Rent or buy a home? The 5% rule and the maths that decide it

“Rent is throwing money away” is one of the most repeated pieces of money advice, and it is only half true. Owning a home has its own costs that you never get back. The fair comparison is unrecoverable cost against unrecoverable cost, not rent against mortgage payments.

What you never get back

When renting:

• Rent
• Renter’s insurance

When owning:

• Mortgage interest. The principal part of each payment builds equity; the interest does not.
• Property tax.
• Maintenance and repairs. Often estimated at about 1% of the home’s value per year, more for older homes.
• Home insurance and any building or association fees.
• Opportunity cost. The return your down payment could have earned if it were invested instead.
• Buying and selling costs. Taxes, legal fees and agent commissions can add up to several percent of the price at each end.

The 5% rule: a quick test

Investor Ben Felix popularised a shortcut: multiply the home price by 5%, then divide by 12. If you can rent a comparable home for less than that each month, renting is likely the cheaper choice. If rent is higher, buying is likely cheaper.

The 5% is a rough sum of three yearly costs of owning:

• about 1% property tax
• about 1% maintenance
• about 3% cost of capital (mortgage interest and the return given up on your down payment)

Example: a $400,000 home × 5% ÷ 12 = about $1,667 a month.

• Similar homes rent for $1,400: renting is likely cheaper; invest the difference.
• Similar homes rent for $2,000: buying is likely cheaper over time.

Adjust the percentages to your area. High property taxes, older homes or higher mortgage rates push the number above 5%; low taxes and cheap financing pull it below.

Time is the deciding factor

Because buying and selling are expensive, owning usually needs time to pay off. If you might move within a few years, the transaction costs alone can outweigh any savings. Many comparisons put the break-even point at five years or more, depending on prices, rates and how fast rents rise.

Run the mortgage numbers

Use the calculator below with a realistic rate and term. For a $300,000 mortgage at 6.5%:

• 30 years: about $1,896 a month and about $383,000 in total interest
• 15 years: about $2,613 a month and about $170,000 in total interest

Then add property tax, insurance and maintenance to see the true monthly cost of owning.

Beyond the numbers

Reasons to buy:

• You plan to stay put for many years.
• You value stability, and freedom to renovate or keep pets.
• Fixed-rate payments protect you from rising rents.

Reasons to rent:

• You may move for work or family.
• You want flexibility and no repair bills.
• Renting and investing the difference beats owning in your market.

If you decide to buy

• Keep your emergency fund intact after the down payment and closing costs.
• Get mortgage quotes from several lenders and compare APRs.
• Budget for maintenance from day one.
• Make sure the total monthly cost of owning fits comfortably within your budget, not just the mortgage payment.

Tip: Renting is not wasting money if you invest the difference between owning costs and rent. The renter who never invests is the one who falls behind.

This guide is general information, not financial or property advice. Housing markets, taxes and lending rules vary widely by country and city.