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Renting v. buying your home: an affordability check

What it means to be a renter was summed up by a carpet cleaner who came to our home several years ago. "Oh," he said when my wife declined the deluxe treatment, "you must be renting."

Renters are slackers, the conventional thinking goes. If they had any brains and ambition, they'd own a house.

Today, in some parts of the country, just the opposite is true. Smart people are renting instead of owning.

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Renting doesn't have to be a permanent choice and, in fact, it probably shouldn't be for most people. But renting temporarily to avoid making an unfortunate leap into today's housing market can make good sense.

Affording a house is murder these days. The average price nationally is $372,544 and three cities - Victoria, Calgary and Toronto - are in the $400,000 to $500,000 range. In a galaxy far, far away is Vancouver at just above $800,000.

The minimum 5-per-cent down payment for the national average-priced home is $18,627. Add another $5,000 to $6,000 for closing costs and you have a grip on the cost of buying.

Next come endless life lessons on the cost of owning. No one ever moved into a house and didn't soon after have to pay hundreds or thousands of dollars in unexpected costs for everything from maintenance to furniture.

Royal Bank of Canada's economists took a look at affordability recently and found that the costs of owning a two-storey house (mortgage, property taxes and utilities) consumed 80.4 per cent of median pretax household income in the Vancouver market, 55.6 per cent in Toronto, 53.7 per cent in Montreal, 40.9 per cent in Ottawa and 36.8 per cent in Calgary. As alarming as those numbers look today, they'll be worse when interest rates rise.

Affordability Check

Here's how to do your own affordability check: Total up all your monthly debt payments including mortgage, add your expected monthly share of property taxes and heating, and then see what percentage of your monthly pre-tax household income it amounts to.

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Lenders will let you go as high as 40 per cent, but that's going to leave you minimal room to save for retirement, your children's college or university education, stuff for the house and so on. So consider an upper limit of 30 per cent to 35 per cent, unless you see big pay increases in your future.

If you're on the affordability borderline, pull back. Don't be one of those chumps who justifies buying something they can't afford because they're afraid it could get more expensive tomorrow.

This is where renting comes in. No, it's not an ideal permanent solution unless you foresee the kind of housing market collapse the U.S. market has gone through. Renting drastically limits your options for choosing a nice place to live, and you'll never hit that sweet spot of living rent- or mortgage-free and owning a big asset you can sell tax-free.

But renting temporarily offers a way to bide your time while building up your savings. It costs less to rent than own, which means you can write your monthly rent cheque and then bank the money a homeowner would be paying for property taxes and routine upkeep and maintenance.

Training Wheels

Call it home ownership with training wheels. You'll try paying the same amount as a homeowner does and, if you wobble, there's no harm done.

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Delaying the purchase of a house is problematic, mind you. The later you buy, the later you pay off your mortgage and give yourself the room to start pumping big money into your retirement savings plan.

But that's life. We're all living longer, and many of us are going to be working longer as well. Having all your financial affairs wrapped up with a bow on it by age 65 is nice, but not always possible any more.

And let's remember that renting does have some rewards of its own. If you're young and restless, renting allows you to change jobs and cities with ease. Renting may also allow you to live downtown in a city where the only homes you can afford are an hour's commute away.

I did an informal survey of attitudes about renting on my Facebook page ( Rob Carrick - Personal Finance) and was surprised by the favourable take most people have on this option.

No, you're not a slacker if you rent instead of buying a home you cannot properly afford. If there's a correction in the housing market, people may even call you a genius.

Crunch the Numbers

Here are some online calculators that will help you determine how renting a home compares with buying, based on your personal situation.

The "ultimate" rent v. buy calculator:

The New York Times buy v. rent calculator:

RBC calculator:

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