Over the past decade, the ever-increasing proportion of household income required to carry the cost of home ownership brings into increasing focus the question of renting versus owning.
The pro-rental argument is that the lower cost of renting versus owning allows the tenant to invest the annual savings over the many years he would otherwise have held a mortgage. By avoiding several hundred thousand dollars in interest costs over the life of the mortgage, the pro-rent argument is that a long-term renter would have just as large a nest-egg at retirement as would have been accumulated as equity in an owned property.
Like many theories, this argument is sound on paper but fails in practice. Let’s take a typical couple who owns a duplex at a total monthly cost, including mortgage payments, of $2,500. Their friends rent a similar unit for $1,500 a month. By renting, they have an extra $1,000 monthly to invest for their retirement.There’s no question that $1,000 monthly, invested for 25 years at even a modest average annual return of four per cent, would grow to $514,000.
In the real world however, would the renters really save the extra $1,000 monthly, or would they upgrade their vehicle more often, take more holidays, or otherwise indulge themselves? The prudent saver is the exception rather than the norm. After 25 or 30 years of renting, a family often ends up with far less in savings than the individual who painstakingly pays off his mortgage.
Paying off a mortgage is a forced savings plan. The homeowner must make that monthly mortgage payment, often at the expense of cutting back on instant-gratification expenditures.
It is likely the long-term gain through home ownership is more than enough to recover all the interest paid by the homeowner over the entire term of his mortgage.
This is not intended to encourage individuals or families to overextend themselves in purchasing a home. But it does suggest that affordable home ownership should, over the long-term, be a more assured means of building one’s net worth than is likely for the lifetime renter.
A retired corporate executive, enjoying post-retirement as a financial consultant, Peter Dolezal is the author of three books. His most recent, the Smart Canadian Wealth-Builder, is now available at Tanner’s Books, and in other bookstores.
