A mortgage can make a big impact on your life choices. Despite the advantages of being a homeowner, you automatically have less freedom: to move, accept a new job offer, or have an adventure.
Financially speaking, it may not be the wisest decision either.
For some prospective first-time buyers, the urge to own might be driven more by a fear of missing out or expectations rather than what’s best for their personal finances. While there are benefits to owning a home, including the opportunity to build equity or to sell your home to help fund retirement, there are negatives as well. Home repairs and maintenance may be more than you anticipated, or a growing personal debt load might make it difficult to keep up with mortgage payments.
If debt is a concern for you, here’s why you should think twice before you let go of that rental.
Most millennials are carrying debt.
The 2021 BDO Affordability Index found that 70 percent of Canadians aged 25 to 34, and 48 percent of those aged 18 to 24, are carrying debt. And 20 percent of this demographic has non-mortgage debt in excess of $20,000, which includes credit card debt, student loans, and other loans. Imagine adding a mortgage payment along with all the other costs of home ownership to your debt burden.
Many people believe they can make their monthly mortgage payment if it is the same as what they pay for rent. But the cost of home ownership includes more than the monthly mortgage payment.
Insurance, property taxes and the upkeep of your house and property are additional costs that quickly add up. Unfortunately, these additional expenses can mean you’ll have less money for saving, spending and debt reduction. It could also mean taking on even more debt.
If you’re one of the many Canadians living beyond their means, renting can give you time to get on top of your financial situation. That may mean changing your money mindset or embracing minimalism so you can prioritize debt reduction and saving.
Most importantly, creating a budget, tracking your spending and setting savings goals can help you take control of your money so you can work towards a stable financial future. And if that future includes home ownership, you’ll be ready to manage those responsibilities without taking on more debt.
It’s nice to feel settled in your own home. But what happens if you’re offered a dream job in another city or you want to relocate for a new relationship? Many young Canadians are in the phase of their lives when major changes — like marriage, career developments or starting a family — take place.
Selling your home, relocating or taking a parental leave could result in you losing money or taking on debt. If you’re not sure that you’re going to be staying put for at least five years, renting (vs owning) gives you more freedom to explore new opportunities.
In the meantime, work on building up your emergency fund and savings to help you avoid taking on debt when you do buy. With the geographical flexibility of renting, you could also choose to move to a cheaper area providing further savings.
The money you save from the absence of a mortgage and household costs can be used to grow your investment portfolio. You could invest in savings accounts like a TFSA or RRSP or go into the stock market. Alternative investments could go towards enhancing your personal abilities by furthering your education or starting a business.
Ensure you are using this extra investment money wisely by doing your research and finding a plan that fits your needs. You can use this guide to learn more about how to begin investing. If you still desire to be a homeowner in the future, this will also put you in a better financial position to make that dream a reality.
Those who have signed a mortgage at a variable rate are now facing the difficulties of a higher interest rate. More of their payment is going towards interest than their principal amount. The Bank of Canada has announced that interest rate decisions will occur eight times in the year 2023 forcing homeowners to be prepared for multiple changes to their mortgage payment plan.
The housing market is recently seeing a decline in house prices causing the issue of underwater mortgages to resurface. Homeowners may find themselves in a situation where their mortgage loan is higher than what the home is worth therefore making them unable to sell unless they can pay to cover the loss.
When you sign a rental lease for a certain period of time, the payment is agreed upon typically for one year. Most commonly throughout Canada, the landlord can increase rent once every 12 months and must give the tenant advanced notice. Therefore, if you are renting, you only have to adjust your payments and budget once a year. Interest rates will not influence your lease payments and you will have time to find a new rental unit if needed.
Millennials have recently been given the name “generation rent” as they adapt to the current economic state and housing market. Current trends have found that 9 million Canadians have given up on plans for homeownership and shifted to renting forever. This includes 23 percent of Quebec residents who don’t desire property, 17 percent of Ontario residents who decided to rent indefinitely and 29 percent of BC residents who settled for renting instead of homeownership. This shift in mentality has allowed for the benefits of renting to be brought to the forefront including more flexibility, greater opportunities to invest and a chance to increase savings.
Owning a home can be a dream come true, but it’s also a significant financial responsibility. Don’t rush into it if you’re not sure. Our advice: if you have a lot of debt or if you foresee a life change or two in the near future, consider holding off. One benefit of waiting to buy a home is you have that much more time to bolster your savings, so the transition from renting to owning will be smoother.
Listen to the Happy Hour Ladies discuss the whys and why nots of home ownership.
Is debt affecting your decision to rent or buy? Our Licensed Insolvency Trustees are here to help you, book a free consultation today.