High rents got you down?
Maybe you should own a home instead. In Toronto and Vancouver, the median cost for a one-bedroom apartment is close to $2,200. Even with mortgage rates up a fair bit in the past year, surely home ownership can’t be much more expensive than those incredibly high rents?
The Canadian Real Estate Association reports that the average resale home price in the Greater Toronto Area was $765,400 in September. With a 10-per-cent down payment on a five-year fixed rate mortgage at 3.5 per cent, you get monthly payments of $3,546.
Whoa, that’s way more expensive than renting. Let’s see what we can do to get that monthly payment down. Maybe a 20-per-cent down payment, enough to save on the cost of mortgage default insurance for your lender? Now we have monthly payments of $3,057. Let’s sharpen our pencils and see what else we can do.
Perhaps a variable-rate mortgage, where you can get a well-discounted rate of 2.85 per cent these days. No, sorry. The monthly payment here, even with a 20-per-cent down payment, is $2,851. You didn’t want a variable-rate mortgage, anyway. Too much exposure to the interest rate increases that we’re quite likely to see in the next year or so.
Let’s just forget Toronto. Great town, but its traffic and congestion will take years off your life. Instead, how about moving 100 kilometres west to Guelph, where the average price in September was $522,300. No, that’s not a major bargain, but what do you expect? Lots of people are priced out of the Toronto market and moving to surrounding cities such as Guelph, Hamilton, Barrie, Oshawa and others.
Bought with a 10-per-cent down payment, that average-priced Guelph house can be had with monthly payments of $2,420 (3.5 per cent fixed five-year mortgage, 25 years’ amortization). With a 20-per-cent down payment, your payments fall to $2,086.
Now, we’re getting somewhere. The mortgage on an entire house in Guelph costs roughly $100 a week less than your crummy Toronto one-bedroom apartment. All we have to do now is tack on a few costs that you’ll pay as a homeowner, but not as a renter.
Property taxes are the biggest cost on a yearly basis. Let’s use $488 a month for your Guelph home, a number taken from a Zoocasa.com survey of property taxes in cities across the country. Next, home maintenance and upkeep. The rough rule is 1 per cent of the value on your home on average over the years, which for your average-price home in Guelph works out to $435 on a monthly basis. Finally, we’ll add an extra $200 a month to cover the additional utility costs associated with owning a whole house over renting a one-bedroom apartment.
Let’s see where we are now with renting versus home ownership. We have a monthly mortgage payment of $2,086, a little less than what Joe or Jane Renter is paying in Toronto on average for a one-bedroom apartment. To that amount, we add a total of $1,123 for property taxes, maintenance and additional utilities. Grand total monthly cost: $3,209.
Maybe that’s not as bad as it looks. You won’t have to save money every month for a house down payment after you buy, which means your monthly cash flow increases by the amount that you were previously putting away. Let’s say you were saving $500 a month – that means your net extra cost of owning over that monthly rent of $2,200 is now $509.
Wait, we have to consider the cost of commuting as well. If your job is in Toronto, you’ll have a long commute each day by either public transit or car. Transit costs would be close to $470 a month.
Hey, can you telecommute? If so, maybe London is the answer. It’s located roughly 200 kilometres west of Toronto, and the average house price in September was $386,135. With a 20-per-cent down payment, you’re looking at monthly payments of $1,542. Even with all the extra costs of ownership, you’re only paying a bit more than the renter.
See, you can own a house for pretty much the same cost as an inflated Toronto rental. Just not in Toronto, or anywhere close by.
PERSONAL FINANCE COLUMNIST
The Globe and Mail, November 14, 2018