JasonParis
Moderator
It's rare to see a pro-renting piece, but here's one for some alternate perspective(s)...
Unreal estate
Get your own mortgage or pay your landlord's? Buying is a better investment, but renting lets you have a life
By Chris Bilton
We can afford to live there, we just can't afford to enjoy it,” says Nick Clayton of the Clinton Street house he and his wife purchased two years ago. Not interested in condos or commuting, they sought out what could be considered the holy grail of first-time homeowners in Toronto: a small semi-detached place in the Annex.
Though initially on the fence about buying, content to continue eating out, travelling at their leisure and living within convenient walking distance of their favourite pub, the early thirtysomethings decided to brave the bubble three years ago. Clayton credits his parents with convincing them that the almost $400,000 investment would be more worthwhile than waiting until housing became prohibitively expensive.
While it's impossible to discount the forbidding cost of owning, rooming with four other grad students in a quirkily converted Victorian or settling into that spacious two-bedroom-plus-den with some kind of significant other are the types of options that still tend to induce a nagging sensation somewhere in the back of your mind that says: why am I throwing away money renting an apartment when I could invest it in a mortgage?
Despite the lure of low down payments, the possibility of increased property and land transfer taxes combined with home ownership's whole new world of monthly expenses – not to mention the financial tragedy of compound interest – the question becomes something like: isn't investing in a house simply throwing money away in different directions?
Right now is probably the easiest time to find out for yourself. With mortgage-related incentives like Canada Mortgage and Housing Corporation (CMHC) reducing the down-payment threshold for mortgage insurance from 25 to 20 per cent back in April, and with banks offering zero-down payment options and 40-year payback periods, many young people could potentially go out and scoop up a half-million dollar property at their leisure.
Andrew LaFleur, a real estate agent and writer for BlogTO who regularly works with younger and first-time buyers says that with a strong economy and low interest rates, “more and more people are leaning towards bigger and bigger mortgages and smaller down payments.”
That was Clayton's experience. “As long as you don't have a lot of debt and loan payments, it seems pretty easy,” he says. “We kept asking for more money and got it no problem.” And with the average price in Toronto hovering just under the $360,000 mark, combined with a recent trend towards bidding wars, the need for more money is a given.
But the price tag is only the initial financial hurdle. Clayton quickly found out where the truly prohibitive costs lie, like CMHC's mandatory insurance on any down payments less than 20 per cent. “Nobody told us about the [at the time] 25 per cent minimum down payment. When we got our first mortgage statement, we were pretty sure that we put a lot more down on the house, and then realized that there was almost $10,000 taken off for insurance.” So much for all those years of dutiful saving.
On top of that, there's a vast array of incidental fees essential to the transfer of property. The CMHC website breaks it down to include: appraisal fees ($250-$350), title insurance ($250-$275), home inspection ($250-$500), survey costs ($1,000-$2,000) and legal fees ($600-$1,000). And, of course, these are not included in the list price.
As their once-comfortable $1,200 per month rent ballooned to a bi-weekly $1,000 in mortgage payments, which combined with water, electrical, heating, property tax and other essentials rounds out at $2,500 to $3,000 a month, Clayton admits “it's been a definite shift in life priorities ... which leaves little money for groceries and fun.”
Using the RBC mortgage calculator to get a sense of just how much interest amounts to is a daunting exercise. If you want to talk about throwing money away, note that for the first 10 years on a balance of about $250,000, the interest alone will eat up 65 to 80 per cent of your yearly contribution. After 10 years, you are essentially still paying $1,200 a month in rent, but your landlord is now the bank.
“If you figure out how much your house is going to cost over 25 years, most people don't think about it,” says LaFleur, “but it is two or three times what you think you're paying for it.” Based on current rates and the most cost-effective bi-weekly payment plan, a $350,000 mortgage will cost at least an additional $314,000.
“The bottom line is, people realize that you have to start somewhere and you have to start building equity,” says LaFleur. “It's kind of like this escalator that's constantly going up and you have to get on it at some point.”
While LaFleur's rationale to “put a little money down and pay your mortgage and two years from now your property's gone up 5 to 15 per cent from doing nothing,” looks good on paper, the reality is a little more complicated. According to The New York Times' Buy vs Rent calculator, which determines how much money you will be able to save while paying off the loan, and using Clayton's situation as a rough estimate, buying is actually better, but only after about 14 years. And, of course, you have to find a house first.
