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Home Free: the advantages of swapping your mortgage for a lease

After years of crushing mortgage payments and escalating maintenance costs, one homeowner sold her house and signed a lease on a place a few blocks away. Life has never been sweeter

Home Free

Our last house was a little gem. Few homes in Leslieville are stately or architecturally impressive—it’s a neighbourhood of unremarkable brick semis with the rare Victorian or Tudor flourish—and the one my partner and I owned for two years was no exception. But inside, stripped down to its simple bones, with Benjamin Moore cloud white walls and dark wood floors, a cute IKEA kitchen and mid-century decor from local vintage shops, the place had charm. We bought it for $450,000 in 2007, a deal, if not a steal, for a home on a coveted street less than a five-minute walk from all the amenities required by the middle-class hordes: good coffee, a busy playground, decent restaurants. Soon, however, our house began to make exhausting demands: the furnace needed to be replaced, then the roof; the basement felt damp in the summer humidity, and in the winter our barely insulated bedroom, with its ancient windows, was so cold we had to run a space heater through the night.

There was no money to fix any of it. Our line of credit and credit cards were maxed out. We had two comfortable incomes, but after mortgage payments, utilities, property taxes, car payments, insurance, daycare and groceries, there was little left over. We added up the sums, living expenses against income, on increasingly complicated spreadsheets—it would be years before we would be in the black. Meanwhile, the company I worked for faltered during the recession. First the frills were cut: fewer couriers, no fancy Christmas parties, no taxi chits. Then jobs; I lost mine in early 2009.

We called our real estate agent. Within a week, our house was purged and fluffed, our excess belongings stowed in cupboards and in the trunk of our tiny hatchback. While agents toured our home, we schlepped around the city looking for apartments like modern-day Joads. By the end of the next week, the house sold for a little over $600,000. Our debts paid off, we invested the rest of our profit in RRSPs, index funds and tax-free savings accounts. We’ve been renting a house a few blocks from our old neighbourhood ever since, and spending about a $1,000 less each month in housing-related costs than we did when we were owners.

A few friends have witnessed this transformation with alarm, as if we’d shucked off our grown-up responsibilities for a stop at dorm life en route to freeganism. Our return to renting was weird for me, too, at first. Home ownership is in my DNA; my dad is a striving, self-made man for whom buying a house is the surest sign of arrival into the middle class. But at the time we sold, just after the U.S. housing market crisis sparked the global recession, it was a relief to no longer be shackled to a mortgage. Now, more than a year into this new living arrangement, with money in the bank and little concern about hiccups from the appliances or cracks in the foundation (they’re someone else’s problem, as is the property tax bill), we feel less like kooks and more like visionaries.

To urban-living theorist Richard Florida, the imperative to own property—something that in no small part contributed to the housing collapse in the U.S.—continues to stall the economic recovery south of the border and elsewhere. If they haven’t lost their homes altogether, people in cities and towns hit the hardest are unable to sell their houses to move to where the jobs are. In an opinion piece in The Wall Street Journal, Florida wrote that, “Today’s idea-driven economy requires a more mobile work force that can seize opportunities wherever and whenever they arise.” This means discouraging home ownership except in cities with strong economic prospects and except for those with stable jobs, savings and a solid down payment. It also means regulating against risky lending practices, such as zero-down mortgages and extended amortization periods.

Toronto is, in theory, a city where home ownership should be a wise investment: we have a diverse economy, a seemingly limitless pool of new migrants and a vital creative class—all contributors to a healthy housing market. It would be easy to view an investment in a home here as a sure thing. That is, until you talk to someone who remembers when rapid house-price appreciation in the late ’80s was followed by a crash that turned the market to mush for years. Even the most bullish economists agree that all bubbles eventually burst.

