Paying Off a Mortgage Takes Longer Than Saving Up While Renting

[orkut]

Hi,

I live in Toronto and I've never owned a home, and I'm thinking of buying a condominium apartment.

I've created a spreadsheet to determine if it's faster to pay off a mortgage or save up while renting. According to my calculations, it would take me 109 months to pay off a mortgage and 106 months to save up while renting. The spreadsheet's here, and it's in Excel 2002 format in a zip file.

Please point out any flaws in my reasoning/logic.

Thanks in advance.

PS: The spreadsheet's also available in google format here, but you have to sign up with google to see it.

 

[MarkII]

I have not looked at the spreadsheet but have you factored in paying it off bi weekly?

That cuts your interest and principle considerably.

M2

 

[inchs10long]

The best way for me was an open mortgage not more than 6 months at the time & bi weekly & when the time was up I put down a some of $$$ on the princ. worked well for me . My house is paid-off. good luck to u

 

[lickrolaine]

Not only is this flawed but way to many variables.20 yrs or so from now the average cost of a home in Toronto is supposed to be close to a million dollars.150 grand would be just enough down to qualify.So even if the average is 750 grand in 10 yrs,you lose out on any appreciation.I remember in the 80's,people were saving for a house ,maybe had 50 grand,but sat by and watched as the prices went up 50 and 100 grand virtually overnight.
I think you would be taking a chance,but seeing as this is likely a condo,who knows where that market is going.Unless you want to be in the condo for a long time,look at buying a house,but if condo style fits you,go for it.
You also did not show any increase in rent,so at 840 you will have spent 100,000 grand or so there,that could have been going into your home.
Now,if you were not interested in home ownership,and a bit of an adventurist,you could invest the money,and with some good strategies,and a lot of luck you could have a lot of money!But life is a crap shoot,
best of luck on whatever you choose,

 

[21pro]

quite a while ago i wrote this in a Real Estate vs. Mutual Funds thread:

i've liquidated my RE holdings now and am currently renting instead of ownership.

believe it or not, you can rent a $700,000 home in King or Caledon township on 2.9 acres for less than $2000/ month.

to buy that home with 25% down that would be an initial downpayment of $183,000 including all closing costs. the monthly mortgage payment if done over 25 years would be at 5.75% or about $3,817 including your property taxes (about $5,800 per year)

you can rent the same property for $2000... that's a monthly cash-flow savings of about $1,817.

now take that $1,817/month + the $183,000 and invest it in any of these top 10-year performing mutual funds on morningstar.com... just make sure it isn't overbalanced in energy stocks... there are alot of mutual funds out there that perform 20% to 30% per year on average and are tax efficient...(look at the 10 year returns) and require $150,000 as an initial minumum investment. If you only make an average of 15% per year off of the mutual fund, that portfolio will swell large enough that you can purchase that same house for CASH in less than 8 years. something that otherwise with the exact same amount of cash flow needs would have taken 25 years to pay for on its own... but also, let's not forget that as the tenant, you are not responsible for any upkeep and maintenance for that property during that duration. landscaping and wear and tear on faucets, roofing, garage door opener, etc.. alone would add a few $1000 dollars of costs to the owner (ie, RE investor) as well in that same 8 years.

BTW- I don't invest in mutual funds... i used it as an easy example.

I love renting... i've even sold my apartment buildings- i'm free of landlording too! and in another 5 and 1/2 years i'll be able to buy the house i currently rent for cash... but, i'm not going to. i'll continue to rent until i know i won't need to move for a long time.

 

[fuji]

The most likely thing that you have overlooked is risk. If you are saving via the stock market you are exposed to substantial market risk. Some of the extra return of the stock market over time has to be subtracted to compensate for the risk taken.

Nevertheless it's often true that renting is cheaper than owning. The difference between the two options is probably not large.

There are intangible benefits of owning that you should consider--like the security of being in control of your own environment. If you are renting you will be less inclined to invest in upgrades to your home that will make your life more pleasant, because you'll be investing in someone else's home.

From a purely financial point of view though I guess renting often wins.

 

[tboy]

In addition, where did all that money go that you were paying for rent? Not in your pocket, not paying off any debts or your mortgage, it went in someone else's pocket.

