Buying a house is one of the biggest purchases most people will ever make. And it’s definitely not a decision to be made lightly. But in the current Real Estate Market, it’s hard for Millenials to make a decision between renting a place and making a down payment on a home. And in truth, it’s not a black-and-white matter. There’s a lot of grey area in between renting and buying that potential renters and homebuyers must navigate.
Today, let’s talk about scenarios when it is good to rent a place and when it is a good idea to make a down payment on a home. Going through the pros and cons of each gives a better idea of the Real Estate Market, what will give you the most benefit for your money, and what will make sense for your lifestyle.
When Renting Is a Better Option
Renting is a popular option in any Real Estate Market because it’s flexible. When you rent, you are agreeing to pay a fixed price per month to the owner of the property. The amount of money you are expected to pay (“the rent”) will be included in the lease—the contract that you and the owner of the property will sign. In the lease, you acknowledge that you will be paying a certain amount of rent by a certain date. You will also be agreeing to any rules the owner sets out (such as no pets, no smoking, etc.), you will agree to a length of renting time, and you will agree to the penalties of what happens if you do not pay your rent on time.
Those dipping their feet into the Real Estate Market for the first time often turn to renting because it carries fewer responsibilities than homeownership. Although you will still need a good credit score and finances, renting means that you do not have to worry about a mortgage. For renting, you’ll just need to make sure you can put down a security deposit (which the owner will keep until your lease is over) first month’s rent, and in some cases, proof that you have extra finances to support yourself in the renting period. Some owners will request a credit check or they will request that you prepare utility deposits.
It sounds like a lot of money, but in the short term, it’s not too bad. Emphasis on short term!
As a Real Estate Agent, I wouldn’t suggest renting as a long-term or permanent solution. Why? If you rent beyond a few years in the same place, the amount of money you will spend on rent will be higher than the amount of money you need for a down payment on a home.
When Making a Downpayment on A Home Is Advisable
Homeownership is the graduating platform from renting. Owning a home means that you are ready to take on the responsibilities associated with ownership, with the largest responsibility being a Mortgage.
As I touched on in a previous post, getting a pre-approval for a mortgage is the first step in figuring out whether or not you can afford a Mortgage. A mortgage is a loan typically given by a bank, that allows people to purchase a home on the agreement that they will make loan payments—known as mortgage payments—against the sum of money given. Getting a mortgage takes more effort than it does to be approved to rent. Mortgage lenders will not only be looking for a good credit score, but they will also assess your income, your employment and your outstanding debts.
The Steps to Homeownership Starts with A Down Payment
If you aren’t scared off yet, then that’s a good sign you’re prepared for homeownership. The next big thing after being pre-approved for a mortgage is of course finding a house on sale that you love. The right Real Estate Agent with experience in your local Real Estate Market can help you find a house, discuss home prices and mortgages, and of course the down payment.
Making a down payment on a home shows the lender that you are able to afford to live in your chosen house and will likely make the mortgage payments associated with the home. A down payment amount varies depending on the home, the amount of mortgage you are receiving, and how much you can initially put down. Typically, the more money you can put into a down payment, the higher your mortgage can be. This is great if you have a large amount of money saved up that you can put against the price of the home, which in turn, will help you pay off your mortgage faster because there is less to pay off, and you’ll save in interest rates.
In Canada, the minimum amount for a down payment is 5% of a home $500,000 or less or 5% on the first $500,000 of a home that is over $500,000 plus 10% of the remainder of the house price. The only time a down payment jumps to 20% is if the purchase price is over $1 million. Keep in mind that if you pay less than a 20% down payment, there may be Mortgage Loan Insurance involved on the lender’s side. Mortgage Loan Insurance protects the lender, but they have to pay an insurance premium on it. This premium is often covered through mortgage payments by the homebuyer each month, or through a lump sum payment.
Down payments are just the first step into homeownership and are the first cost associated with a home. Beyond money for a down payment, you’ll also need to consider closing costs, monthly mortgage payments, utilities, and home repairs. These are inevitable costs and you need to have more than just down payment money to start living comfortably. Try and have savings that can cover these costs and give you some buffer room in case you run into financial troubles.
So what’s the definitive answer on when to pay rent and when to make a down payment?
If you have the money and opportunity to buy a home, it’s a great idea to make a down payment and start your mortgage. You’ll be building equity and investing in property, which is never a bad thing. If making a down payment isn’t in your budget or you aren’t quite ready to settle down in one place as yet, renting is a better option.
If you need to talk to a Mortgage Broker or a Real Estate Agent to discover which option is best for you, please don’t hesitate to contact me, Deb Olender. I’ve worked with clients that are both renting and buying homes in the Guelph Real Estate Market and the Tri-Cities. I would be happy to discuss the options that suit your finances and your lifestyle.