Leverage in buy vs rent

Leverage in one sentence

Leverage means using borrowed money to hold more of an asset than your cash alone would buy. If the asset grows faster than the cost of the borrowing, your return on the cash you put in is magnified. If it grows slower, or falls, the same arithmetic works against you.

A renter who invests the difference is typically not leveraged. A homeowner almost always is, so the two households carry different amounts of risk even when their expected outcomes look similar.

A small slice of cash controls the whole home

Take a $600,000 home. With the federal minimum down payment of $35,000 (5% of the first $500,000 plus 10% of the rest), the buyer's total upfront cash in the calculator is $41,490 after closing costs and moving. A 1% change in the home's price is $6,000, which is about 14% of that cash. At 20% down, the upfront cash is $126,380, and the same $6,000 is about 5% of it.

So a modest drop in price is a serious event for a buyer with little cash in the deal, while a modest rise is a large gain on the money they have at stake. The assumptions are illustrative planning inputs and not market data.

How the buy vs rent gap swings with prices

This table shows how much the owner finishes ahead of (or behind) the renter after ten years, at different appreciation rates and down payments, in the $600,000 example with a 4.5% mortgage and a 25-year amortization:

What your own cash is exposed to

Look at the owner's net worth, not just the gap. At −2% a year for ten years, the minimum-down buyer ends with about $40,840, essentially all that was put in at the start of $41,490, and the 20%-down buyer ends with about $118,906 from $126,380. Neither outcome is catastrophic in the sense of owing money after the sale, but both mean a decade with little to show for it, and the buyer with less cash had far less cushion to absorb repair bills or a job interruption on the way.

That is one lens on risk. Another is borrowing: if prices fall below the mortgage balance, selling may not cover the loan. With less equity, that threshold is closer.

The cost of borrowing is part of the bet

Leverage works only if the asset outpaces the interest. In the example the result is very sensitive to the mortgage rate:

Renewal makes the rate a moving target

Most Canadian mortgages are fixed for a term, commonly five years, and then renewed at whatever rates prevail. Suppose the first term is at 4.5% but the renewal is at 6.5%. The ten-year result falls from +$41,686 to −$2,113. At a 7.5% renewal it is −$24,334. Leverage that looked comfortable at signing can become heavy at renewal.

The mortgage stress test, which requires qualifying at the greater of your contract rate plus 2 percentage points or 5.25%, is designed with this risk in mind. See the guide on mortgage renewal risk for more.

A range of outcomes, not a single number

A simulation that varies yearly home returns (a 6-point spread) and investment returns (a 12-point spread) around the base inputs puts the median ten-year result for the 20%-down example at about +$44,850 in the owner's favour. The 10th percentile is about −$153,622 and the 90th is about +$241,830. Owning came out ahead in roughly 61% of the 1,000 simulated paths at 20% down, about 53% at the minimum down payment and about 59% at 35% down.

These are outputs of an illustrative model with assumed volatility. They show that leverage widens the range, but they are not forecasts. You can run your own through the probability tool.

Using leverage wisely in your comparison

Treat the mortgage as part of the risk, not just the cost. Check that your budget still works if you renew at a higher rate, keep a cash buffer for repairs, and avoid stretching to the maximum approval. The mortgage payment tool shows how rate changes flow into the payment, and the guide on opportunity cost of a down payment shows how down payment size changes results.