Renting vs. Owning

For newcomers to Toronto’s housing market, most are divided between two concerns: those worried about the high costs of ownership and those worried about the high costs of renting. Each option seems to only be getting more expensive, leaving many wondering what the best course of action is? This post will focus on the average payments, costs and expenses of renting versus owning in Toronto to provide some greater information on the topic.

According to Pad Mapper the average monthly rent of a one bedroom unit in Toronto is currently $2,260 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 $515,000 and the price for a two bedroom is $674,000.  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 3.6%.  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 $103000 $26,500
Land Transfer Tax $  13,550 $13,550
CHMC Insurance N/A $19,540

Now let’s look at the monthly expenses

o r 1 bedroomSource: Six Housing Sense

Costs Ownership Renting
20% Down Payment Minimum Down Payment
Mortgage $2,080 $2,470 N/A
Condo Fees $   400 $   400 N/A
Property Tax $   300 $   300 N/A
Rent N/A N/A $2,260
Total $2,780 $3,170 $2,260

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, the better comparison is looking at the monthly payment after the principal portion of the mortgage has been removed (the blue expenses in the graph). From the 20% down scenario, we see $1,850 per month in the first 5 years would be going towards interest, condo fees and taxes. For the minimum down payment owner, that number increases $2,070, nearly equally the average rent. People may argue that renting is throwing money away, but clearly owning has some lost costs too.

Two bedroom Scenarios

Up front payments

Costs 20% Down Payment Scenario Minimum Down Payment Scenario
Down Payment $134,800 $42,400
Land Transfer Tax $  19,910 $19,910
CHMC Insurance N/A $25,264

Monthly costs

o r 2 bedroomSource: Six Housing Sense

Costs Ownership Renting
20% Down Payment Minimum Down Payment
Mortgage $2,720 $3,190 N/A
Condo Fees $   550 $   550 N/A
Property Tax $   400 $   400 N/A
Rent N/A N/A $2,950
Total $3,670 $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.  If we remove the principal payments, we see the 20% down owner pays $2,450 in monthly sunk costs in the first 5 years, while the other owner pays $2,710. 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 or the owner will be there for a long time.

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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