There's a great deal of doom and gloom in the media currently so I thought it would be beneficial to analyze whether potential first time buyers in Kitchener Waterloo are better off financially to rent or buy. For illustration purposes, let's use the one bedroom, one bathroom bungalow condominiums at 931 Glasgow Street, Kitchener. They were built in 2011 by Deerfield Homes. The last unit to rent through MLS went for $975/month. There is just one for sale on MLS at $170,000 and the last sale was at $168,500. As there is currently a great deal of demand for these new and shiny "granite and stainless" units, let's assume it sells for $170,000(and it makes the math easier!)
A first time buyer would need to put down a minimum of 5% to purchase a unit. For the sake of round numbers, let's say legal costs, title insurance and disbursements total $1500. Note qualifying first time buyers pay no Ontario Land Transfer Tax for purchases under $227,500. With $8500 down, a first mortgage would be $161,500. As the buyer has less than 20% for a downpayment, CMHC insurance of 2.75% of the mortgage amount would be required. This brings the total first mortgage to $165,941.25. Let's assume the buyer takes a 5 year mortgage at a 3% interest rate and amortizes it over the maxiumum 25 years. Monthly payments of principal and interest would be $785.31. Add to that property taxes of approximately $1600 or $133.33 monthly. Finally, let's add monthly condominium fees of $95.94. Total monthly outlay to own this unit is $1,014.58.
So far, the renter is ahead by nearly $40 a month. After 5 years and 60 payments, the renter is further ahead by $2374.80. In addition, they still have their $10,000. Let's assume the renter has invested that money and achieves a compounded 4% annual return. After 5 years, they have $12,166.53 plus the $2374.80 for a total of $14,541.33.
After 5 years, assuming no prepayments, the buyer has made $47,118.60 in mortgage payments. This breaks down to $24,103.65 principal and $23,014.95 in interest. The buyer will have a remaining mortgage balance of $141,837.60. Let's be conservative and assume no price appreciation in Kitchener Waterloo over the 5 years. The buyer has equity of $28,162.40 less the initial outlay of $10,000 for a total gain of $18,162.40.
In this scenario, the buyer is further ahead by $3,621.07. Note I haven't adjusted for rent increases or for increases in property taxes or condominium fees. To be fair, property tax and condominium fee increases in Waterloo Region have risen at a much greater clip than the allowable rent increase in Ontario of 3.1% for 2012.
I understand every situation is different and not everyone wants to live in a 1 bedroom condominium. This analysis is purely financial and there may be other compelling reasons to disregard the numbers. If you are a potential first time buyer in Kitchener Waterloo, feel free to contact me and, together, we'll decide whether you should be buying or renting.
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