Most people believe that renting means throwing your money away. Not so, says Vince Brescia, head of Ontario’s biggest rental-housing advocacy group. He ran some numbers comparing renting to owning over a 25-year period and came up with a surprising seven-figure windfall:

ASSUMPTIONS: House appreciation rate of 2%; inflation rate of 2%
1. Based on August 2011 average GTA home price of $451,663, with a 20% down payment and a 5% interest rate
2. Lost investment returns on funds tied up in the home, and on any excess annual costs of owning compared to renting. Investments are assumed to yield 4% annually
3. Assumes average GTA monthly rent for a three-bedroom apartment of $1,312 (utilities included)
4. Funds available to renter to invest in other assets

  • Ben

    Summary: We bought a home we couldn’t afford, and now rent instead. If you have no plan to pay off your mortgage in the next 10 years, then you are better off renting.

  • Paul

    Ben—-> Bingo! U nailed it. They went into some bank, who preapproved them for a huge mortgage , simply based on income without looking at the TOTAL COST of home ownership. I always believed nothing is wrong with renting, nothing at all but think first before you buy especially with that crazy 5% down on a single income – madness!! Think they have the realtor to thank for their unwise decision.

  • Andy

    While I agree in theory with this article, I’m wondering where in the GTA I can find a 3-bedroom apartment for $1312/mo *with* utilities…

  • Goo

    Consider the following first…

    1. Rent or lease your whole life and you have no home to pass on to your kids (assuming kids). Are you that selfish?

    2. Did you really save money in equity? If you spend like an average North American you will blow your alleged savings on crap anyway.

    3. You will own nothing. You will have no financial leverage if there is a life crisis and you need to borrow against your house.

    4. It is not yours. So you can’t necessarily do any upgrades or make modifications the REAL owner doesn’t approve of.

    5. Your owner can boot you if it suits them. Think you have a contract? Contracts are only as good as the lawyer defending them now that you’re wasting time battling it out in arbitration.

    6. You are carefree now. When you are an elderly you won’t want to be screwing around with your lease your rent. You’ll want the dignity of ownership.

    Disagree? Fair enough. I celebrate our diversity.

  • Aaron

    Very short sighted article. Simply put, if everything was maxed out, then proper planning was never done.
    This is a case where speaking with a financial planner could have not only rised any red flags to buying the home but created solutions for debt reduction, to free up cash flow or to have said no in the first place to buying!
    While they may be carefree now, with rising rent a proper downpayment and good planning, they could be owners with no rent later on in life.

  • Christine

    @Goo: Does anyone really expect their parents to give them a home these days? If the children you are raising are that entitled, that’s a problem in and of itself. Also, isn’t renting and living within their means a less selfish option than owning a home and not being able to provide a good life for their children?

  • Charlene

    I totally agree with ‘Goo’ above. Not only that, but they are showing your home prices based on 2% appreciation versus an investment at 4% yield annually. The GTA and surrounding markets have held a strong and steady increase at well over 2%. On the other hand, I know many investors who will confirm they did not receive 4% yield—especially in tough markets. Also, a home priced at $450,000 in 25 years will be WELL MORE than $665,000.

    I have yet to see anyone’s RRSP yield more income to them than their house did. PLUS, after 25 years… if you did not borrow on the equity… you will be able to live mortgage free for another 20-30 years. OR use the equity to purchase and fund a retirement residence. Something one can not afford without strong homeowner equity or income from renting the family home.

    This example was based on too many ‘guesstimates’ to be taken too seriously.

  • Ben

    Christine: no one is forcing to live in one of the hippest and most expensive neighbourhoods in Canada.

  • John

    Aaron: A financial planner ? Get real. The average FP or advisor or whatever they call themselves dont even know the debt load or cash flow of 90% of their clients. They will offer no advise other than ‘give me more assets so I can trade trade and make more commission”. It starts with YOUR inner thinking and dont get caught up in the hype. Thats all this city is built on. Do you know these people really think they made $150K profit ( from the purchase price in 2007 to selling now for $600K) without taking into consideration the amount of property taxes they paid, heat hydro, maintenance and real estate fee ? Yeah.. thats how screwed it is. Only YOU can know if leasing is better than buying. No realtors, Planner, advisor , banker. No one and clearly these people were not ready like maybe 40% or more of torontonians travelling on this crazy real estate hype!

