A Canadian's random thoughts on personal finance

Apr 12, 2008

Save money by renting your home

If you're renting, you're throwing your money away, right? Well, if you're paying mortgage interest to the bank, that's throwing money away too. Which costs less over the long term?

I pay $1200 per month in rent, including my parking space. That rent includes a number of items that would come out of my own pocket if I owned a home, such as property tax, repairs, maintenance, and some utilities. All told, I get about $500 in value every month included in my rent. That leaves $700 that is truly "thrown away" just like mortgage interest.

How large a mortgage would cost $700 per month in interest? Today's variable-rate mortgages are going for about 4.6% per year. At that rate, a mortgage of $182k would have interest charges of $700 per month. That means if I could stop renting and move into a house with a mortgage of $182k or less, I would save money every month.

Houses in my area don't sell for $182k. They sell for more like $482k, meaning I would need a $300k downpayment. With that large a downpayment, I'd need to look carefully at the opportunity cost of moving $300k worth of assets into a single piece of real estate. $300k in the stock market would earn about half the Canadian median household income every year, so that's a pretty high opportunity cost.

What if I get a larger mortgage instead? If I get a $300k mortgage instead of $182k, that would cost an extra $452 per month. I'd have to justify that extra cost either using the appreciation in the value of the property I buy, or else using non-financial arguments (e.g. I just really want to own a house). Since I don't particularly want to own a house, that leaves me with the appreciation argument.

So the question I ask myself is: do I want to borrow several times my gross salary to bet my entire net worth on a single real-estate investment? Given the current climate of the real estate market, I'm pretty happy with my current diversified portfolio, thank you very much.