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Thoughts on Buying vs. Renting


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I haven't met with the bank about a LOC yet, but I'm wondering what most of you plan to do about living arrangements.

 

I'm looking to live alone in a decent area close to the Uni, and I haven't found anything less than about 900-1000 a month...therefore I'm thinking buying a condo may be a better option in the long run.

 

Anyone know anything about getting a mortgage during med school/making mortgage payments through a LOC?

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Potentially good plan, but I don't think a bank would be approving you for that much credit on your own. You'd very likely need to have a parent cosign on the mortgage. As for me, I don't think I'd want to put my parents on the hook like that, but maybe your parents have more assets and it wouldn't be a burden. It could definitely pay off, but real estate is always a risk. With renting at least you know exactly what you're getting yourself into. I'm definitely no finance expert though, so my thoughts should likely be taken with appropriate amounts of salt.

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Can we use our LOCs for a mortgage down payment? Has anyone done this before?

 

yes you can BUT in many cases now that means you have a 100% mortgaged house effectively and that will result in significant increases to the effective interest rate you are paying because now there is a high mortgage insurance cost required. There are some ways around this though - you want to have 20% down if you can to remove the interest penalty.

 

Quite often the cost of renting is a little bit less than renting the same space (because the rise in the value of the property, competition, and the debit being serviced by the renters - local markets may vary of course :) )

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Depends, if you have a job now, getting a mortgage shouldn't be too hard. I applied for it while I was still working full-time and didn't say I was going to start med school. My parents gave me the downpayment and the mortgage was mine.

 

Cons: 1) I moved for residency, so I had to make a decision to sell or rent. The real estate prices on the type of building my condo is in have actually decreased, so I would definitely lose some $ selling it.

 

2) Also, I invested a fair bit into obligatory repairs throughout the 4 years I lived there - probably close to $15,000 for things like roof replacement, window and sliding door replacement, and smaller things.

 

3) Also, my condo fees went up almost 60% in 2 years. They have remained the same since and will stay the same next year, but as you can imagine, I was not thrilled.

 

Pros: 1) I was able to rent it no problem since it's in a great location and a decent suite; it also allows pets, which makes it very popular. Even though my condo fees have shot up so much, I am currently making $200 a month off of the condo. Nothing mind-blowing, but that's more than $0, and after a year, I will have made $2400 and in the meantime, my tenants' rent will also have paid off like $6,000 from my mortgage.

 

2) Mortgage rates have gone down and I'm refinancing shortly and expect to save between $50 and $100 a month in mortgage payments, which means another $1000 in income per year

 

3) I can expense the interest on my mortgage payments and amortize the cost of the suite so I basically never get income on my tax returns. Obviously, 10-20 years from now I won't be able to do it since I'll be paying a lot more principal rather than interest and depreciation has a limit. I can also expense one flight back home to visit friends under the guise of "property maintenance."

 

4) While the real estate prices are low, rental rates have shot up. My previous renters paid $150 a month less. My current tenants were shocked I wasn't charging condo fees on TOP of the rent.

 

5) The neighborhood my condo is in is going through some major upgrades, there are some public venues and new malls being built in the area. This will undoubtedly drive up the price of my condo in a few short years. As it is an older building in a neighborhood that bans high-rises, I suspect in a decade or so, the high-rises will start to encroach on the area and developers will want the land from these smaller, older buildings. If I could sell to a developer, I could make a ton of $, so I'm planning to hold out for a while.

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Also factored into this is whether or not the banks allow you to get a mortgage with a LOC. I know residents can, but not sure about MD students. I know the banks say that down payments can't be from borrowed sources, so not sure if LOC works or not. Also consider that an LOC would reduce your ability to get qualified for a mortgage in the first place (I.e. Approval not as high).

 

But from a cost perspective, here's an example: Buy house for $300,000 with minimum down payment of 5%($15,000) so mortgage for $285,000 at a rate of 3%. That makes payments about $1700 per month which would include property tax, condo fees (if any), and mortgage insurance for putting less than 20% down (really not a big deal - offset by the fact that you saved 15% up front). Let's say this is over 4 years, and in that time spend $10,000 on renos/repairs. So after 4 years you have payed a total of $106,600. Let's also say that all of this was on LOC at 3% so your actual amount is about $116,600. Now let's say you sell after 4 years at the same price you bought it for - $300,000. Right away you lose 6% to realtor fees so you take home $282,000. By 4 years, you will have paid off about $33,000 on the house. So you need to repay $252,000 to the bank. That leaves you with a debt of about $83,000 over 4 years.

 

Now compare that to renting, where you might pay $1600 for that same house, and your total debt over 4 years is also around $83,000 (if you include LOC interest). So from this, buying and renting are about even. However, if you spend less on renos, or if your house appreciates in value (which it could, my house appreciated by about 8% in one year), then you come out ahead with buying. Conversely, if you spend way more on renos, or if your house goes down in value, which some housing markets have done, then renting is better.

 

These examples were also done assuming everything goes on the LOC. If you have any cash, I personally think it makes buying more attractive.

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side note - as a resident the LOC at least has no impact on the amount of mortgage you can get. It is quite common for people to be approved as a resident for purchases up to 400K.

 

One other think that hasn't really be talked about is the flexibility of renting - life circumstances often change over 4 years. However the property will be rather fixed - there are questions about whether it will meet your needs with certainty all the way through.

