The hidden costs of owning a home in a buy vs rent decision

Why the mortgage payment understates the cost

Lenders and listing sites tend to quote the monthly mortgage payment. That number covers interest and principal only. Owners also pay property tax, home insurance, upkeep and extra utilities, and they face one-time costs at both ends of the ownership period.

Renters have their own costs, such as annual rent increases and tenant insurance, but the two lists are not symmetrical. The goal of a buy vs rent calculation is to put both lists side by side, spend the same total budget in each scenario, and compare what each household is worth at the end. The main calculator does exactly that, and the true cost of owning tool breaks the ownership side out line by line.

A worked example of ten years of ownership costs

Suppose a $600,000 home in Alberta with a 20% down payment, a 4.5% mortgage rate and a 25-year amortization, held for ten years. Property tax is assumed at 0.65% of value per year, home insurance at $1,500 a year (rising with inflation), upkeep at 1% of value per year, and $150 a month in extra utilities. These are illustrative planning inputs, not market data.

On those assumptions the engine adds up the following over ten years.

The costs people forget

Property tax, insurance, maintenance and extra utilities add up to about $152,275 over the ten years in the example, on top of interest. That is a large amount to leave out, yet it is easy to miss because it arrives in many small pieces rather than one monthly debit.

Three groups of costs are most often forgotten:

• Upkeep that is lumpy. A roof, furnace, windows or a driveway do not wear out on an annual schedule. Using a percentage of home value per year is a way to smooth the lumps. See maintenance and repairs in buy vs rent.
• Costs tied to the property, not the mortgage. Property tax and home insurance continue after the mortgage is paid off.
• One-time costs at each end. Closing costs when you buy and selling costs when you leave are paid from your own pocket and cannot be spread across years the way rent can.

How much each hidden cost moves the result

On the default inputs, buying finishes about $41,686 ahead of renting after ten years. That result is sensitive to the hidden costs. If upkeep were 0.5% of value instead of 1%, buying would finish about $87,432 ahead. If upkeep were 2%, renting would finish about $49,807 ahead.

Property tax behaves the same way. At 0.5% of value buying finishes about $55,409 ahead, and at 1.2% renting finishes about $8,635 ahead. Property tax rates differ widely between municipalities, so use your own local figure rather than the example.

Costs that depend on the type of home

A condominium replaces some of the upkeep a house owner carries with a monthly fee, and may add the risk of a special levy. These are covered in condo fees and special assessments. A freehold house usually has no fee but carries the full repair burden directly.

Owners of older homes or homes with deferred maintenance should assume a higher percentage than owners of newer homes. Owners with a rental suite can offset some costs, which is covered in the suite income tool.

What owners get in return

None of this means owning is a bad deal. In the example above, the household that buys also builds equity through principal repayment and any price growth, and it controls its housing for as long as it stays. Those benefits are real, and the model counts them.

The point of listing hidden costs is to make sure the comparison is honest. A decision based on the mortgage payment alone overstates the benefit of buying; a decision that ignores equity and price growth overstates the benefit of renting. Look at both sides, test your assumptions with the break-even tool, and read the methodology to see how each input is treated.