Whether it is better to rent or to buy depends on what each costs each month, what the home is worth later, and what the money not spent on the home earns elsewhere. All the Numbers does not guess at an answer. It runs both lives for the same household and shows where each ends up.
The comparison
The plan is run twice: once buying the home, once renting for the whole plan. Income, living costs and every other account are the same in both runs.
Renting, the cash the purchase would have taken (the down payment and closing costs) stays in your accounts. In a month when the mortgage payment and carrying costs are more than the rent, the renter has that difference left over and saves it the way the plan saves any leftover cash: in the order you set, or as cash if leftover cash is not put to work. In a month when the rent is the larger, the owner saves the difference the same way. Each account earns its own return and is taxed by its own rules, so the two sides differ only by the home. Rent rises at the plan's rate for rent. Until the purchase closes, the buyer pays rent too.[1] This is our convention; PWL's comparison also has the renter invest the down payment and the monthly difference.
Each year All the Numbers reports each side's net worth. The crossover is the first year from which owning stays ahead; an early lead that is later given back is not a crossover. If either run has a month it cannot pay for, the comparison is marked as not fair, because one side was short of money that the other was not.
Money gone and money kept
The house page splits what a home costs into money that is gone and money that stays yours. Rent, mortgage interest and the carrying costs are gone. The principal part of each payment is kept, because it lowers what you owe. Rent from a suite, after the tax on it, comes off what is gone first. This is the split the earlier HouseDeltas calculator used. Beside it, the chart shows the return given up: what the down payment and the principal would have earned if they were invested, measured as how much more the renting plan's investments grow that year, before tax. It follows the plan's own returns rather than a set rate, and the net-worth comparison between the ways already includes it.[2]
What drives the answer
- The home's growth, which is an assumption and not a forecast.
- The one return assumed on invested money; see investment returns.
- Closing costs at purchase, including land transfer tax and default insurance, and selling costs at the end; see selling a home.
- The mortgage rate and how rent grows.
- Rent from a suite, which lowers what owning costs.
The stress tests and scenarios re-run the same plan with one of these changed, which is the way to see how much the answer depends on it.
Where to put the money
A related comparison asks where to put a given amount of saving while deciding. It deploys the same amount of pre-tax income into a TFSA, an RRSP, an FHSA and a taxable account, holds each for the same number of years at one return, and then cashes each in. The RRSP refund is not reinvested. The FHSA takes the amount up to its annual limit, and the rest is shown as after-tax money growing tax-free. The taxable account pays a 2% yield each year, taxed as ordinary income at the exit rate with no dividend tax credit, and the gain on exit is taxed at the inclusion rate times the exit rate.[3] It is used to show the trade-off for a first-time buyer, and it is not advice.
What it does not do
- A separate pot that invests the difference in one taxable account at one return, as many calculators do. The difference goes into your own accounts instead.
- A change in rent for a move or a lease ending, or a sale followed by renting again. See rent.
- Anything the plan cannot know: the market, the house you would actually buy, and your future income. Where a figure is an assumption, the plan says so beside it.