The 5% rule for renting vs buying: how it works and where it breaks

The 5% rule comes from Benjamin Felix, a portfolio manager at PWL Capital, who set it out in The Globe and Mail in July 2019. His example was a 500,000 dollar home: 5% of the price is 25,000 dollars a year, or about 2,083 dollars a month. Rent a similar home for less than that and, by his estimate, renting costs you less.

It is popular because it fits in one line. It is also seven years old, and it was written when mortgages cost about 3%. This guide covers how the rule works, where each number comes from, and what changes with the 30-year rate at 7.40%.

What is the 5% rule for renting vs buying?

It is a quick test that compares a year of rent with 5% of the home's price. The 5% stands for what an owner pays each year and never gets back.

Break-even monthly rent = home price x 5% / 12

If the rent on a comparable home is below the figure in the last column, the rule says renting is the cheaper option. If it is above, owning is.

Where do the three numbers come from?

Felix adds up three yearly costs of owning, each as a share of the home's value:

• Property tax: about 1%.
• Maintenance: about 1%. Roofs, boilers, paint, and everything else a landlord would otherwise pay for.
• Cost of capital: about 3%. The return you give up by having money in a house instead of in investments.

The 3% is the least obvious part. Felix took long-run real returns from the Credit Suisse Global Investment Returns Yearbook for 1900 to 2017: 1.3% a year for real estate and 5% for stocks. After adding assumed inflation of 1.7% and rounding down for caution, he used 3% for real estate and 6% for stocks. The gap between them, 3%, is what an owner's equity gives up each year.

He also noted that with a mortgage at 3% and the property growing at 3%, the borrowed part of the purchase carries no extra cost. That is the assumption that has aged.

Is renting throwing money away?

No, and this is the most useful idea in the rule. Rent is an unrecoverable cost: you pay it and get nothing back at the end. But owning has unrecoverable costs too. Property tax, maintenance, mortgage interest, and the return your down payment could have earned are all gone once paid.

The only part of a mortgage payment that is not a cost is the principal, the slice that reduces your loan. So the fair comparison is not rent against the mortgage payment. It is rent against the owner's unrecoverable costs. The monthly breakdown in our rent vs buy calculator splits an owner's bill into the part that builds equity and the part that is gone, so you can compare like with like.

Does the 5% rule still work with 7% mortgage rates?

Not without adjusting it. The 30-year fixed rate averaged 7.40% on October 8, 2026, according to Freddie Mac. The rule assumed borrowing cost about the same as the home's price growth. When the mortgage rate is far above that growth, the borrowed part of the purchase has a real yearly cost, and 5% understates what owning costs.

Felix flagged this himself, writing that the rule could change if mortgage rates rose above expected real estate returns.

To see the size of the effect, we ran a 500,000 dollar home through our calculator and searched for the rent at which buying and renting tie after 10 years. This is our own illustration, not Felix's method. It assumes 20% down, 3% home price growth, 6% investment returns, 3% to buy, and 6% to sell.

At a 3% mortgage the model lands at 4.7%, close to the original rule. At 7.4% the figure is 7.5%. On that reading, with today's rates the rule behaves more like a 7.5% rule for a 10-year stay: a 500,000 dollar home has to rent for more than about 3,144 dollars a month before buying comes out ahead.

When does the 5% rule mislead?

• Short stays. The rule ignores the cost of buying and selling. In the same model at a 7.4% rate, a 5-year stay needs rent of about 3,567 dollars a month to tie, and a 15-year stay needs about 2,978. See how the break-even year works.
• Unusual property tax. Rates differ widely between states and countries. Replace the 1% with your own.
• Cautious investors. The 3% cost of capital assumes the renter holds an all-stock portfolio. Felix suggested that a conservative investor in a high tax bracket might use something closer to a 3% rule.
• Renters who do not invest. The rule assumes the down payment and any monthly saving are invested. If they would be spent, the comparison tilts toward buying.
• Insurance and fees. Home insurance and community fees are not in the 5%.

How should you use the rule?

Use it as a first screen, then run the full numbers.

1. Find the price of a home you would buy and the rent on a similar one nearby.
2. Work out the yearly rent as a share of the price. Below 5% leans toward renting. Above about 7.5% leans toward buying at current rates. In between, the answer depends on the details.
3. Put both figures into the rent vs buy calculator with your own mortgage rate and the number of years you expect to stay.

The same share, turned upside down, is the price-to-rent ratio. Rent at 5% of the price is a ratio of 20. Whichever way the decision goes, the down payment is the largest sum involved, so keep it visible while you save it. You can set it as a savings goal in Nethaven and watch it against your real balances.