Carolyn makes monthly mortgage payments, which consist of interest and principal repayment. 

  • CONDO FEES. She also pays a monthly condo fee, which covers only some of the utilities.  She pays separately for remaining utilities.

  • PROPERTY TAXES. As an owner, she also pays municipal property tax.

  • REPAIRS. And she has to pay for all repairs in her condo.

  • ​INSURANCE. She'll also buy home insurance.

  • Experts estimate that these ongoing cost of ownerships are approximately 40% higher than the mortgage payment alone.


REWARDS

  • The interest portion of Carolyn's monthly mortgage payment is the cost of borrowing money. The principal repayment portion goes towards her condo ownership.  After the repays the entire mortgage principal, she'll own the condo.

  • She can sell the condo and assess her wealth (after she subtracts transaction costs and any yet-unpaid mortgage).  Meanwhile, she can tracks prices in the real estate market to estimate how much her condo is worth.​

What's next?

RENT-OR-BUY DECISION CHECKLIST

​1. Are you ready to settle down, or do you plan to move often?

​2. Can you handle the responsibilities of ownership? 

3. Have you saved for a down payment?

4. Will you be able to cover the ongoing cost of ownership given your income? 

  • Will the bank be willing to lend you enough to buy the property you've chosen?
  • ​Even if you qualify for this amount of mortgage, are you truly prepared for the monthly spend that will be required?

Rent or buy?  It's both a financial and life-style decision.

Start by learning how a mortgage works.​

For most of us, home ownership starts with renting.

Jamal could use a real estate agent to help him find an apartment to rent. But most people find rentals on their own, through landlord advertising or referrals. Carolyn probably used an agent - most sellers and buyers do. 

Once you decide to buy, a pre-approved mortgage gives you a few months (usually 3) to find the home you want to buy.  The lender will not change the rate or other terms of the mortgage during this period and you'll know exactly how much you'll be able to borrow and how much you can pay for your new house / condo.

How do you decide?

Once you've found a home and the seller accepted your offer, you'll know the closing date. You'll need to make sure your full payment is delivered to the seller.

JAMAL DECIDES TO RENT AN APARTMENT


Jamal's life-style arguments:

  • He rents as he doesn't expect to settle down any time soon in one place because of career. He plans to do a few internships abroad.  Only after that will he look for a permanent posting. 

  • And he doesn't quite feel ready for the responsibilities related to maintaining a condo, never mind a house.    


Jamal's financial analysis:


COSTS


​1. Upfront 

  • Unlike buying, renting does not require a down payment. Jamal happens to have saved enough for a down payment. The money will stay in his investment account and will grow over time. 

  • MOVING COSTS. He'll dip into his savings to cover moving costs and additional apartment furnishings. This time, he'll need to repaint the walls, fix the faucets, and clean the carpet.  Some landlords pay for apartment renovation / carpet cleaning before a new tenant moves in, but in some cities tenants have to take care of these.


2. Ongoing budget

  • RENT. Jamal pays monthly rent.

  • UTILTIIES. Most of the utility costs are included in the rent.

  • The landlord will cover all repairs, unless Jamal is responsible for the breakage.

  • INSURANCE. He'll buy tenant insurance, which is less expensive than home-owner insurance.

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REWARDS

  • Jamal can save some money every month. His rent is lower than what he'd have to spend if he owned a condo and was paying down a mortgage. 

  • Each month he adds to his investment account and his wealth is growing.

  • Jamal reviews his investment account every year to assess his wealth. 

Pay attention to your mortgage - your circumstances may be changing and a lot of money is at stake. At the end of term you'll either renew the mortgage, renegotiate the terms with your lender, or perhaps get a new mortgage from a different lender.

how does a mortgage work?​​

You can borrow only a portion of the purchase price. 

Down payment is the portion of the price of the condo / house you'll need to provide from your savings. 

  • If the purchase price of the home is less than $500,000, the minimum down payment is 5%.
  • If the purchase price is between $500,000 and $999,999, the minimum down payment is 5% of the first $500,000 and 10% of any amount over $500,000.
  • If the purchase price is $1,000,000 or more, the minimum down payment is 20% of the purchase price.
  • ​If your down payment is less than 20%, you'll have to buy mortgage insurance.


​A mortgage loan is repayable over a very long time.

​​A mortgage's amortization period is the amount of time it takes to pay off your mortgage in full.

  • The Canadian standard is 25 years. This means each year you'll repay 1/25 of the amount you borrowed (called 'principal').
  • You can select a longer period, but your lender may ask for more than 20% of your home's value as down-payment. 
  • You can also choose a shorter amortization period. Your principal repayments will be bigger than with the 25-year amortization


The time over which you'll fully repay your mortgage will be divided into shorter periods, called the 'term'.

  • Term is the length of your current mortgage contract with the lender.
  • Interest rate (the cost of your mortgage) and other key features will be set for the term of the mortgage.
  • At the end of term, you can pay back the full amount (if you have the cash). More likely, you'll renew the mortgage for another term.
  • Common term is 5 years.  It can range from 6 months to 10 years.


You'll make equal payments during the term of your mortgage.

Each mortgage payment consists of two parts (so called blended payment):

  • Repayment of a portion of principal.
  • Payment of interest. ​In each period, your mortgage rate will be applied to the outstanding principal.  'Outstanding principal' is the amount of money you still owe.​
  • At first, the payments consist mostly of interest payment. Towards the end of your amortization period, the payments are mostly principal repayment. 


You don't truly own your home until you repay the mortgage in full.

  • A mortgage is a secured loan. Security for the loan is the condo / house you're buying.
  • ​Because the home is pledged as security to the lender, you can get a lower interest rate than you would on other loans.​  But if you stop making payments, the lender can take over your condo / house and sell it to get its money back. 
  • ​When all payments are made, you'll fully own the property.

Let's look at 2 different people, with different needs.

RENT​

​When you rent, you are a tenant and pay the landlord (the person or company who owns the place) an agreed upon amount each month.

  • Details of your agreement with the landlord are in a document called 'lease'.​​​  You can download a standard residential lease agreement for your province.
  • Your rights as tenant are protected by relevant legislation.
  • While you rent, your budget should make room for your financial goals.  One of these goals could be saving towards a future purchase of a home.​​

After you've made your last repayment, contact your lender to make sure the mortgage is discharged - which means the bank no longer holds security and the property is legally your. 

Own your mortgage, step-by-step.

BUY

​When you buy, you are your own landlord.

  • You need to have enough money to purchase the place and cover all ongoing costs related to ownership.
  • ​​​Most people don't have enough savings to pay the full price of a condo or a house, and need to borrow. This type of loan is called a mortgage.​