Liam and Sophia moved into their place in the Vancouver area 10 years ago. Since then, they’ve become parents and they’ve also become entrenched in the community. They love their neighbourhood and their child has settled into the local elementary school.
The only question causing the West Coast couple distress is the same one faced by many Canadians who live in hot housing markets: Should they keep renting or bite the bullet and buy?
Sophia, who works part-time as a caregiver, is tired of renting. When the couple moved into what she describes as a lovely garden-level apartment, they were paying $1,700 a month in rent; now they fork over nearly $2,000. However, her husband, a doctor, isn’t keen on purchasing real estate with home prices being what they are in the Vancouver area.
“The amount we’ve paid in rent is crazy,” Sophia says. “For 10 years, I’ve wanted to buy a house, but my husband was gun-shy, thinking the prices would not keep going up. We can’t afford to buy a house in our neighbourhood now, and my husband is trying to convince me to just keep saving money.”
Sophia describes herself and her husband, both 50, as good savers. She says the last thing she wants is to be house poor, but she’s feeling as though her family is at a crossroads.
“If we are going to move, I would rather do it now,” she says. “I’d like the security of knowing we have a home for my daughter that we can call our own, but now I’m wondering if it’s the best financial decision. It would cost us about $1-million to get into a detached house in a different neighbourhood.
“I have a number of friends in a similar situation, in so much angst over whether it’s wise to buy a house after so many years of real estate climbing,” she adds. “I feel paralyzed trying to make this decision on my own.”
To help Sophia and Liam, we consulted Vancouver certified financial planner Tom Kelly, wealth adviser at the Granville West Group/Manulife Securities Inc., and Biljana Manojlovic, a private banker with RBC Wealth Management, also in Vancouver.
Two tax-free savings accounts (TFSAs) totalling $58,622
Registered education savings plan (RESP): $30,000
Liam’s registered retirement savings plan (RRSP): $457,378
Sophia’s RRSP: $83,560
Liam’s cash savings: $313,573
Sophia’s non-RRSP savings: $300, 278 (in money market funds)
Chequing account: $58,409
Monthly expenses, including car insurance, child’s activities and travel: about $5,000
Rent: $2,000 monthly
Mr. Kelly’s tips
1. Begin your planning by defining your ideal lifestyle.
“Our wealth is meant to serve us, not the other way around,” Mr. Kelly says. “Ask yourselves: If you were to pass away in 10 years and never owned a home of your own with your family, would you be disappointed? If the answer is yes, and you can reasonably afford a home – which you can – then buy the home for the long term and build in as much safety as possible.”
To do that, Mr. Kelly suggests the couple purchase life insurance for at least the value of the mortgage, disability insurance to cover a portion of the pair’s income, set the mortgage to be paid off in 15 years when they want to retire, and take advantage of today’s ultra-low mortgage rates to keep costs fixed during the next five to 10 years.
“The soft benefits of owing a principal residence with your family should not be overlooked,” he adds. “You cannot put a price on pride of ownership, control of your environment and stability.”
2. Develop a long-term perspective.
“The challenge that we all face is to live each day as if we were going to die tomorrow while developing long-term plans as if we were going to live forever,” Mr. Kelly says. “Defining your retirement needs and determining how to save in order to reach your goals will help relieve the stress of day-to-day financial decisions. What happens to financial assets tomorrow or over the next year should not be your focus. Putting the odds in your favour to be successful over the next 10, 20, 30 years is what you should try to control.
“In this case, owning a principal residence should be thought of as the best way of growing an asset tax-free over the next 20 years, diversifying your asset base and getting the benefits of living in your own property every day,” he adds. “If you can balance this with investments that have the ability to grow at a reasonable rate over this same time period, you will be in great shape.”'
3. Be more aggressive with your investment portfolio.
“Golfers have a saying that 100 per cent of putts that don’t make it to the hole won’t go in,” Mr. Kelly says. “By sitting on cash and not making a decision on buying a home or investing, you’re virtually guaranteeing that you are losing money after inflation is factored into the equation. You are excellent savers, so make your savings work for you.”
Mr. Kelly suggests the couple take the time to understand more about investing so that they can invest more aggressively with confidence. “With 15 years to retirement, and likely 30 years in retirement, you need to invest largely in high-quality equities with any of your long-term capital that is not needed for a home purchase. In today’s investment climate, I would suggest 25 per cent in U.S. equities, 20 per cent in Canadian equities, 20 per cent in international equities, 20 per cent fixed income, and 15 per cent alternative assets as a starting point. Don’t worry so much about getting in at the wrong time. Find a financial professional to work with who can help you make the putt that will get you to the hole."
Ms. Manojlovic’s tips
1. Meet with a licensed, accredited financial planner. Creating a financial plan will allow Liam and Sophia to discuss family goals, needs and priorities, Ms. Manojlovic says.
“They will be able to address financial management, budgeting, tax planning, investment planning and risk management, retirement planning, estate planning,” she says. “This [owning a home] is a big decision, and by going through the financial planning process, they’ll be able to see what that scenario would look like in numbers and what impact would it have on their retirement – their net worth and their cash flow.”
Say the couple put a large down payment of $600,000 on a $1-million home, they’d have a mortgage of $400,000, Ms. Manojlovic notes. “Assuming a 25-year amortization, at current interest rates their monthly mortgage payment could be around $2,000, which is what they are paying in rent now, so they could make their dream of owning a home reality,” she says. “There is no right or wrong decision when it comes to owning a home. It comes down to the personal value system and priorities.”
2. Examine their insurance needs.
“If they go ahead and purchase a home, I would strongly advise them to review their life and disability insurance needs,” Ms. Manojlovic says. “As the husband is the main income earner, should something happen to him this would put a strain on their finances.” It’s crucial that insurance be reviewed and, if not adequate, topped up or acquired.
3. Have assets invested according to their investor risk profile.
“The large amount of cash in savings and chequing accounts, as well as one TFSA account in money market [funds], and both RRSPs need to be reviewed and properly invested and monitored,” Ms. Manojlovic says. “One spouse has a higher income and a much larger RRSP; the other spouse has a smaller RRSP and a pension. Perhaps it would make financial sense to set up a spousal RRSP to equalize their income at retirement.”
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