# Rent at \$1500/month in Toronto or Mortgage even with ≥ 5% interest?

Because my aunt had 1 Bankruptcy discharged in 2004 and 1 Consumer Proposal discharged in Jan. 2015, for her any mortgage interest rate probably ≥ 5%. Her credit score is 720, and she is renting now in Toronto for \$1500/month. She hopes to buy a \$300,000 condo in Toronto.

How do we calculate the break-even amount between renting and mortgage?
At what amount would the mortgage (even with the exorbitant interest) be cheaper than renting?

• 5% interest is hardly "exorbitant". Yes, it's perhaps a few percentage points higher than what some other people can get, but just a few years ago it would have been considered a cheap loan. – user Jun 19 '16 at 19:16

I made this calculator for analysing such question on renting vs buying.

If you're simply looking at a \$1500/month mortgage (for say 20 years) vs \$1500/month in rent then there is no break-even unless property depreciates 10% pa, in which case either scenario leaves you with nothing after the term of the mortgage.

The screenshot below shows an idealised 100% mortgage for \$230,000 costing \$1503 per month with 2% property appreciation. After 20 years the buyer owns the property while the renter has nothing.

Edit further to OP providing property price

A property price of \$300,000 at say 6% effective annual interest - equivalent to 5.84% nominal annual interest compounded monthly - will cost \$2,121.88 per month for a 20 year 100% mortgage, (neglecting fees and duty). To make this a fair comparison, say the renter also utilises \$2,121.88 per month by paying \$1500 rent and putting the remaining \$621.88 into a savings account or fund at a deposit (or return) rate of 4% effective annual interest. Taking into account property appreciation at 2% per annum and rent inflation at 2% per annum, the scenarios play out as shown below. After 20 years when the term of the mortgage is finished the buyer owns the house, now valued at \$445,784 while the renter has \$120,348 in savings. Lets suppose they both continue to utilise \$2121.88 for the next 20 years. The buyer can put it all into savings while the renter has to continue paying rent. After 40 years the buyer has \$1,436,966 in savings and appreciated property value while the renter has \$66,136 in savings.

• I added the purchase price. Can you please update your post? – user44214 Jun 20 '16 at 0:23
• Guys, doesn't "mortgage insurance" drastically affect these calculations?? – Fattie Jun 20 '16 at 12:35
• Good answer w.r.t. the math, although the "If you're simply..." part should be elaborated: other non-mortgage and non-rent costs factor in. On top of the probable mortgage insurance @JoeBlow mentioned (required when downpayment is less than 20%), there would be differences in property tax, maintenance, home insurance, etc. ... and condo fees may figure large on the other side. – Chris W. Rea Jun 20 '16 at 12:41

At the request of the moderator I have deleted my comment and moved it here to an answer.

It is important to keep in mind that owning a condo brings with it costs over and above the cost of maintaining a mortgage. In particular, typical monthly maintenance fees on a \$300,000 condo will be \$300-\$400 per month. Then there are property taxes to consider - say, \$100-\$120 per month. Over a period of 10 years, one should also budget for at least one "special assessment". Depending on the age of the build, this unexpected "special assessment" could be upwards of \$10,000. My sister was hit with a \$42,000 sp assessment on a 2 bedroom condo here in Vancouver. Finally, maintenance fees will include building insurance, but in addition one is legally obliged to take out "condo insurance" which will add another \$30-\$40 per month.

When all of this is taken into account we are adding about \$500 per month in known expenses to the cost of condo ownership. This needs to be added to the cost of maintaining the mortgage when considering affordability. Also keep in mind that maintenance fees, taxes, and insurance have a habit of increasing each year.

Regarding the issue of unknown expenses - i.e., special assessments - if one is mortgaged up to the limit of affordability, then where does the money to pay the special assessment come from. It would have to come from renegotiating the mortgage by adding these expenses to the capital. This brings with it new risks. In addition to the considerable expense of renegotiation, one will be adding a significant amount to the capital outstanding and therefore the monthly payment. In addition, there is the risk that interest rates have increased since the original mortgage was negotiated. A 1% increase on an original 5% rate is a 20% increase in the monthly payment, and that is without taking into account the extra capital amount.

Thus, one can compute the mortgage amount corresponding to \$1500 per month at a rate of 5%, but this is a dangerous oversimplification of the measure of affordability. As a minimum, one should compute the mortgage amount corresponding to rent at \$1500/month less the known expenses (say, \$500/month) and then knock off 10% for good measure. Once this is all taken into account, then one can use online models to look at break-even points.

This is difficult to answer, because the mortgage rate is also dependent upon the size of the house she buys. A 5% mortgage APR is good if the house is only worth \$50K. It is not good if the house she buys is worth \$5M.

A good rule of thumb is 5 years. If your aunt is going to live in the house for at least 5 years (preferably 10) then she can buy it. If not, she should rent.

Generally, if people are asking this question, they should continue to rent.

• I added the purchase price. Can you please update your post? – user44214 Jun 20 '16 at 0:23