The Single Biggest Savings Opportunity of Your Life

by Darwin on October 21, 2013

For people who spend a lifetime clipping coupons and ripping fabric softener sheets in half, the biggest savings opportunity available could be looking them right in the eye.  While interest rates globally have slowly started to creep up, there are still millions of prospective homeowners who have not yet pulled the trigger on a home purchase.

Buy vs. Rent Decisions

  • Financials – On a flat-out financial basis, it’s almost always advantageous to buy over renting.  This may not be the case in certain high cost areas and vacation destinations, but in general, if a landlord can buy a property and turn a profit (via rent paid from tenants), then a homeowner can buy an equivalent property with no  profit motive for considerably less.  If you think you get off as a renter by paying no property taxes, you’re wrong. The taxes are just baked into the monthly rent payments since landlords must pay property taxes and just build that in to your fees.
  • Mobility – A deterrent to home ownership is the inability to easily sell and move.  There are high transactions costs associated with buying and selling and the property may have to sit on the market for months before a sale occurs.  You should contemplate your job situation and whether you intend on moving, can work remotely, or have a dual salary situation where things may be much more flexible.
  • Down Payment – A huge impediment to young people today is the inability to come up with a down payment.  In the US people can often get around this by taking advantage of various government loan programs or paying PMI.  The ROI on this approach really depends on a variety of factors from rent paid to interest rate and how quickly you can breach the 20% equity threshold to eliminate PMI.  A final consideration is opportunity cost if the money could have been invested elsewhere, but I don’t find this to be a very meaningful measure if you just intended to buy a property further down the road anyway; this would only be relevant for a lifetime renter.
  • Lifestyle – One of the biggest drivers for our family to always want to be owners rather than renters is the ability to have a place we call home.  We can modify, paint, upgrade or basically do as we choose on our property.  We also know we can’t be evicted (assuming we keep paying the mortgage) and don’t have to worry about hyperinflation hiking our monthly payments, whereas in a landlord/tenant situation, you could be subject to competition with other prospective tenants or untenable hikes in rent payments.

Obviously, one of the most important factors is affordability.  It’s best to check out what kind of monthly payments you’d be looking at based on various factors like rate and duration.  For this exercise, IMB has a home loan repayment calculator that serves this purpose.

{ 1 comment… read it below or add one }

Edward October 22, 2013 at 1:48 pm

I think there are about a million Americans who will still tell you that (as of around say 2008), home ownership was the “Single Crappiest Savings Opportunity of Their Life”. Some of them are still paying underwater mortgages. What would have happened if they saved that all that money instead and invested only a fraction of it? Yes, their net worth would be worth a lot more now than the value of their home even after paying years and years of rent.

The *only* reason to buy a house (in Canada at least at this moment) is if you fully acknowledge your point about “Lifestyle,” and admit that it is a purely emotional decision rather than a logical or mathematical one. …And any young person who has difficulty coming up with a down payment, should definitely *not* consider buying a house (at all!) until they’re on far more stable monetary ground.


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