If you never pay off your mortgage until you sell your home or condo you are still no worse off then when you were renting because if you pay the same as you do for rent, in interest, at the very least you are living in your own home.

With all that being said, there are good times to buy property and bad times. A bad time to buy is at a peak in the market (for eg: calgay right now). But if if you follow the standard you should buy the cheapest place, in the best area, you will realize the largest ROI.

 

[stang]

I think you've failed to "appreciate" all the factors.

 

[james t kirk]

Do you really want to live in an apartment any longer than you have to?

It's funny, but when I was a kid, my uncle lived in a high rise apt. I remember thinking it was very glamourous. He had been married and divorced and was on the road alot for work. It was like living in your own hotel on a permanent basis. Me and my family were living in a single family house and my uncle got to ride in an elevator every day. As a kid, I envied that.

When he died, he still lived in that stupid apartment (by then I had grown up). He made probably twice what my dad made annually, but when he passed away, all he owned was the contents of his apt. and a 4 year old car. I'm not belittling it, I am just saying that at least if you are paying a mortgage, you are living in the house and your money is going towards something to give you a little security. It's forced savings. You have to be very disciplined to just put the cash in account on a without fail basis. No trips, no excessive hobbying, no toys. Every 2 weeks, a mortgage payment goes into an account. I know that I am not so diciplined.

 

[oldjones]

Hi,

I live in Toronto and I've never owned a home, and I'm thinking of buying a condominium apartment.

I've created a spreadsheet to determine if it's faster to pay off a mortgage or save up while renting. According to my calculations, it would take me 109 months to pay off a mortgage and 106 months to save up while renting. The spreadsheet's here, and it's in Excel 2002 format in a zip file.

Please point out any flaws in my reasoning/logic.

Thanks in advance.

PS: The spreadsheet's also available in google format here, but you have to sign up with google to see it.

I f you can 'save up' the mortgage loan plus interest in 106 months versus paying it off in 109 months, then the obvious question is: why would you take out a mortgage for 109 months instaed of paying it off three months earlier and saving one quarter's interest?

And, of course the reason one borrows instead of 'saving up'—and by all means, do keep saving—is because you get to live in the place from now til you burn the mortgage, instead of waiting 106 months to finally make a cash offer for a place that's now a) more expensive and b) no on the market any more.

 

[21pro]

oldjones: it wouldn't work... if you take a mortgage out for 106 months instead, the payments would be off... a little, of course, but orkut did this to be precise to prove a point. also, his money saved up did not accumulate any interest... shall he invest the money he saves by renting, he'll get there alot sooner. @15%, about 7.8 years. @8%, about 11 years... @4% in a PCF savings account 23 years.

did none of you people read my previous post? renting is better if you really take the time and calculate it. Even if you get 6% aror on your invested money, it is better to rent... ie, monthly costs are lower and you'd own a house sooner!

the truth is, real estate in general- the detached home, that is- does not appreciate greater than inflation in any period over a 25 year average. and you actually lose money because you pay taxes, maintenance and insurance.

 

[Venus_mgr]

You also forget most people have a VERY hard time saving... but those morgage payments MUST be made.

 

[agbu]

Unfortunately a very flawed analysis. To begin with you should be looking at all carrying costs for a more realistic time period than 9 years since you will presumably require living accomodation for a much longer period. ie. what happpens after your nine month example to your carrying costs for the condo versus renting? Have to assume that you are now down to property tax. Maintenance is a funny number because often a portion of that cost applies to renting. Use an amortisation caluculator such as canadamortgage.com and plug in the numbers. My advice is you should at least wait until you have a 25% down stroke so you don't have to pay that goofy insurance before you make a decision either way. Good luck

 

[tboy]

..... renting is better if you really take the time and calculate it.

Dude, you are out of it.....renting is NEVER better than owning/owing.

There is no safe investment in the world that will realize the growth that real estate will. EOS.

For eg: you show me 1 investment that is a) safe and b) will show a 300% roi in 8 yrs. because that is exactly what I have realized when I purchased my loft in '98 and it is still growing. In addition, my mortgage payment, taxes, all utilities and my maintenance work out to be 25% less than what a comparable apartment is going for...

