Buying Versus Renting a Home in Canada

By Jeff Hayward | 12 minute read

You’ve been living in that cozy, two-bedroom rental apartment with your partner for a few years now. It has been everything you wanted: close to major amenities, near a transit stop, and relatively quiet (assuming the tenant below you isn’t playing their music at full volume).

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But lately, you’ve been thinking about owning real estate. Perhaps you want more space for a home office, or you’d like to start a family and build a nursery. While there are many benefits to homeownership, there are also many considerations, such as coming up with the down payment and closing costs. 

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Renting also has its upside, like having monthly utility costs covered in the rental payment, for example. You also know how much you’ll be paying each month, compared to mortgages that can fluctuate with borrowing rates.

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There is no “right” choice. It comes down to your personal financial situation, your lifestyle choices, as well as your long-term goals.

Mortgages and the Down Payment

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The Pros of a Down Payment

While the down payment can be a considerable sum, it has its benefits – especially when you allocate 20% or more.

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The first and most obvious benefit of a down payment is that your monthly mortgage payments will be less. For example, if you’re buying a property that’s $500,000, and you put down 20% ($100,000), your mortgage payment will be about $2,000 a month (over 25 years.)

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If you put down only 10% (plus the required mortgage insurance, which we will explain later), then you will pay about $2,340 a month assuming the mortgage is amortized over the same 25 year period.

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Another advantage to putting down a bigger down payment is that you will likely get a lower interest rate from your lender, which will further lower your monthly costs and overall interest expense. A bigger upfront down payment lowers the loan-to-value (LTV) ratio, which corresponds to less risk for the lender and a more favourable interest rate for you.

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The Home Buyers’ Plan

If you have funds in a Registered Retirement Savings Plan (RRSP), you can tap into them early to use toward your down payment. To qualify, you must be a first-time homebuyer and a Canadian resident.

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You can withdraw up to $35,000 under the plan without tax being withheld by the bank. You will have 15 years to pay the amount back into your RRSP.

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The Cons of a Down Payment

The minimum down payment in Canada depends on the purchase price of the home. If it’s $500,000 or less, then you’ll need 5% set aside.

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That means for a $450,000 property, you’ll need at least $22,500 as a down payment. If the property you’re interested in is priced higher than $500,000 but under $1 million, then the minimum down payment increases to 10% on any amount over that threshold.

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So if the home is $750,000, then you need at least  $50,000 upfront (that’s 5% on the first $500,000, and then 10% of the amount over $500,000).

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For any homes priced above $1 million, a minimum 20% down payment is required.

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Mortgage Insurance

While the minimum down payment in Canada is 5%, there are other considerations to keep in mind. Any down payment below 20% is subject to mortgage insurance, also known as a “high-ratio” mortgage. This type of mortgage is designed to remove some of the risk from the lender.

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In this scenario, you will pay an ongoing premium to one of the major mortgage insurers in Canada: CMHC, Genworth, or Canada Guaranty. You’ll also likely pay a fee upfront.

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The Mortgage “Stress Test”

As of 2018 (with changes in 2021), the federal government added a “stress test” to determine if you qualify for a mortgage. This applies to anyone who wants to buy a home or renew a mortgage, regardless of how much money you allocate as a down payment.

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What does this mean? It’s not a “test” per se, more of a review of how well you would handle financial fluctuations. Whatever your lender is offering you as a mortgage rate, the stress test increases it to the greater of two numbers: the 5.25% benchmark rate or your offered rate plus 2%.

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 As an example, even if your lender is offering a favourable borrowing rate of 3%, you will still have to qualify for a loan under a benchmark rate of 5.25%. If your lender is offering a rate of 4%, you will need to qualify for a 6% rate. 

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The stress test rate will boost your monthly mortgage payments to a hypothetical amount. This is because your rates can change if the Bank of Canada adjusts its rates based on the health of the economy and inflation levels. If you are still approved at the stress-test levels, then your mortgage financing can proceed at the more favourable offered rate. 

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The amount your actual rate will fluctuate during the mortgage term depends on whether you have a fixed or variable rate. The latter is sometimes more attractive to homebuyers, but is more immediately affected by Bank of Canada interest rate adjustments. 

Lifestyle

Owning a Property Versus Sharing a Yard

If you place a lot of value on peace and privacy, then owning your lot might be an ideal option. This allows you can customize your yard without the approval of the other tenants or the landlord – so long as local bylaws are adhered to.

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If you’re sharing a yard with other tenants in a monthly rent situation, there’s no guarantee you’ll have it all to yourself. That means you may need to give notice if you’re hosting guests for a barbecue, for example. And depending on your rental agreement, a party of any kind might not be allowed.

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Appreciation and Home Equity

Owning a home means it has the potential to increase in value over time, which has been the long-term historical trend for most real estate assets in North America. Beyond making monthly mortgage payments, the appraised value of your home can increase your home equity. Home equity is the difference in the determined value of your home minus what you still owe on the mortgage.

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That obviously means a bigger profit if you sell. You may also qualify for a home equity line of credit, known as a HELOC, which allows you to access up to 80% of your home’s value. This is handy if you want funds available to pay for repairs or upgrades, without the high interest rate of a credit card.

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Investing in Home Ownership Versus the Stock Market

Buying versus renting a home makes a difference if you’re looking at the purchase as a long-term investment. You will often be able to sell for more than you paid (except in the case of a distress sale, when you may take lower offers due to your financial circumstances).

