Rent vs. Buy
Compare rough monthly cost of renting versus buying.
About the Rent vs. Buy
Buying beats renting only after enough years to recover the purchase costs. That crossover point, not the monthly comparison, is the real answer.
How to use it
- Enter the purchase price and your rent.
- Enter the rate and how long you expect to stay.
- Compare the totals.
The formula
Buying is not automatically better than renting. The honest comparison is between money you spend and never see again in each case — not between rent and a mortgage payment, because a mortgage payment contains savings inside it.
Cost of owning = interest + tax + insurance + maintenance + opportunity cost of the deposit − appreciation
Cost of renting = rent + opportunity cost of nothing
Principal repayment is not a cost. It moves money from one pocket to another. Interest, tax, insurance and maintenance genuinely leave and never come back, and on a new mortgage those unrecoverable costs are usually close to the rent on a comparable home — which is why the decision so often comes down to transaction costs and time.
Buying costs roughly 2% to 5% of the price to enter and 6% to 10% to exit. That 8% to 15% round trip has to be recovered before ownership wins, and how fast it is recovered depends almost entirely on how long you stay.
Worked examples
| Years in the home | Round-trip costs spread per year | Typically favours |
|---|---|---|
| 1 year | ~10% of the price | renting, heavily |
| 3 years | ~3.3% a year | renting, usually |
| 5 years | ~2% a year | close — depends on the local market |
| 10 years | ~1% a year | buying, usually |
This is why the common advice is a five-year horizon, and the mechanism is simple arithmetic rather than folklore. The costs of buying and selling are fixed and paid once; the longer you stay, the more years they are spread across. A job that might move you in two years is a stronger argument for renting than any interest rate.
Common mistakes
- Comparing rent to the whole mortgage payment. Part of that payment is principal, which you keep. Compare rent against interest, tax, insurance and maintenance — the money that actually disappears.
- Leaving maintenance out. Budget roughly 1% of the home's value a year over the long run. It is lumpy rather than monthly, which is why it is easy to forget until the roof needs replacing.
- Ignoring what the deposit would otherwise earn. $80,000 sitting in a house is $80,000 not invested. At 5% that is $4,000 a year of foregone return, and it belongs on the ownership side of the ledger.
- Assuming prices always rise. Housing does appreciate over long periods and it does not do so reliably over short ones. A calculation that depends on 5% annual appreciation is a bet, not a plan.
Terms explained
- Unrecoverable costs
- Money that leaves permanently: interest, tax, insurance, maintenance and opportunity cost when buying; rent when renting. The only fair basis for comparison.
- Opportunity cost
- What your deposit and closing costs would have earned invested elsewhere. Invisible, and often the largest single item.
- Closing costs
- Fees to complete a purchase, typically 2% to 5% of the price.
- Selling costs
- Agent commission and transfer taxes, commonly 6% to 10%. Paid on the sale price, which is normally larger than the price you paid.
- Break-even horizon
- How long you must stay before buying comes out ahead. Usually three to seven years, driven mostly by transaction costs.
- Price-to-rent ratio
- Purchase price divided by annual rent for a comparable home. Under 15 tends to favour buying, over 21 tends to favour renting.
Common questions
- Is renting really throwing money away?
- No more than mortgage interest is. Renting buys housing and flexibility; interest, tax, insurance and maintenance buy nothing you keep either. The recoverable part of a mortgage payment is the principal, and early on that is the small part.
- How long do I need to stay for buying to win?
- Usually three to seven years. Buying and selling costs roughly 8% to 15% of the price in total, and that has to be spread over enough years to be worth paying.
- What is the price-to-rent ratio?
- Purchase price divided by a year of rent for a similar home. Below about 15 buying tends to win; above about 21 renting usually does. It is a fast sanity check on a local market.
- Should I include my deposit's lost returns?
- Yes, and most calculators do not. Money in a house is money not invested elsewhere, and over a decade that foregone return is a substantial number.
- Does a low interest rate change the answer?
- It lowers the largest unrecoverable cost, which shifts the break-even earlier. It does not change transaction costs, so a short stay is still expensive at any rate.
- What about the tax deduction?
- Mortgage interest deduction only helps if you itemise, and since the standard deduction rose most filers do not. Treat it as a bonus if it applies rather than a pillar of the case.
- Is a house a good investment?
- It is a leveraged, undiversified, illiquid asset that you also live in. Long-run real appreciation is modest — the wealth effect mostly comes from forced saving and from leverage working in your favour.
- What if rents keep rising?
- That is the strongest argument for buying. A fixed mortgage freezes the largest part of your housing cost while rent tracks the market, and over twenty years that divergence compounds into a large difference.