Homeowner or Renter for Life?

Owning a home has long been a traditional financial goal. Yet it’s getting harder to reach that goal. In January of 2018, a new mortgage stress test was introduced, which in effect reduces the mortgage amount applicants could qualify for. And this put home ownership out of reach for many -- or at least delayed it.

With house prices in Canadian cities like Toronto soaring to new heights in recent years, more and more young people see a future as a life-long renter. Even as some real estate markets slow down, the high cost of real estate, home maintenance and property taxes puts home ownership out of reach for many young Canadians. But in the long-term, what does this mean for your financial life? Can you get ahead, do well financially, and even save for retirement as a renter?

Homeownership as Forced Savings

Those Canadians who do become homeowners benefit from the “forced savings” reality of home ownership. They build savings through growing equity or the difference between the home’s value and the amount owed on it. Thanks to required mortgage payments the amount you owe goes down, and in the long-run, Canadian home values have historically increased.

Budgeting to save for a down payment and then to make regular mortgage payments forces aspiring homeowners to save their money. As they pay down the mortgage and build equity, many homeowners considered their home their retirement nest egg, one that can be sold to fund retirement.

Then there’s the emotional aspect - owning can make you feel a little more secure. After all, if you live in a property you own you don’t have to deal with a landlord raising the rents or selling your home out from under you.

There’s No Shame In Renting

Don’t feel bad if you can’t buy a home. The truth is, in some markets, such as Toronto, Vancouver, and increasingly, Montreal, real estate is very expensive. For new graduates juggling student debt and living expenses on an entry-level paycheque, renting may be your only option. And there are actually some perks to renting.

You don’t have to deal with the stress and added costs of paying condo fees, property taxes, or homeowners insurance. And depending on your rental agreement, you may not even have to foot the bill for utilities such as heat and hydro.

Saving for Retirement as a Renter

Don’t think that being a lifelong renter means you can’t save enough for retirement. However, you won’t be building equity in a home through the forced savings of making mortgage payments. It’s up to you to take charge of saving for retirement another way.

So just how can you end up in the same place financially at retirement as a homeowner?

Review your budget and get intentional about setting a retirement savings goal. Look for opportunities to invest any money you’re saving as a renter. For example, if you live downtown close to work, you can save on the cost of gas and owning a vehicle.  Either walk or take public transportation.

In some real estate markets, monthly rent payments could be significantly less than mortgage payments on a comparable property. With that in mind, open a Tax Free Investing Account (TFSA) or a Registered Retirement Savings Plan (RRSP) and invest the money you don’t have to spend on home-related costs. The experts suggest saving at least 10 percent of your take-home pay each year for retirement, whether you’re renting or not.

Remember, through the power of compound interest even small amounts grow over time. So start saving early and automate your savings.