Rent or buy? How to decide what is right for you

"Rent is throwing money away" and "buying is always smarter" are both too simple. The right answer depends on how long you will stay, what you can afford after all the costs and how much flexibility you need.

The short version: buying tends to make sense if you will stay at least five years and the numbers are close. Renting keeps you flexible, and can come out ahead over a short stay.

What buying really costs

Buying has big costs up front and on the way out: closing costs, then agent fees, legal fees and sometimes a mortgage penalty when you sell. A common rule of thumb is that buying tends to make sense if you will stay five years or more.

Compare the full cost of owning, not just the mortgage payment:

• Mortgage interest (the principal portion builds equity).
• Property tax and home insurance.
• Maintenance, about 1% of the home's value a year as a common guide.
• Condo fees, if any.
• The return you give up on your down payment.

What renting really costs

Rent is the cost of housing without ownership. It may rise over time, and your landlord may sell or move in, but you avoid repairs, property tax and the cost of selling. You can invest the money you would have used for a down payment.

The price-to-rent ratio

A rough screen is the price-to-rent ratio: the home price divided by a year of rent for a similar home. Around 15 or lower generally favours buying, and around 20 or higher favours renting. It is a starting point, not a verdict.

Example (illustrative)

A $600,000 home with 10% down and a 4.00% fixed rate on a 25-year amortization.

• The loan, with the insurance premium, is about $556,700 and the payment is about $2,930 a month.
• In year one, about $21,800 is interest and $13,300 reduces the loan.
• Adding property tax, insurance and maintenance, owning costs about $35,000 a year that does not build equity, or around $2,900 a month.
• If a similar rental costs much less, renting and investing the difference can come out ahead, especially over a short stay.

Things a spreadsheet misses

• Stability and control: you can renovate and you cannot be asked to leave.
• Flexibility: renting makes it easier to move for work.
• Risk: prices can fall, and rates can rise at renewal.
• Forced saving: a mortgage pushes you to build equity; renters must save by choice.

How to decide

• How long will you stay? Under three years, renting usually wins. Five or more favours buying.
• Can you afford the payment with room for repairs, rate increases and an emergency fund?
• Do the numbers for your city, since the ratio varies across Canada.
• Would a larger down payment, a cheaper home or a different neighbourhood change the answer?

If you plan to stay at least five years and the numbers are close, buying often wins. If you are unsure about your plans, renting keeps you flexible. Try your own numbers in our Mortgage Simulator.