Friday, June 22, 2012

Why you can't afford not to rent longer before buying a home

Generation Y'ers like me - the ones who bother to read the news, at least - likely feel like someone has been trampling on their dreams with shiny budget shoes lately.

Finance minister Jim Flaherty's changes to mortgage rules this week disproportionately affect first-time buyers. The Globe has some pleasantly thorough coverage on the matter today.

I'm a renter in my late 20s, so every pamphlet in the mail from home builders that begs the question "why rent when you can own?" indeed makes me wonder, why am I throwing away my money?

Tighter mortgage rules may mean some don't have a choice in the matter.

Either way, there appears to be some room for relief.

Included in the Globe's print coverage was a dandy breakdown of home and mortgage costs across the country, including in Edmonton. Call me naive, but I found it startling to see in one big number that servicing a $347,000 mortgage (the Edmonton single-detached average) costs you $273,000 in interest. That's for a 30-year mortgage, which will no longer be allowed lest you have a 20 per cent or better down payment. The amount you'd pay in interest on a 25-year mortgage for the same Edmonton home would be $220,000 - a savings of $53,000 in interest versus a 30-year mortgage.

It begs the question, especially in light of the coming ban on 30-year insured mortgages - why rush into home buying when it may be cheaper to rent, save up and wait?

Say I bought a condo three years ago, just after I moved to Edmonton. With the job I had as a newspaper reporter, I would almost certainly have needed a 30-year mortgage.

But lets say instead I wait 5 years to buy the same home, but with a 25-year mortgage, paying rent in the meantime. In the last three years, having coupled up half way through, I've paid about $25,000 in rent. I can expect to pay about $13,000 more in rent to reach five years of renting before buying.

Total paid in rent: $38,000. Money saved in interest: $53,000. Plus, my income has steadily, thankfully, increased over that time. My capacity to pay the higher payment of a 25 or even 20-year mortgage has increased. It's also given me the chance to build savings for a down payment. I've also been able to enjoy the walkable lifestyle of an urban neighbourhood, rather than putting up with the long commutes to lifeless fringe suburbs where homes are most affordable.

Maybe I'm overlooking a major step here, but that looks like a pretty solid case to hold off on home buying, even if it means paying rent longer. Now only can I afford it, I can hardly afford not to.

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