 

[icto]

Appreciation of your principle residence is not taxable when you sell. That adds another huge factor in being a better/safer investment than alternatives. What else has tax-free gains (legally)? (I have a friend who used to buy/fix up/sell very frequently - I believe they're taxing that now though.)

 

[orkut]

I think you've failed to "appreciate" all the factors.

Thanks to everyone who participated in this thread.

Now I find myself wondering what is the likelyhood of appreciation? But that's currently being discussed in another thread about the housing "bubble."

 

[Papi Chulo]

Appreciation of your principle residence is not taxable when you sell.

I believe it is taxable if you live there less than 12 months

 

[21pro]

ok everyone. sure my philosophy is contrarian... but it does work... it works great for me, actually.

lemme tell you, i am an experience real estate investor, too. i know what i am talking about on the issue and hence, why i gave my opinion.

i can tell that alot of the people here don't know what they are talking about.

owning real estate is expensive. i hate to break it to you, but it isn't always better to be an owner- especially if you wish to own a house outright sooner.

killing a mortgage vs. investing money in stocks... i've calculated this a two years ago... and it MAKES even MORE sense today!!! I now have saved enough to pay for 50% of the house i currently rent by using my approach... 2 fuckin years in another 3 or 4 I can own it outright. so that woulda took me 7 years total. and no mortgage, maintenance, or property taxes to worry about during that time.

i have nothing more to say. i'd share my plan to anyone who's interested... but those damn terbites are such pessimistic disbelievers... it's funny. i talk about this at seminars... in the likes of millionaires and like minded individuals... but, on terb... totally different attitudes. are you guys all financially incompetent or something? whatever... like i said, i have nothing more to say.

 

[tboy]

Do tell Mr Pro, what is your secret?

Let's see, you're renting a house right? So let's assume that it is around $1200.00 a month plus utilities (cuz that's the going rate for renting a house in t.o.). We also have to assume that the retail value of the house is probably around $400,000.00 if it is in toronto.

so you have spent $28,800.00 in rent and saved $200,000.00 so basically (for your abode) you have spent or acquired $228,000.00

So if you bought the property 2 yrs ago it would have been $275,000.00 so minus what you've saved, and what you spent on rent, you would have paid off (minus interest) $228,000.00 of the 275,000.00 so you'd only owe about $47,000.00 +/-. but instead, with the increase in property values, you still owe $400,000.00 and even if you bought it right now, you'd still owe $125,000.00.....

So IF your investments keep growing the way they have in the past, you will save another $200,000.00 in the next 2 yrs. But your property will most likely go up another $200,000.00 so you're still $200,000.00 in the hole.

How is this BETTER?

 

[fuji]

Let's just compare renting vs. outright ownership.

Scenario #1 -- You buy a home for $200k, and it appreciates at 4% per year. After 10 years it's worth $240k. You pay utilities on top of that.

Scenario #2 -- You invest your $200k conservatively at 8%. It returns $1333.33 per month in interest. You rent the above home for $1200/month plus utilities, and pocket $133.33 per month.

Scenario #3 -- You invest your $200k conservatively at 8%. It returns 1333.33 per month in interest. You rent the above home for $1500/month plus utilities, and you're out $166.67/month versus scenario #1.

I guess what I'm trying to say is renting can be either better or worse depending on how crazy the rental market is versus how crazy the housing market is. If home prices are too high renting will win. If the rental market is too tight then owning will win.

It's not as clear cut as "where did the money you paid for rent go" because if you pay LESS for rent than you would have paid for a mortage you are saving the difference. If the savings add up to more than the home appreciation then it's a big win.

Note that a mortgage throws a monkey wrench into this. A mortgage is a form of leverage, and is just like buying stocks on margin. A small gain or loss in the value of your home gets multiplied by the mortgage leverage. This works well for you if prices go up, but it can absolutely bankrupt you if there's even a small drop in home prices.

So it's easier to compare outright ownership with outright renting. Mortgage is more like outright ownership obviously, but with the monkey wrench in there that you are playing the buying-on-margin lottery. You don't always win that lottery, sometimes you get bankrupted by it, sometimes you get rich.