“If you want to buy a house downtown for less than $400,000, it's going to be very challenging,” says LaFleur. “I've worked with a number of people over the past few months that that's exactly what they're trying to do. I mean, it's possible, but it's very challenging. If these properties do come up that are priced in that range, there are hundreds of other buyers just like you who see it too who are thinking the same thing.”
Even two years ago, it took the Claytons almost a year of searching to find the right place. “We became total MLS junkies,” Clayton confesses of the online real-estate listings, as finding the right place at an ever-increasing right price in the Annex required both an imagination and a strong stomach.
“The first house we almost bought was a row house at College and Spadina with ridiculously narrow rooms and bunk beds built into the walls,” he says. “At $280,000, it was the cheapest house in [the area] at the time. We figured we would just do the work on it.” The list of problems discovered during the conditional inspection was so overwhelming that they needed to go outside and collect themselves before revoking the offer.
The alternative was, of course, a condominium. But adding maintenance fees on top of the aforementioned costs was more than enough for Clayton to rule that option out. However, within the first month of owning their house, the entire drain system had to be replaced to the tune of $13,000. “Now I know what the maintenance fees are for,” he says of his unexpected baptism into instantaneous expense. If you're keeping a tally, that's now somewhere around $25,000 in extra costs before all the boxes were even unpacked.
Despite the horror stories, Clayton is still fairly optimistic, if considerably more realistic, about the whole situation. “I've gotten into owning a home,” he says admitting a new-found love of HGTV. “I think the whole thing is worth the time and effort. Sure, it's financially crippling, but there's a certain amount of freedom. You slowly own the house (well, you and the bank), and it does feel good to have the investment.”
“And there's a certain righteousness that comes with paying property tax,” he adds with a laugh.
As for the investment itself, Clayton says that already the house would probably list for upwards of $50,000 more than what they paid for it. Not that he is eager to try to turn a profit just yet, especially when selling the house has its own hidden costs. Besides, however unreal the success of Toronto's real estate market appears, it doesn't show any signs of slowing. Of course, he'll happily take the increase on his investment, but Clayton still wonders who would be in the market for a house that expensive and small, and what lifestyle adjustments are in store for them.
EMAIL: LETTERS@EYEWEEKLY.COM
Unreal estate
Get your own mortgage or pay your landlord's? Buying is a better investment, but renting lets you have a life
By Chris Bilton
We can afford to live there, we just can't afford to enjoy it,” says Nick Clayton of the Clinton Street house he and his wife purchased two years ago. Not interested in condos or commuting, they sought out what could be considered the holy grail of first-time homeowners in Toronto: a small semi-detached place in the Annex.
Though initially on the fence about buying, content to continue eating out, travelling at their leisure and living within convenient walking distance of their favourite pub, the early thirtysomethings decided to brave the bubble three years ago. Clayton credits his parents with convincing them that the almost $400,000 investment would be more worthwhile than waiting until housing became prohibitively expensive.
While it's impossible to discount the forbidding cost of owning, rooming with four other grad students in a quirkily converted Victorian or settling into that spacious two-bedroom-plus-den with some kind of significant other are the types of options that still tend to induce a nagging sensation somewhere in the back of your mind that says: why am I throwing away money renting an apartment when I could invest it in a mortgage?
Despite the lure of low down payments, the possibility of increased property and land transfer taxes combined with home ownership's whole new world of monthly expenses – not to mention the financial tragedy of compound interest – the question becomes something like: isn't investing in a house simply throwing money away in different directions?
Right now is probably the easiest time to find out for yourself. With mortgage-related incentives like Canada Mortgage and Housing Corporation (CMHC) reducing the down-payment threshold for mortgage insurance from 25 to 20 per cent back in April, and with banks offering zero-down payment options and 40-year payback periods, many young people could potentially go out and scoop up a half-million dollar property at their leisure.
Andrew LaFleur, a real estate agent and writer for BlogTO who regularly works with younger and first-time buyers says that with a strong economy and low interest rates, “more and more people are leaning towards bigger and bigger mortgages and smaller down payments.”
That was Clayton's experience. “As long as you don't have a lot of debt and loan payments, it seems pretty easy,” he says. “We kept asking for more money and got it no problem.” And with the average price in Toronto hovering just under the $360,000 mark, combined with a recent trend towards bidding wars, the need for more money is a given.