  • Christine

    @Ben: I never said they needed to live in that neighborhood. I just think it’s harsh to call someone selfish for choosing to rent instead of buying a home.

  • Della

    This assumes that people actually take that additional money they “save” each month by renting vs. owning and invest it.

    Not sure that most renters are actually doing that.

  • downtowner

    ‘Most Renters are more care free…’

    of course they are. All my early 30′s friends that still rent have little future plans for home ownership (or plausibility of home ownership.

    If they had planned like the rest of use, they would be riding this wave instead of watching everyone else get elevated. Yes the market will trouph, but we’ll still be ahead of those that have simply been observing.. until they finally jump in !

  • Jung

    Downtowner: Spoken like a pushy realtor!!!

  • Lors

    I think there is a belief that renters are either transitory individuals (students, ‘hippies’, or soon-to-be-homeowners slumming it until they have a down payment) or just selfish and irresponsible. There is no one perfect solution for everyone. Some people like the idea of homeownership and the ability to customize their home while others prefer renting and investing their money – and yes, some renters are quite the investors! To each their own! However, homeowners seem to be the most vocal about their beliefs (or at least, in my experience). I have never met a renter that would turn to a homeowner and say “wow – you put 10% down on a half-a-million dollar bungalow. That’s stupid!”. But I am often confronted by homeowners that tell me that I am throwing my money away through rent or they ask me when I am going to buy, thinking that that is my life’s goal. Renting works for my husband and I. We have a great 3-bedroom apartment in bloor west village for under $1300 (with utilities), we can afford to travel and save large chunks of our paycheques for the future.

  • ALL

    No need to get competitive about your positions. The article is fairly anecdotal but the main point of “its not a waste of money to rent” does hold up. The historical return on housing is surprisingly low and a house is an incredibly non-liquid asset.

    Still, that’s not to say you should never buy a place. People get tremendous non-monetary value from being a home owner (pride, satisfaction, flexibility to upgrade, etc) and the renting argument does suppose a level of discipline to save and/or invest the difference.

    Anyway, it seems to me that the point is not “dont buy, rent!” but rather, that its not a waste of money to rent and it can suit some people better.

  • Shirley

    Lors – thank you for bringing some sense of decorum to this whole debate. Well said! For me, the mystery lies in why this is such a hot issue for most ‘owners’ when speaking to or about ‘renters’.
    If you’re on such a high right now with only sunny days ahead then you should all be in better moods.
    The lesson from this article is: make the decision that makes the most sense financially for you. And reassess that decision every couple of years to see if you’re still on that path. We are still buying in to the “American Dream” when the dream has long been trashed, abused and picked clean by those in charge of the money.

  • May

    If you can comfortably afford to buy, then buy. If you can’t, then rent. It all boils down to what you can afford given your choice of lifestyle, location of home, income earnings, income potential and comfort with being tied down to a home. There is no right answer. The wrong answer, however, is “owning” a home when you really can’t afford to.

  • Lena

    Lors: Please tell me where you found a 3 bedroom in Bloor West for $1300. Seriously, I’m looking to rent in the area and all I found were 1 bedrooms for that price or higher.

  • Mae B

    Gathering knowledge; my assumption is that a house is like a car, starts new and then becomes used. People typically want new and the improvements, (self reversing cars, what will they think of next) When a car becomes used people pay less for it, presuming because as it ages there will be higher fees associated with upkeep/maintenance/upgrades. Does this not also apply to a house? What factors are being considered when assume a home will go from $450K >$665K over 25 years (as noted above).

  • barry

    I can easily afford a home but it makes zero financial sense to buy right now unless you can buy straightup with cash. The only thing that makes realestate worthwhile is future appreciation, and that ship has sailed. I’m currently planning to rent for at least another 6years (making me 35).