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side note - as a resident the LOC at least has no impact on the amount of mortgage you can get. It is quite common for people to be approved as a resident for purchases up to 400K.

 

One other think that hasn't really be talked about is the flexibility of renting - life circumstances often change over 4 years. However the property will be rather fixed - there are questions about whether it will meet your needs with certainty all the way through.

 

For sure, LOC doesn't affect getting approved as a resident. But also at that time you have a completed MD, a guaranteed resident salary, and a high likelihood for high salary after finishing residency. The same is not necessarily the case for an MD student (especially if the MD student has no past job history with decent enough annual pay), so I'm not sure how the banks would see this (not saying they wouldn't give approval or that LOC would for sure factor in to the approval amount, just that I really do not know what the answer is).

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  • 1 month later...

In the situation of most Canadian med students, renting is almost certainly better than buying, though this varies by city.

 

If you are living in a city where housing prices have continued to rise for the last decade (e.g. Toronto, Vancouver, numerous other metros), then housing is quite a bit more expensive than renting. These markets are also cooling off at present, so you cannot assume that gains in the value of your home will make up for the interest payments in the way that home buyers from previous generations have.

 

More importantly, if you intend to move at the end of med school, then your home moves with you. Indeed, if there is ANY chance that you will be moving, then the investment will be unlikely to pay off. A 10 year time horizon is probably a minimum for home ownership at this point.

 

But if you want to have some fun, then try messing with some of the the values in this calculator, it's pretty comprehensive: http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

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You may find this calculator handy for your situation:

 

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0

 

A thing to note is that banks are receiving quite a bit of regulative pressures from the government to crack down on non-traditional down payments or highly-leveraged purchases. If you already own a home, you're much more likely to get approved for a Student Line of Credit than in the reverse; where you already have a Student Line of Credit and then want to buy a home. Banks are technically supposed to show that your source of down payment came from your own funds, not borrowed.

 

However, that isn't to say it can't happen. And further, there are lots of mortgage brokers who will "work in the grey" if the bank doesn't approve you.

 

On the whole though, I would worry more about whether it makes fiscal sense for you than if you could get approved.

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To add to the other side, I think buying can make sense for non-trads who are coasting off of income from their previous career and are doing a program that they are certain they will be able to stay at/around their current city.

 

I put down 25% like rmorelan mentioned to get around CMHC insurance, and that was 4 years ago at the start of my BSc. Payments have been less than rentals in the same city and/or area, and my net worth looks better because of principal payments. It's also great to be able to do renos whenever you want and to have the stability of knowing you really have a "home" to go back to when working out of town during summers or between semesters. There's also the advantage of rental income if you can pick truly trustworthy tenants. I have rented before when working out of town, and if I do rural residencies, I will have no issues renting out and making money off the property.

 

I don't think a 10-year horizon is neccessary to consider ownership - you don't HAVE to make money on the appreciation of the place; the reduced cost of living is worth it alone even if you place never appreciates in value over the few years you own it.

 

However, there is a lot more paperwork and credit responsibility involved!

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fourloves, I believe you are an exception to the rule.

That's why I said "non-trad". I'm not willing to guess how many people (trad students, too, with very supportive parents maybe) think they can afford a condo, so I gave the advice for balance.

 

Being in Edmonton and/or Calgary on the housing bubble also helps to make the 10+ year horizon negligible as well. There have been many periods where 2-4 years of ownership have increased property values over 10%.

 

I just think land is always a good idea if you can swing it, and thought I'd throw that out there. Land ownership is all there is in the real scheme of things :P

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My wife and I bought our place 5 years ago and it has increased in value >30%...it definitely happens, though depends on the timing, the area, and luck! However, I would stick with renting during med school as it will rarely be worth it buying and selling within a 4-year period (closing costs are killer, 6% commission when you sell it, land transfer taxes, etc). You could rent it out if/when you move for residency, but that is another responsibility and time sync you won't want to deal with.

 

As stated above, you would be essentially paying double the interest (3% mortgage, 3% LOC) on all your mortgage payments. Your property would have to appreciate at record speeds over the 4 years to make it worth your while.

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Like Fourloves, I had a downpayment.

 

If you have it, makes a big difference. I made enough in a smaller market to be able to get a decent place after living there for 4 years (medical school) then moving to be in residency. I have a much smaller unit (1100 sqft to 650 sqft), but the finishings and the layout is much better (40 year old building vs. 5 year old build).

 

Like Jochi said, be aware of ownership costs too. I have had to pay "special assessments" on top of my condo fees. The new place I have only been asked to pay under $200 (easy peasy), but the old place I was asked to pay $15,000 for new windows.

 

Hint: Smaller square footage = smaller amount of special assessments you have to pay because they calculate the $$ based on your footage.

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one thing to consider is that there are some many that think the canadian real estate market is overpriced.

 

http://www.thestar.com/business/real_estate/2014/07/14/canadian_homes_20_per_cent_overvalued_ratings_agency.html

 

Just a risk to consider - real estate can and has going down in the past, and with low interest rates now set to rise, and a long period of well above average growth we may be in a setting issues.

 

Even the government is aiming for a soft landing as they call it - basically a period of low or no increases. Otherwise we may have a standard bubble + burst situation.

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We thought long and hard about buying. But at $800 a month for a two bedroom one bath apartment (heat,cable and water included) in a small city we decided to continue renting.

 

It is not worth it to buy in our case. No maintenance costs and few utility expenses we will just continue renting.

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