In this months blog we explored the difference between buying a condo versus renting a similar apartment. For the purpose of this exercise we took a standard $300,000 condo and used Halifax averages for condo fees, utilities, interest rates and so forth. Note that in an exercise like this there will always be variances in costs and no two scenarios are ever the same. That said, we did our best to be neutral (if anything we rounded favourable numbers down) and the process is standard.
Buying a standard $300,000 condo with the current five-year fixed interest rate and 5% down would look something like this:
Condo Purchase Price: $300,000
5 Year Fixed Interest Rate: 3.25%
Total Due on Signing:
o Down Payment: 5% = $15,000
o Deed Transfer Tax: 1.5% of purchase price = $4,500
o Lawyer Fees: ~ $800
o Total Up Front Costs: $20,300
o CMHC fees (added to loan amount to be financed): $11,400
Balance Remaining to be Mortgaged: $296,400
Mortgage Payment: $1,441 / Month
o Interest Paid: $797
o Principal Paid: $644
Condo Fees / Utilities / Insurance: $450
Property Tax: $250
Total Monthly Carrying Costs: $2,141
At this rate, in 5 years, the mortgage will be paid down to $254,552. Meanwhile, the estimated condo value in 5 years with 2.5% appreciation equates to $339,422.
Equity Gained = Appreciation ($339,422) - Balance Remaining on Mortgage ($254,552) = $84,870 – Upfront Costs ($20,300) = $64,570.
However, in this example buying costs $541 more per month (see ‘Renting’ below) so we want to back that number out now; $64,570 - $32,460 ($541 x 60) = $32,110.
So after five years, assuming you have to live somewhere (and that rent is $1,600 / month) purchasing a condo will provide you with a lift on investment of approximately $32,110.
Note that if you put more than a 5% down payment you would reduce the CMHC insurance fee in addition to the interest paid on your mortgage so that the lift on your investment would be even greater.
Renting Similar Unit: ~ $1,600 / Month = $96,000 in Rent over 5 Years
Monthly Savings Renting vs. Buying = $541 ($2,141-$1,600)
By renting, one would be saving $541 / month in addition to the $20,300 in up front purchasing costs. If you were to invest all of this money in a GIC with a 3% annual compound interest rate you would make $6,274 profit in five years (see below).
Current Principle: $20,300
Annual Addition: $6,492 ($541 x 12)
Years to Grow: 5
Interest Rate: 3%
Future Value: $59,034
Gain on Investment: $59,034 - $20,300 - $32,460 ($6,492 x 5) = $6,274
No two scenarios are ever the same and some people are much more savvy investors than others. For example, a renter may choose to invest in stocks instead of a GIC and do very well. In contrast, appreciation on your condo might only be 2% or if it’s new construction it could be more than 5%. Regardless, whatever the scenario, you can take the guidelines set out here and apply them so they match your own.
Last, it’s very important for us to note that this is meant only as an example. We always recommend discussing any investments you plan on making with your financial advisor and mortgage broker. After all, while we know and understand the Halifax Condo Market very well the same cannot be said for your personal finances and investment goals. Whichever the case, we hope you found some value here and if you would like to discuss this exercise in greater detail, please feel free to contact us. Thank you for reading.