    @Christine I don’t expect my parents to leave me their home. To be honest, I don’t expect my parents to leave me anything. They’ve provided enough for me growing up. If we have to label a party selfish, I think I would happily place that on the adult children who expect their parents to forgo pleasures for the rest of their lives just so their children won’t have to “go without”. If this is what the parents wish, so be it, but for the children to expect this, shame on them.

  • tiffany

    Renting may be cheaper over 25 years, but what happens in years 26 through 45? You still need somewhere to live until you die. That’s the one advantage of owning: at some point, the house becomes paid for, and your housing costs drop dramatically.

  • Jae

    Looks like a few insecure home owners are out to justify the fact that they are barely making the mortgage payments, and you had to spend your vacation money on a new roof this year.

    I don’t agree with this article 100% only because as stated before, it’s mostly anecdotal. But you cannot deny there is an unrealistic frenzy towards buying a house, and how that signifies you’ve made it in life. Which is why most people that buy in a crazy market like right now can’t really afford it, which in turn, drives the market crazy.

    Don’t get me wrong: I want to buy a home eventually, for all the same reason those angry commentators have. Which is why I’m saving like crazy, by renting.

    Are you really so selfish you want to spoil your kid by serving them a free house on a silver platter? I’m only half joking here.

  • Ug and double ug

    Seriousy…. a 3 bedroom apartment in Toronto that includes utilities?? You can barely get an illegal basement apartment near the danforth with ONE bedroom for under $1312. LMAO.

    If you are getting 3 bedroom apt for $1312… then you are living behind god’s back… and would need a car, and transit passes for everyone in the family… bringing your living expenses up to a ridiculous cost.

    i.e the entire calculation is flawed.

  • Rex

    It’s not homeownership but homeOWNERS that make me wanna PUKE sometimes, especially the types who chime in on stories like this one acting like they’re oh-so-precocious winners because they’re “part of the game” and so many of us are not. Worse, they accuse anyone who doesn’t own of simply procrastinating instead of tilting their noses downward for a second and realizing that many of us CAN’T AFFORD IT. Everything the author writes in her second paragraph is ABSOLUTELY TRUE for far more homeowners in this city — this PROVINCE — than the minority NEW homeowners who can actually afford their homes are capable of realizing.

    If I had to count, for example, all of my co-workers who bitch and moan about the crushing debt-loads they’re carrying, or the fact that they’re ONCE AGAIN tapping lines of credit or mortgages to pay for home repairs, renos they don’t need, unexpected car repairs, buying replacement vehicles, rising college/university costs and so on, I’d have to take off my shoes and pants, and those of several other people, just to get a final tally (which could be fun, depending on how you look at it). Worse still, many of them have NO EFFING PROBLEM diverting potential revenue AWAY from the company that pays them (and this is a place that offers salaries, benefits, perks, you name it) by making freelance deals “on the side”. Open your ears at your workplace, people; this is how many homeowners score extra cash. Honest freelance (meaning, you sell it YOURSELF) and self-employment is one thing, but actually ripping off your employers so you can make more money because you’re swimming in debt? Disgusting.

    Would I prefer to have a home (or even a condo) over renting. Of course. But I’m smart enough to realize that it’s just not in the cards for some of us, and having those bragging rights (as demonstrated by so many in this comments section) would mean nothing if I’m so far in over my head that even IF I sell the house at a profit 10 or 20 years down the road, I’m STILL NOT MAKING ANY MONEY BECAUSE OF WHAT I’VE REALLY SPENT TO OWN THE HOME.

    Oh sure, maybe if I was part of a two-income situation, I’d think differently, but I’m not. But what happens to all those self-satisfied double-incomers in houses they can ill afford when suddenly one of those incomes isn’t coming in anymore, or is a fraction of what it once was. “Well, we’ll just worry about that then,” they’ll tall you, but really, will they be able to up and relocate with ease for a new job? Will BOTH parties be able to relocate? Just the very THOUGHT of relocating keeps most homeowners in career ruts, especially once kids are part of the equation.

