Rent, Buy or Reduce Debt? How to Make the Right Decision

Are you living with Mom and Dad to reduce your expenses? Or maybe you’re trying to reduce your credit card debt or pay back school loans. Whatever your reason, you’re definitely not alone.

Eventually, you’ll want to take the next step. This is where so many Canadian millennials find themselves caught. Even though they manage to pay down debt while living with their parents, most haven’t started saving for a home of their own.

If you’re feeling caught between renting, buying or staying put, read on to find out which option might fit your financial situation best.

The facts don’t lie – millennials want a place to call their own

Recently CIBC polled Canadian millennials between 18 and 37 years old,  and here’s what they had to say:

  • 94 per cent of millennials who live at home or rent say they plan to buy a home
  • 67 per cent of those who intend to buy haven’t started saving yet
  • 38 per cent of millennials are homeowners, but more than half of them are concerned about the cost of rising interest rates and their mortgage.
  • Only 7 per cent of millennials have saved a full down-payment

How to weigh the pros and cons

Millennials are divided when it comes to renting or buying, but as the data shows, most want to own a home eventually. That said, what are the benefits of each option? Well, it depends on a few factors:

Check out how your city’s average rental costs compare to other parts of Canada, using the rental housing index.

  • How much do you have saved? If you’re still fighting school loans and consumer debt, renting might be a better option. Once your debts are paid, you can start funneling that cash into a down payment fund.

Renters may have more opportunity to save than they realize, though.

The CIBC poll found that homeowners on average are actually saving more per month than renters ($566 per month vs. $360) — even though they have greater housing costs than renters.

  • How old are you? Older millennials who are looking to start or expand their families might be feeling the pull toward home ownership while their younger counterparts might be perfectly content to rent or live with their parents. If you’re still on the fence, use this rent vs. buy online calculator

What steps to take if home ownership is on your radar

Whether you’ve got your sights set on a swanky condo or a hobby farm, home ownership takes time, money and compromise.

Here are some things to think about before you take the next step:

  1. Be realistic. Your first home doesn’t need to be your dream home. Don’t stretch yourself so financially thin with a big mortgage that you’re unable to save or cover emergencies. Stick to what you can afford comfortably and don’t get caught in a financial trap.
  2. Be cautious. Keep an eye on economic factors that contribute to higher costs such as interest rates, housing prices, inflation, etc. Jumping into the housing market during a bubble means you could end up owing more than your home is worth.
  3. Be prepared. Finance expert and blogger, Jessica Moorhouse talks about buying her first home and how it was imperative to have an emergency fund when things went wrong (and they will). Whether you’re buying a brand new home or an older, charming one, there will be unexpected expenses. Period. Make sure you have enough money saved up before undertaking home ownership so you don’t get caught in a jam or incur more debt.
  4. Stick to a budget. If you’re trying to scrape together a down payment, start by setting a budget. Cut down spending in areas that are eating up your cash flow, reduce debt or consolidate it, and finally, set financial milestones for yourself.

Keep yourself accountable by keeping the big goal in mind (this online goal calculator will help). And adjust your budget regularly when setbacks happen.

  1. Weigh your options. Don’t rush the decision to buy a home. If it’s too much of a stretch right now, pay down your debt load and save more money. Then, buy when the time is right. It can also help to be flexible about where you live. If you have a portable job, such as freelance work, consider moving to a more affordable housing region.

Should you rent or buy –  or reduce debt while living at home? Check out what Bridget Casey has to say on her blog or connect with us on Twitter for more advice about paying down debt before buying. #HomeOwnership #DebtSolutions