Costs of Renting vs. Owning

The cost of buying a home in Toronto takes up most of the air time when discussing the housing market; however, the cost of renting in this city is also gaining notoriety due to its own price increases.  This post will focus on the average payments, costs and expenses of renting versus owning in Toronto.

According to Pad Mapper the average monthly rent of a one bedroom unit in Toronto is currently $2,250 and the average rent for a two bedroom is $2,950.  According to Zolo.ca, the current price for the average one bedroom condo in Toronto is $532,000 and the price for a two bedroom is $732,000.  So let’s compare the difference between renting and owning.  Unfortunately, this will not be a perfect apples to apples comparison, as not all rentals are condos; however, this will provide a useful overview of the standard monthly costs of ownership versus renting.

We will map out two ownership scenarios: the first being for a buyer able to put down 20% and the second for someone who puts down the minimum down payment for their home.  For all scenarios we will use an estimate from the major banks five year closed variable rate mortgage, which all seem to be running around 3%.  For the one bedroom condo we will assume $400 in monthly condo fees, and $550 will be estimated for the two bedroom.

One Bedroom Scenarios

First, we need to include the upfront ownership payments before we show the monthly costs.  We will leave aside the realtor costs because technically the seller pays those or you could buy without one.  We will also leave legal fees, inspections and other miscellaneous expenses out because those could also vary depending on the situation.  The definite expenses are your down payment, land transfer taxes and CHMC insurance if you fail to put down 20%.

Costs 20% Down Payment Scenario Minimum Down Payment Scenario
Down Payment $106,400 $28,200
Land Transfer Tax $  14,230 $14,230
CHMC Insurance N/A $20,152

Now let’s look at the monthly expenses

Costs Ownership Renting
20% Down Payment Minimum Down Payment
Mortgage $2,020 $2,490 N/A
Condo Fees $   400 $   400 N/A
Property Tax $   300 $   300 N/A
Rent N/A N/A $2,250
Total $2,720 $3,190 $2,250

Not surprisingly renting comes out significantly cheaper than the minimum down payment scenario and still remains a noteworthy amount less than the smaller mortgage that comes from the 20% down payment.  However, it would be important to remember that with a 3% interest rate mortgage the owner would be contributing roughly 50% of their mortgage payments to their principal amount.  Meaning that while the entire $2,250 for rent is a lost expense, both ownership scenarios pay less in sunk costs than the renter because they are reinvesting 50% of their mortgage payment into their personal net worth (if prices hold).

The important detail to take into consideration about this scenario is you have to be able to make that higher monthly payment and have the necessary down payments saved to even be in a position to own.  It is easy for someone to advise you to buy rather than rent, but you need to ensure you can afford that gap.

Two bedroom Scenarios

Up front payments

Costs 20% Down Payment Scenario Minimum Down Payment Scenario
Down Payment $146,400 $48,200
Land Transfer Tax $  22,230 $22,230
CHMC Insurance N/A $27,352

Monthly costs

Costs Ownership Renting
20% Down Payment Minimum Down Payment
Mortgage $2,780 $3,380 N/A
Condo Fees $   550 $   550 N/A
Property Tax $   400 $   400 N/A
Rent N/A N/A $2,950
Total $3,730 $4,330 $2,950

The two bedroom scenarios all play out the same as the one bedroom.  Again renting is cheapest and having a large mortgage is most expensive.  Also, the same remains true about the principal payments, however, in the minimum down payment scenario the amount being put towards the principal only beats the monthly sunk cost rent by a few hundred: $2,950 vs. $2,640 ($2,640 being $4,330 minus half the mortgage payment).  Given the significantly higher monthly expense and the required up front investment, it calls into question the benefits of ownership unless the assets is strongly appreciating.

From the investment angle, maybe the biggest takeaway from both of these situations should be that unless someone is paying for the entire home with cash upfront there is absolutely no way they will even come close to covering their expenses with rental income anymore.  This means that investors would have to be incredibly confident in significant price growth for buying a property as an investment to still be worth it.

This post is not designed to recommend renting over owning or vis versa but merely articulate the expenses associated with both options.  It is important to know what you are getting into before making such a huge decision.  Or if nothing else, you can use the figures to explain how high the sunk costs are to others even when you own your home.

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