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Zan Molko
ABR, ASP, ASA, Real Estate Broker

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Rent versus Own?  - Good question...

Where were you five years ago? Beyonce's "If I were a boy" and Katy Perry's "I kissed a girl" were climbing the charts and streaming to our ears.

It was 2008, and David and Sarah were looking for a home in central North York, reasonably close to the subway.

"Advice" was finding its way to them from all the typical sources. Parents, relatives friends, co-workers. "Prices are too high", "rates will change". "Why not rent, you can get a nice 3 bedroom home for $1,600 per month" "Save your money."

After all this frustration, David and Sarah called me. They had been receiving our emails. I reviewed their needs, answered some really great questions and I started them up on my free Preferred Home Finder Programme that sends out daily emails of ONLY the homes that matched their specific criteria and price range... as soon as they came on the market.

They quickly got an understanding of what was out there and what they wanted in their first home. We began visiting some of the homes that they were interested in, and eventually put an offer in on one.

They purchased a home at pretty close to the average price and average mortgage interest at the time (rates are considerably lower today)

Let's review the numbers.

Average price for a home in 2008 in Toronto was $379,347.

5 Year fixed term Mortgage Rate was 5.1% on a 25 year amortization.

They put 5% down ($19,600) on a home just a little higher than the average price, plus $5,455 closing costs (1.4%) total around $25,000.

The mortgage principal including CMHC insurance fee (2.75%) was $382,641

Their mortgage payments were $1,127 twice a month. This meant they were paying down the mortgage faster. (By the way at today's rate the payments would only be $903.)

So now it is 2013. Let's see how David and Sarah's investment of $25,000 has done.

Since they bought close to the average at that time, the average price for a home now  has been hovering around $498,000.

Their current mortgage is up for renewal and it looks like they will be getting a 2.94% for 5 year rate. (That is almost 42% lower than their first mortgage) Not 2.16%!!!

These are their numbers:

Gain in Equity with Market appreciation $498,000 - $392,000 = $106,000

Mortgage Principal paid $392,000 - $326,257  = $65,000 (With accelerated payments)

Total Gain = $171,000 less original investment $25,000 = approximately $146,000

David and Sarah's $25,000 investment yielded about $146,000 of equity gain. This gain is tax-free as a principal family residence makes it worth well over $190,000 compared to a direct taxable income source.

Pretty good rate of return!

Assuming they had rented, they would have paid around $96,000 (with nominal rent increases). Their landlord would have appreciated the $106,000 plus had $65,000 paid off on his mortgage.

Let's not forget they could have saved money if they had rented.  The rental saving option that was suggested to David and Sarah before they purchased might have worked out for them.

If they had just rented and saved the $600 in rent per month they would have saved away over 5 years about $36,000 - not too bad.

Now let's take that $36,000 and buy an average home today….

Wow! That average home is $106,000 more expensive than it was five years ago.  And an even larger downpayment is needed.  Not to mention closing costs in Toronto would now be almost double! May be an opportunity to go to Thornhill, Markham Richmond Hill

It's certainly make one think! Does it not?

The world's most famous investor, Warren Buffet says, "the rearview mirror is always clearer than the windshield." Of course, looking back, they did well.

What would you have done if you were David and Sarah?

What would you do today?

As always, there are a lot of variables to consider... and market increases are never guaranteed.

Real estate can go up and down in value and is subject to a wide range of factors (interest rate increases would be the most influential factor, among many others).

The intent of this email is not to paint a rose-coloured picture, although it certainly gave a pretty strong argument towards buying.

These are a completely accurate set of numbers, and hopefully they can give you a perspective of some of the options you might have.

I can't promise the next 5 years will look the same.  But even if the home had zero appreciation and was worth exactly the same now as it was then, they still banked $65,000 in principal paid, which was more than the savings from renting at $36,000.

As always, I would love to hear your thoughts.

Call us at 416-410-9909 or email

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