Andrev is a Russian guy. Came here with his wife and two kids a few years ago. An engineer, he landed a great job and soon started saving for his family’s future. He knew he had to invest and ended up putting all their money in second mortgages promising 9%. Six months later the broker was gone, and so was the money.
“Why?” I asked, “did you do that? It was a crazy dumb investment with no security.”
Because, Andrev said, the mortgage guy was Russian. Like me.
But this piece is not about second mortgages, finding an investment opportunity or even Russian dudes. It’s about trust. And women.
Yesterday Money Magazine published an article on whether it’s better to rent or buy a home. This is a hot topic, with rate increases coming later this year, prices at a screaming pitch, and a swelling number of economists finally agreeing with me. You can get the tone of this particular piece from the lead: “Owning the roof over your head should still be a goal for most Canadians as paying rent is like paying someone else’s mortgage, experts say.”
Well, that got my attention.
In fact, here is the entire argument for renting-sucks, buying-good, using a $300,000 house as an example:
With interest rates currently so low, on the purchase of an average $300,000 property, mortgage payments are unlikely to be that much higher than rental payments. A fixed-rate mortgage of 5% and an amortization period of 30 years would put monthly mortgage payments at $1,521.02.
Adding in property taxes monthly payments are likely to be about $1,771.02, according to figures supplied by BMO. If a monthly rental of $1,200 increases by about 5% a year, after eight years your mortgage payments will be less than your rent, BMO says.
That’s it, property virgins, all the facts you need from a leading financial magazine (and bank) to make that secret, sweaty house porn addiction legit. No longer do you need to ogle those intimate red spots on the mls.ca site under the sheets with a flashlight. Get over the shame. Go and have closing climax.
Ooops. Maybe not. I ran some numbers.
So a $300,000 house with 5% down (like Money Magazine says), and a five-year mortgage at 5% spread over thirty years does indeed cost $1,520 a month. Of course, after 60 months, you’ll have paid $54,590 in interest, and reduced the $285,000 mortgage by just $18K.
But what the hell, we’re building equity!
Over five years also count $15,000 in property tax (we’ll exclude utilities and maintenance), plus on buying there was $6,000 in closing costs (mostly land transfer tax), a charge of $7,900 for CHMC insurance and, of course, the $15,000 downpayment. If the down had been invested for five years at 7%, it would be $21,038. So the true cost of owning is $104,528, or about $1,742 a month.
Hmmm. More than rent.
But what about those evil landlords (like BMO says) jacking rents by 5% a year? Well, not where I live. In Ontario tenant-friendly rent control legislation pegs the allowable increase for 2011 at merely 0.7%. That is 2.3% below the current inflation rate, which basically means rents are decreasing, not humping.
So over five years rent (assuming this kind of change) would total $82,810. Once again that’s way less than owning – more than $21,000 less. If that extra were invested at 7% over five years, it would be $30,400. Also more than the homeowner’s equity.
So what happens after five years when the deflowered virgin learns this and sells? Then (assuming the house retained its value), she’d get $18,300 after paying commission and retiring the mortgage. Of course $15,000 is just the down payment being returned. So I guess this person has spent about $17,000 more that the renter to live in the same house.
And what might happen if real estate values fall? Right. Glub, glub. Selling would be impossible without actually finding new money to buy your way out. Rent wins.
OK, so how does this magazine declare: “Owning the roof over your head should still be a goal for most Canadians as paying rent is like paying someone else’s mortgage, experts say”?
Because the expert is Judith Cane, president of Antara Financial Group, in Ottawa. Says she: “I am of the mind that it’s always good to buy… it’s better, especially if you are younger to put your money into buying rather than renting.”
If that means people need to be given incomplete information, guided into bad decisions and fed grossly inappropriate advice just because they’re women, then I guess they are special. But, of course, this is untrue. Women have an equal right to ethical treatment and full disclosure.
Hell. I hear some of them are actually as smart as guys.
But don’t tell Judith.