    Once upon a time, when the world was a dirty, sexist place, ONE INCOME provided for a family, and if usually provided a home. That’s rare these days. We’re not all doctors, lawyers and engineers. Some of us struggle to make ends meet on 30,000 to 40,000 a year (yes, even at 40,000). To be GOADED by homeowners into following their glorious lead is, for many, to set oneself up for a painful financial awakening down the road.

    And this crap about “leaving a home for your kids?”. Who the hell says your special little darlings will even be living in the same province, let alone the same city, when you’re old and grey. If anything, the last two generation have had to deal with enormous changes to the whole concept of “career” — and how long it lasts, and where it takes you — as well as the prospect of seniors living longer than ever before that the idea of leaving an entire HOME to your children should be the last thing on anyone’s mind. Granted, leaving the PROCEEDS of a home/estate is one thing (and that usually follows a couple of DEATHS, as I recall), but woe to anyone who thinks their kids will magically be able to move in to the old homestead once mom and dad are safely ensconced in a retirement villa.

    In recent weeks, there have been stories about how young, single 30-something females now make up a near-majority of condo buyers in Toronto. Every article either ignores, or greatly downplays, the fact that most of these women have substantial help from mommies and daddies who don’t want to see them continue “throwing money away” on apartments. Must be nice to have a money faucet back home. Once again, we’re not all so blessed . . .

    The fact is, and this article only affirms it, renting is the best option for a LOT of people. The best homeowners are the ones who can be grateful for their situation and realize that it CAN’T work for everyone, then keep their mouths SHUT.

  • jfactor

    I think the REAL ISSUE is affordablity for both renters and homeowners in Toronto. Both house prices and rents are going up, and will continue to go up over time. New rental construction is even starting to happen on a larger scale in the city for the first time in many years, in order to capitalize on the increased land values. There is no landlord who is in the business out of the goodness of their hearts, so rest assured they are making a profit and to ensure they continue to profit rents will continue to increase over time.

    Inflation has generally been outstripping wage increases. Add to that the other high costs of living in Toronto, many people are feeling the pinch all around, and for some the pressure to buy is just another “thing” they can’t afford to do.

    Renting versus Ownership… One is not neccessarily better than the other. So do the math and figure on some price increases whether you are considering renting or ownership and figure out what works for you as an individual. Don’t base your opinions on a one sided article!

  • KCCM

    My investment rule of thumb, which I have used since buying or first house in TO in 1990 is:
    If you can rent a similar property (location, amenities, size) for the same or less than the interest cost (interest rate times total purchase price) of the property you propose to buy, then buying is too expensive.
    Another counter-intuitive rule of thumb: if you own your own house in an expensive market and want to stay there (i.e., not sell and rent), take out a secured line of credit for about 50% of the assessed value and invest the proceeds. You have diversified 50% of your assets and can deduct the interest cost against any proceeds from your investments.

  • Greta

    Congratulations Rachel on making a financially responsible choice for you and your family. I’m a renter who doesn’t relate to many who desire to “OWN” some property – even at the expense of having money to live with and use in the here and now – or even if it means living beyond their means. Less can be more. Simply can be lovely.

  • Alex Rascanu

    Interesting read. A different perspective from the usual ‘buy, buy, buy’.

  • joshua

    1,312 for a 3 bedroom rental? and 5 % interest rates on mortgage. Maybe if TO Life used real life numbers, it would be more insightful

  • bam

    Good plan in theory – not all Canadians are pulling it off though.

  • Joseph Carlisle

    Contrary to the rental advocates, renting is the gesture of paying off someone elses mortgage. The average rent for a decent home is in the high $2000′s or more versus the cost to own a home with the lower interest rates available. The main difference is that you have equity and you don’t have a landlord who governs your length of stay.
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