Summary

In this article, Rob Carrick explains why renting an apartment is typically cheaper than owning a house. This lesson plan explores the important factors young adults should consider when deciding whether to rent or buy a house in today’s heated housing and renting markets.

Getting Started

Appropriate Subject Area(s):

Personal finance, banking and finance.

Key Questions to Explore:

  • Why is renting often cheaper than purchasing a home?
  • What factors should young adults consider before deciding to rent or buy a house?
  • Why are house prices currently rising?
  • What is sticker shock?

New Terminology:

Mortgage amortization schedule, sticker shock, property tax.

  • Mortgage amortization schedules: A mortgage amortization schedule is a complete table of periodic loan payments, showing the amount of principal and the amount of interest that comprise each payment until the loan is paid off at the end of its term..
  • Sticker shock: Sticker shock is a condition experienced by home buyers on discovering higher monthly payments, typically due to changes in annual interest rates.
  • Property tax: A property tax is a levy on the value of a property. The tax is levied by the governing authority of the jurisdiction in which the property is located.

Materials Needed:

Copies of the article plus links to these associated articles:

Learning Activity

Introduction to lesson and task:

Deciding whether to buy a house or rent an apartment is an incredibly difficult personal finance decision. Young adults in Canada looking to live independently are entering a heated housing market in which supply is limited and rent, house prices and demand are simultaneously rising. Thus, the question of whether to buy or to rent an apartment carries extra weight because of the huge financial commitment involved and long-lasting impact such a decision could have on an individual’s financial security.

Prior to deciding whether to buy a house or rent an apartment, the factors listed below should be taken into consideration, to reach an informed decision.

Things to consider before purchasing a house

  • Price: Prospective home buyers should ensure that they can afford the total cost of their desired homes. Home buyers often fail to consider hidden costs like property valuation fee ($150-$200), home inspection fees ($500), property survey ($750-1000), land transfer tax, legal expenses, moving expenses, property taxes, service charges for connecting utilities, renovations, closing costs, etc. While these costs may seem small relative to the sticker price of a new home, these costs should not be ignored.
  • Financial stability: Home buyers should always ensure that they will earn enough income to meet their monthly mortgage payments and their other obligations. They should also take unforeseen events like temporary unemployment into account.
  • Flexibility: The duration of the mortgage should also be considered. Not only do long mortgage term reduce flexibility, it also means higher total interest expense.
  • Variable vs. fixed mortgage: In a fixed rate mortgage, the mortgage rate and payment is constant throughout the term of your mortgage. In a variable rate mortgage, however, the mortgage rate will change with the prime lending rate as set by the lender. A fixed mortgage will offer greater stability, which often comes at a price; however, variable mortgages tend to be cheaper in the short-term, but subject to more volatility.
  • Maintenance fees: maintenance fees are typically higher for home owners.
  • Property taxes: typically, property taxes are determined by municipal governments, based on property value, the applicable municipal tax rate(s) and education tax rate.
  • Tax provisions: Home buyers make use of various provisions which will enable them to finance their purchase of a home. These include: first home buyer’s plan (which allows a non-refundable tax credit of up to $750), home buyer’s plan (which allows home buyers to withdraw up to $25,000 from their RRSP tax free), etc.

In today’s climate it is important to consider all these factors; purchasing a home is a huge financial commitment which will have long lasting financial impact on home purchasers.

Things to consider before deciding to rent

  • Price: It is important to compare rent price to mortgage payments to decide which option is more favorable.
  • Location: Rent prices are typically a function of the location, size, and condition of the apartment. It is important to factor in the location when choosing an apartment. Apartments in the suburbs are typically cheaper than apartments in city centres.
  • Cheaper alternatives: If possible, young adults/millennials should consider moving back home and saving for a down payment, as indicated in the article.
  • Save/invest: It is also important to save and invest the differences that exist between the rent prices and a mortgage payments when purchasing a house.
  • Flexibility: Renting an apartment provides young adults with the opportunity to remain flexible, with respect to their job prospects because renting an apartment is typically less of a financial commitment than purchasing a home and it is less complicated to move.

It is important to advise your students to conduct their due diligence prior to deciding whether to purchase a home or rent an apartment.

Action (lesson plan and task):

  • Ask your students to state if they would prefer to own a home or rent an apartment. Ask them to explain the reasoning behind their decision.
  • Ask your students to share their understanding of how mortgage loans work.
  • Ask your students to differentiate between a fixed rate mortgage and a variable rate mortgage.
  • Ask your students to explain the benefits and costs of owning a home.
  • Ask your students to explain the benefits and costs of renting an apartment or a house.
  • Ask your students to state some factors they will consider before deciding to buy a house.
  • Ask your students to state some factors they will consider before deciding to rent an apartment.
  • Ask your students to state the two big drivers of mortgage-rate increases.
  • Ask your student to explain why house prices are rising. (low supply, speculation in the housing market, etc.)
  • Ask your students to state the negative effects of rising house prices. (higher property taxes, unaffordability, higher wealth inequality, etc.)
  • Ask your students to explain why renting is generally cheaper than purchasing a home.

Consolidation of Learning:

  • Walk your students through an amortization table for the first year of the hypothetical mortgage example provided by Rob Carrick in the article.
  • It is important to note that the interest payments steadily decline as the balance outstanding is paid off. Thus, making prepayments in the early stages of a mortgage term is an effective means of reducing total interest expenses over the term of a mortgage.
Success

Success Criteria

  • After completing this lesson students should become aware of relevant factors to consider when deciding whether to buy or rent an apartment.

Confirming Activity:

  • Ask your students to explain the difference between variable and flexible mortgages.