The most common question asked about real estate is "Should I rent or should I own the family home?". While the question really requires an in depth discussion with each individual asking it, a simple answer exists when ONLY the financial cost and risk of owning the family home are being considered.
At The Wealthy Homeowner™ we are advocates for the wealth building potential of own the family home because we know that "in depth" discussion generally points to making an educated homeownership choice. That said when you are not looking to become The Wealthy Homeowner™ this simple rule can help answering the question you probably are asking.
At The Wealthy Homeowner™ we are advocates for the wealth building potential of own the family home because we know that "in depth" discussion generally points to making an educated homeownership choice. That said when you are not looking to become The Wealthy Homeowner™ this simple rule can help answering the question you probably are asking.
The Rule of Two Point Three
This simple but always accurate rule always tells you at which point the cost of renting and the cost of owning cross paths on strictly financial terms. It goes like this.
Take the current posted 10 year term posted mortgage rate and add 2.3 to it. Then multiply that total by the price of the home you are considering. Finally divide your answer by 1200 to get the magic number where finances alone make your decision.
Take the current posted 10 year term posted mortgage rate and add 2.3 to it. Then multiply that total by the price of the home you are considering. Finally divide your answer by 1200 to get the magic number where finances alone make your decision.
Let's say you are looking at a home valued at $500,000 and the current 10 year term mortgage rate is 3.7%.
|
(3.7 + 2.3) x $500,000
1200 |
= $2,500
|
If the cost to rent this home is $2,500 per month or less, then renting is the best strictly financial decision.
If the cost to rent this home is $2,500 per month or more, then owning is the best strictly financial decision.
If the cost to rent this home is $2,500 per month or more, then owning is the best strictly financial decision.
Why it always works?
The underlying formula used to create this simple rule is really quite complicated because it takes into account the 100's of homeownership decisions every homeowner eventually makes. Choosing a 10 year rate gives you the confidence that every bank in Canada believes that over the next ten years your mortgage will average less than the cost of the posted 10 year rate today (after all banks are not looking to lose money).
All "opportunity cost" tied to how much downpayment is used or how much home equity you will build, something that is so commonly argued about by financial advisors and accountants in their warnings about homeownership, is removed from the discussion. Property taxes, maintenance, repairs and even the renovations required to keep the home at it's current value are all accounted for.
Finally since a home is always a forced savings plan this simple rule removes any illusion those forced savings traditionally create.
Back in 1990 when the 10 yr mortgage rate was 13% and homes were priced at $150,000, if you could rent at $1900 or less it was a better strictly financial choice to rent. At the same time had you invested any downpayment and then contributed the amount of the monthly principle you would have had to pay on the standard 5 yr mortgage rates on a standard 25 year amortized mortgage, you would have been far far far wealthier than the owner who bought and owned when 2003 finally rolled around. That was when the home had returned to it's inflation adjusted value of its original purchase price after weathering Canada's last great house price correction.
Of course for The Wealthy Homeowner™ , they comes out ahead as they are using a homeownership strategy that is designed to build wealth over their lifetime no matter where the market or interest rates go.
All "opportunity cost" tied to how much downpayment is used or how much home equity you will build, something that is so commonly argued about by financial advisors and accountants in their warnings about homeownership, is removed from the discussion. Property taxes, maintenance, repairs and even the renovations required to keep the home at it's current value are all accounted for.
Finally since a home is always a forced savings plan this simple rule removes any illusion those forced savings traditionally create.
Back in 1990 when the 10 yr mortgage rate was 13% and homes were priced at $150,000, if you could rent at $1900 or less it was a better strictly financial choice to rent. At the same time had you invested any downpayment and then contributed the amount of the monthly principle you would have had to pay on the standard 5 yr mortgage rates on a standard 25 year amortized mortgage, you would have been far far far wealthier than the owner who bought and owned when 2003 finally rolled around. That was when the home had returned to it's inflation adjusted value of its original purchase price after weathering Canada's last great house price correction.
Of course for The Wealthy Homeowner™ , they comes out ahead as they are using a homeownership strategy that is designed to build wealth over their lifetime no matter where the market or interest rates go.