Should you buy that funky condo? Or maybe a smaller house outside the downtown core? Spending that much money every month on rent must be wrong, right?
Maybe, maybe not. It depends on your financial situation and your personal goals. Perhaps renting a cheap apartment and putting your money into RRSPs is a better plan for you.
The cost of renting is no doubt cheaper than the cost of maintaining a property. Taxes, upkeep and condo fees — they all add up to a large commitment. So why do people buy? Equity — the golden egg at the end of your mortgage.
But what is the equity in your home worth? The taxes and upkeep (and condo fees) will still be there, and no doubt they’ll be higher than today. If you just can’t save money, a mortgage may still be the best way to force yourself to save, but at what cost?
Many people start retirement savings plans for the purpose of saving for a house. Certainly, the federal government’s Home Buyers Plan seems attractive — tax credits to save money that you can use “interest free” to borrow to buy a home. You and your spouse can take up to $20,000 each out of your RRSP to purchase your first home (of course, first you both have to qualify under the rules of the HBP program as first-time home buyers).
Did you know that a 30-year-old person who removes $20,000 from an RRSP which is at $30,000 before the withdrawal will have more than $100,000 less in their RRSP by the time they reach 60, assuming they follow the plan and pay the money back over the 15 years allowed (and based on a conservative estimate of an average growth rate of 8 percent). Of course, the repayment of the money borrowed is mandatory unless you want to add it back into your income and pay the taxes back each year.
So what’s best? Buy, rent or find a box to live in? The answer is simple. If you have money left over every month and wonder what to do with it, then renting or buying doesn’t make a difference. If you rent and invest the money you save in a balanced portfolio, you’ll end up in exactly the same place. If you run out of money every month and just can’t seem to find that extra money to save for retirement, then buying may be a good decision. As long as you have advice to help you plan it all, you’ll have a great forced saving program.
There’s no magic formula for figuring out the best option for you. However if you’re looking for yet another alternative that allows you extra money for your lifestyle right now (travel, going out etc), consider renting below your means. This will provide extra cash that you can put into RRSPs if you choose, and the flexibility to buy just the right condo when you see it.
If you’re still not sure, talk to someone who really understands your needs. Any qualified investment advisor or financial planner can help; however, it’s important to work with someone who cares about you and your future.
It really comes down to your comfort. It’s great to live the condominium lifestyle when you’re paying nearly the same in rent for an apartment. Just remember, the equity in your home is great to have, but you can’t retire on it unless you’re moving back to a rental (or to the box).