The flexibility value in a buy vs rent decision

Flexibility has a price on both sides

Renting is usually called the flexible choice, and in one sense it is. When the lease ends, you can go. But that flexibility is not free, and owning is not as rigid as it sounds.

Leaving a rental costs moving expenses, a possible gap between leases and a new unit at whatever the market is asking. Leaving a home you own costs commissions and fees, legal costs, and sometimes a mortgage penalty if you leave before the end of the term.

The comparison is therefore about which exit costs more, how often you expect to pay it, and how confident you are in your plans.

The exit costs for an owner

When you sell, the proceeds are reduced by a real estate commission, GST on that commission, legal fees and other costs. If you break a mortgage before the term is up, a penalty can apply. The calculator's default assumes three months of interest if the home is sold between renewals.

In the $600,000 example below, selling after 10 years costs about $38,047, and selling after 2 years costs about $34,649 including the penalty assumption. These are the amounts that the early-exit owner is trying to recover through appreciation and principal repayment.

Our guide to selling costs lists each item. The selling costs tool lets you adjust the commission and penalty for your case.

How the time horizon changes the answer

Suppose a $600,000 home with 20% down, a 4.5% mortgage rate and a 25-year amortization, compared with renting at $2,300 a month. The calculator's other defaults apply: 3.5% yearly appreciation, 3% rent growth and a 5.5% investment return for the renter. Only the number of years you stay changes.

The pattern is typical: staying a short time favours renting because the fixed costs of buying and selling have not had time to be repaid. Staying longer favours buying on these assumptions.

The cost of moving as a renter

A renter who moves also pays. If you assume a move costs $3,000 in total and happens every three years, the calculator adds about $10,147 in moving costs over 10 years. In that case the buyer's lead widens from $41,686 to $54,229, because the renter has more costs to carry.

Moving more often makes the gap larger still. At a move every two years the lead is $58,974, and every four years it is $50,038. These figures assume the buyer does not move at all, which is the key assumption: they stay put while the renter relocates.

If the buyer also moves every few years, each sale brings selling costs again, and the picture reverses. Flexibility is only valuable if you expect to use it.

• Frequent moves for a renter add up, but moving frequently as an owner is far more expensive.
• A renter who stays put for years pays little for flexibility they do not use.
• An owner who stays for a long time spreads the one-time costs of buying and selling over many years.

Signs that flexibility should weigh heavily

Some situations make flexibility worth more than the model shows, because the future is hard to predict. Examples include an uncertain job, a contract that may end, a relationship that may change, a plan to move for study or family, or an expectation of a major life change in the next few years.

In those cases, a shorter horizon is the honest input. If the calculator shows the renter ahead for two to three years, that is a signal to rent unless you have strong reasons to expect a longer stay.

• Employment tied to a contract, a probation period or a project.
• A relationship or family situation that may change.
• Plans to relocate for study, work or care responsibilities.
• A strong preference for trying a neighbourhood before committing.

Ways to buy flexibility while owning

Owners are not completely locked in. A home with a rental suite or a roommate can be kept and rented if you move, though different rules apply to rental use, so check them before relying on this. A mortgage that is portable or has more lenient prepayment terms can reduce exit costs, and a shorter term lets you reset sooner. Ask the lender what is available.

Renters can also buy flexibility. A longer lease can lock in rent, and a lease with a clear sublet clause can make a short-notice move less costly. The checklist lists questions to ask on either side.