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Owning real estate is an alternative to investing in the stock market. While a home can gain value in a relatively short amount of time, it is an active investment that will come with ongoing mortgage payments, utilities expenses, and maintenance and repair costs. These can offset your financial gains. The stock market, alternatively, is a passive investment vehicle that does not require any active management on your part (beyond the level you want to devote to it). In most cases, it is wise to diversify by investing in both real estate and the stock market, although expensive housing costs may limit your ability to meaningfully contribute toward a stock market fund.

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While rental payments do not help build equity for you over time, they offer multiple advantages compared to homeownership. You won’t have to pay any costs associated with fixing and selling the property when you want to move on.  And once you are renting month to month, you have the flexibility to leave with no more than two months’ notice required. More importantly, renting is often cheaper than homeownership, as condo fees, maintenance and repair costs, and mortgage payments can quickly add up. By renting, you may have an increased ability to save money to devote towards other investments, such as a personal business or through making larger contributions to your tax-free savings account (TFSA) or RRSP.

Closing Expenses

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Land Transfer Tax

On the subject of taxation relating to homeownership, there’s also land transfer tax (LTT) to consider. This applies to any property purchase, but varies in tax rates from province to province.

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In Ontario, land transfer tax is based on a multi-tiered rate system, with 0.5% charged on the first $55,000, 1% on amounts above $55,000 up to $250,000, and so forth. In addition to provincial LTT, some Canadian cities like Toronto, Victoria, and Vancouver levy a municipal tax on property transfers. In Toronto, the municipal LTT uses the same percentage tiers as the provincial system, so a Toronto property will have double the LTT compared to a home of equal price elsewhere in Ontario. 

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However, here’s some good news for those new to homeownership: you may be eligible for a refund on this tax, to a maximum of $4,000. First-time property owners in Toronto are also eligible to have their municipal land tax reduced by a maximum of $4,475.

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Let’s say you’re purchasing a property outside Toronto, somewhere like Thunder Bay or Ottawa. If the cost of a home here is $800,000, the blended rate for land transfer tax will be 1.56%. This percentage amounts to $12,475 of provincial LTT. Subtracting Ontario’s Provincial Land Transfer Tax Refund, you will end up paying only $8,475. 

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To compare, if you were buying a house at this price in Toronto you would need to consider municipal LTT as well. In total, your provincial and municipal land taxation amounts to $24,950. Combining both refunds ($4,000 for provincial and $4,475 for municipal) will leave your amount owing at $16,475.

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Other Closing Costs

When you’re buying a property, there are some other standard closing costs beyond land transfer tax. These other closing costs will depend on your unique situation and generally cost between $2,000 to $5,000.

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You will want to do a home inspection to get a professional opinion on the condition of the home ($300 to $500). This is not mandatory, but it’s a cost-efficient measure to ensure there are no hidden surprises that may cost you thousands in repairs.

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Closing costs will also include lawyer fees to register the ownership and complete a title search that determines if anyone else is on the deed and if there are any restrictive covenants or easements tied to the property.

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When it comes to renting, you won’t have to worry about the above-mentioned costs. However, most landlords will expect a first and last payment at the start of the agreement. This ensures your last month is prepaid when you decide to move on.

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Finally, whether renting or buying, most people will need to pay for a professional moving service or U-Haul truck. If the move is in a different city, this can bring the cost into the thousands, while most in-city moves can be accomplished for $200 to $600.

Ongoing Homeownership Expenses

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Maintenance Costs

Depending on the rental agreement, home repairs will be covered in your rent. That means if the stove stops working, or your ceiling gets water damaged due to a poor roof, you won’t be out of pocket.

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However, when it comes to ongoing maintenance you’re on your own when you own the property. You’ll be paying for items like furnace inspections, appliance repairs, and any damage that’s not covered by home insurance.

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The rule of thumb on maintenance costs is to keep 1% of the property’s purchase price set aside per year. However, keep in mind this can amount to several thousand dollars annually. Depending on the age and condition of the home, the repairs might end up costing more than that.

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Home Insurance

The landlord will be paying the home insurance to protect the overall structure in the case of a fire or flood. If you’re buying a property, you will need a home insurance policy. This will cost an average of about $1,200 a year.

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However, renters can consider tenant insurance that will replace the value of some of their belongings in the case of a major mishap. Luckily, most tenant insurance policies are affordable, costing around $200 annually (keep in mind, though, that factors such as the location of the rental property can affect this premium).

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Utilities

Monthly bills such as gas, electricity, even internet/phone will need to be considered when considering whether to buy or rent a home.. In Ontario, the average monthly cost of utilities is about $325 including cable.

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If you’re renting, you need to pay special attention to the section about utility costs. In some cases, the landlord may pay them or charge you over a set amount. In other situations, they may split the cost or leave it to you altogether.

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Is Homeownership Right for You?

There are many factors to consider when it comes to buying versus renting a home. While buying means you’re the master of your own domain, you’ll also need to brace for unforeseen maintenance costs, the potential for interest rates to rise over time and add to your monthly expenses, and the risk of a market downturn specific to your geographic area.

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It’s important to figure out your long-term goals when weighing the pros and cons of both. Buying a home can provide for a retirement fund or an inheritance for your family down the road, but if you’re investing in the stock market successfully, you may not look at a place to live as a long-term investment.

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It’s always wise to consult a financial professional to determine which approach makes the most sense for you.

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Takeaways

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• Homeownership is not necessarily more financially savvy than renting. It’s important to consider your long-term financial goals and personal situation such as career and travel aspirations.

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• Be prepared to have at least 5% of a property’s purchase price available for a down payment. This will amount to $25,000 on a $500,000 home.

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• Buying means you will gain equity as you pay off the mortgage, which can be used as a loan to upgrade the property.

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• Renting might mean expenses including utilities and repairs/maintenance are included in the agreement. Carefully review these details with your REALTOR®.

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