But the price tag is only the initial financial hurdle. Clayton quickly found out where the truly prohibitive costs lie, like CMHC's mandatory insurance on any down payments less than 20 per cent. “Nobody told us about the [at the time] 25 per cent minimum down payment. When we got our first mortgage statement, we were pretty sure that we put a lot more down on the house, and then realized that there was almost $10,000 taken off for insurance.” So much for all those years of dutiful saving.
On top of that, there's a vast array of incidental fees essential to the transfer of property. The CMHC website breaks it down to include: appraisal fees ($250-$350), title insurance ($250-$275), home inspection ($250-$500), survey costs ($1,000-$2,000) and legal fees ($600-$1,000). And, of course, these are not included in the list price.
As their once-comfortable $1,200 per month rent ballooned to a bi-weekly $1,000 in mortgage payments, which combined with water, electrical, heating, property tax and other essentials rounds out at $2,500 to $3,000 a month, Clayton admits “it's been a definite shift in life priorities ... which leaves little money for groceries and fun.”
Using the RBC mortgage calculator to get a sense of just how much interest amounts to is a daunting exercise. If you want to talk about throwing money away, note that for the first 10 years on a balance of about $250,000, the interest alone will eat up 65 to 80 per cent of your yearly contribution. After 10 years, you are essentially still paying $1,200 a month in rent, but your landlord is now the bank.
“If you figure out how much your house is going to cost over 25 years, most people don't think about it,” says LaFleur, “but it is two or three times what you think you're paying for it.” Based on current rates and the most cost-effective bi-weekly payment plan, a $350,000 mortgage will cost at least an additional $314,000.
“The bottom line is, people realize that you have to start somewhere and you have to start building equity,” says LaFleur. “It's kind of like this escalator that's constantly going up and you have to get on it at some point.”
While LaFleur's rationale to “put a little money down and pay your mortgage and two years from now your property's gone up 5 to 15 per cent from doing nothing,” looks good on paper, the reality is a little more complicated. According to The New York Times' Buy vs Rent calculator, which determines how much money you will be able to save while paying off the loan, and using Clayton's situation as a rough estimate, buying is actually better, but only after about 14 years. And, of course, you have to find a house first.
“If you want to buy a house downtown for less than $400,000, it's going to be very challenging,” says LaFleur. “I've worked with a number of people over the past few months that that's exactly what they're trying to do. I mean, it's possible, but it's very challenging. If these properties do come up that are priced in that range, there are hundreds of other buyers just like you who see it too who are thinking the same thing.”
Even two years ago, it took the Claytons almost a year of searching to find the right place. “We became total MLS junkies,” Clayton confesses of the online real-estate listings, as finding the right place at an ever-increasing right price in the Annex required both an imagination and a strong stomach.
“The first house we almost bought was a row house at College and Spadina with ridiculously narrow rooms and bunk beds built into the walls,” he says. “At $280,000, it was the cheapest house in [the area] at the time. We figured we would just do the work on it.” The list of problems discovered during the conditional inspection was so overwhelming that they needed to go outside and collect themselves before revoking the offer.
The alternative was, of course, a condominium. But adding maintenance fees on top of the aforementioned costs was more than enough for Clayton to rule that option out. However, within the first month of owning their house, the entire drain system had to be replaced to the tune of $13,000. “Now I know what the maintenance fees are for,” he says of his unexpected baptism into instantaneous expense. If you're keeping a tally, that's now somewhere around $25,000 in extra costs before all the boxes were even unpacked.
Despite the horror stories, Clayton is still fairly optimistic, if considerably more realistic, about the whole situation. “I've gotten into owning a home,” he says admitting a new-found love of HGTV. “I think the whole thing is worth the time and effort. Sure, it's financially crippling, but there's a certain amount of freedom. You slowly own the house (well, you and the bank), and it does feel good to have the investment.”
“And there's a certain righteousness that comes with paying property tax,” he adds with a laugh.
As for the investment itself, Clayton says that already the house would probably list for upwards of $50,000 more than what they paid for it. Not that he is eager to try to turn a profit just yet, especially when selling the house has its own hidden costs. Besides, however unreal the success of Toronto's real estate market appears, it doesn't show any signs of slowing. Of course, he'll happily take the increase on his investment, but Clayton still wonders who would be in the market for a house that expensive and small, and what lifestyle adjustments are in store for them.
EMAIL: LETTERS@EYEWEEKLY.COM
