Should you buy or rent?

Question

My boyfriend and I are both 24, we’ve been together since high school and we think we ready to buy a home. So far we’ve saved $35,000 and we make a combined $95,000 a year. I’m able to save more because I only pay $200 in rent to my parents while he pays $750 for his apartment. We’re hoping to buy a place, perhaps a pre-construction condo, that’s closer to work to cut our hour-and-a-half commute. I think that the money he pays in rent can better be used towards a mortgage and my savings in my TSFA aren’t collecting much interest. Are we ready to buy a home or should we wait until we have more cash?

Answer

I love your fiery passion to become homeowners. You are focused and goal-oriented, and the amount you’ve amassed as such a young couple is impressive. But I don’t think your choice is limited to staying put or buying now. There is a third option that you haven’t mentioned and it is the one I would recommend: Move in together, in a rental apartment close to your work. I have a moving van full of reasons why I think this plan makes sense.

Living together is different

At the risk of sounding like your parents, I think you should consider living together before you buy a home. You have been dating for a long time, but living in the same space is different. Your boyfriend may well be your husband forever, but if things don’t work out then you will have to sell the condo as you part ways and that will cost a lot.

Flexibility on location

You are both early in your careers, but that may change in next few years and renting will provide you with the freedom to move to where the work is—to another neighbourhood, city or even a different country. Renting will also give you time to learn about what you want in a home and a neighbourhood, and whether a house would fit your lifestyle better than a condo. Are you considering having kids? If so, when and where do you want to raise them? I mention all this because selling and buying houses costs a lot of money in real estate commissions, legal fees and moving expenses. You want to be confident that you’ll be in your place for at least five years before you move.

Renting together won’t cost more

You currently spend $950 in total on rent for your two places. Add in the $300 you’ll save on gas and you’ll have $1,250 a month to spend on a place without putting a dent in your savings plan. I looked online and found plenty of one-bedroom places for that amount in your home city. Once you buy a home you will have more than just the mortgage to pay, you will have condo fees, property taxes, and maintenance costs to consider. You’ll be surprised how quickly they add up. Sure, a portion of your mortgage payment goes to the principle, but most of it goes to paying the interest, which is just another form of rent. You’re renting someone else’s money.

Don’t wait to shorten your commute

Your commute is insane. Moving to a rental closer to work will save you money on gas and give you 10 hours more per week to crank harder at work or enjoy a hobby. Given that it won’t cost you more to rent closer to work, I wouldn’t wait. Audiobooks and talk radio lose their appeal over time and I think life is too short to spend that much of it in your car.

The real estate market is uncertain

Your belief about the value of investing in real estate has been true for the past 15 years. Prices have been on a tear, but there is no guarantee that price gains will continue after you buy. There is a huge supply of new condos on the market and interest rates will be moving up at some point in the future which will likely put pressure on prices. As with any investment, real estate carries risk. Riskier still are pre-sale condos. While they can be a great investment, you’re basically making a bet on what your condo will be worth in three years when you move in. And new condos can be prone to delays and construction problems, while an existing building should have already sorted those kinks out.

Make the most of the Home Buyers’ Plan

You didn’t mention your RRSP, so I don’t know if you’re currently investing money there. The first time Home Buyers’ Plan is a good idea because it allows you to contribute to your RRSP and qualify for the income tax deferral. As long as the money is in there for 90 days, you can then withdraw up to $25,000 to put towards your down payment, and then repay that sum over the next 15 years. Using up your RRSP contribution room will give you a nice juicy tax refund which you can then add to your condo savings.

Minimize your CMHC mortgage loan insurance

The amount you have saved—$35,000—is admirable. But it isn’t likely enough for a 20% down payment, which is what you’ll need to avoid CMHC loan insurance. Still, the higher your down payment, the lower your insurance premium. For example, if you buy a $300,000 condo with your current savings, you’ll pay a lump sum of $5,300. If you save another $20,000 your premium drops to $4,300. (Check out the CMHC calculator for a better sense on how much your insurance premium will be.) Buying real estate can be a great investment, and it sounds like you are on track. But if I were in your shoes, instead of buying now, I would find a rental near your jobs and live together for a year or two while you work ferociously to increase your down payment and let the real estate market sort itself out.