|
Compare Renting a home with Purchasing a home. The criteria above is used
to calculate what the average annual increase in home value must be to reach a
financial break even point - if you anticipate a lower % increase in home value, this means renting may be the better option.
|
The rental alternative will allow you to save and invest both the downpayment of
$ 25,000 and the monthly rental savings, initially at $ 125.
At the end of the 36 month term your before tax
investment will have grown to $ 32,054, assuming the savings rate of 3 % per annum.
After paying annual income taxes at 0 % on the investment interest gain, the investment will have grown to $ 32,054.
In order for the home purchase alternative with a mortgage interest rate of 7 % to perform as well as the rental option,
the annual rate of property appreciation must be at least 2.84 % .
Total property appreciation of 8.75 % together with principal repayment would result in homeowners equity of $ 37,492 in 36 months,
less the 5 % cost to market the home of $ 5,438, for a net gain of $ 32,054.
If the home value increased by more than $ 8,753 ( 8.75 % ) in 36 months, purchasing would be a better financial option than renting.
|
|
|
RENT
|
OWN
|
|
Canadian Calculation - Compounding Semi-Annually
|
|
Down Payment (25 %)
|
|
$ 25,000
|
|
First Mortgage Amount
(Includes Ins. Fee of $ 0)
|
$ 75,000
|
|
TOTAL PRICE
|
|
$ 100,000
|
| |
|
Monthly Costs
|
|
|
|
|
Mortgage Payment
|
|
$ 525
|
|
|
Property Taxes
|
|
$ 0
|
|
|
Condo Fees
|
|
$ 0
|
|
|
Other Costs
|
$ 0
|
$ 0
|
|
|
Rent Payments
($ 400 Month 1 to $ 400 Last Month)
|
$ 400
|
|
|
Total Monthly Payment
|
$ 400
|
$ 525
|
|
Monthly Cash Savings
|
$ 125
|
|
| |
RENTAL cost always lower than Monthly OWNERSHIP cost in example. |
|
Future Value at Term ( 36 months)
|
|
|
|
|
Down Payment Saved (@ 3 %)
|
$ 27,351
|
|
|
|
Monthly Cash Savings (@ 3 %)
|
$ 4,703
|
|
|
|
Taxes assumed to be paid annually (12th period) on interest.
|
|
| |
|
Required Home Price at Term End
|
|
$ 108,754
|
|
Less : Mortgage Balance
|
|
( $ 71,262 ) |
|
Less : Sales Commission (@ 5 %)
|
|
( $ 5,438 ) |
|
Equity at Term
|
$ 32,054
|
$ 32,054
|
|
Less Income Taxes on gain ( @ 0 % )
|
( $ 0 )
|
$ 0
|
|
NET After Taxes
|
$ 32,054
|
$ 32,054
|
| |
|
Required ANNUAL Home Price Increase Rate
|
2.84 %
|
|
Required TOTAL Home Price Increase % (36 months)
|
8.75 %
|
|
Required TOTAL Home Price Increase (36 months)
|
$ 8,753
|
|
It is always difficult to forecast home price increases, but if the likely Annual Increase is higher
than the above %, then buying a home would be the better option. If home prices do not rise by the
above %, then renting would be a better option. Note that other factors with home ownership
may impact the financial decision including the potential to borrow funds at lower rates if you own a home.
Input a 0% commission rate
if a sales commission is not payable. The savings rate is the percentage return on funds saved.
The Mortgage Insurance Fee (Insur. Fee - ie. CMHC) is usually required for down payments less than 25%.
Other factors to consider include heating costs - are they included in rent ? Home Insurance costs may also be factored in
as another cost. Additionally, maintenance costs should be considered as part of home ownership and may be added to
"other costs".
|
|