Question from Luke, 30, in Toronto: I am newly married and my wife and I want to buy a home in Toronto. We have a combined income of $150,000 and based on our current situation, I would be comfortable with a mortgage of $650,000. We have $100,000 saved and would put 10 per cent down. The question I have is how do you plan for income changes like maternity leave or new costs such as child care? I feel if three years from now, we added child-care costs of $2,000 a month, it would be a huge problem. What can we afford?
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Ms. Simmons work with young people to help them navigate the new economic climate with personal finance, ethical investing and small business advice.
Shannon Lee Simmons is a financial planner and founder of The New School of Finance in Toronto.
Answer: It’s smart of you to be thinking about this. Right now, with both of you working and no child-care expenses, you may be able to afford one kind of home. But once you are paying for diapers, daycare, and eventually piano and or swimming lessons, that home might be out of reach. Studies cite the annual expense of raising a child in Toronto. until 18 to be $10,000 to $15,000. You certainly don’t want to be baby poor. Which means you need to factor future kids into the financial equation before you buy the home.
When you’re crunching the home-affordability numbers, which should already include more than just mortgage payments, slot in an extra $1,000 a month per child to safely cover all the expected expenses. I call this the “baby-affordability test.” If you can afford the home with these increased costs, you should be fine. If the additional expenses have you slowly sinking into a sea of debt, you may want to rethink the home purchase amount and “pre-downsize” or baby-size your home.
Here are some of the average costs for each child. Keep in mind that these are just averages and that they vary widely depending where you live and how old your child is:
Day care: $1,600 a month (eventually this goes down/away)
Groceries: $150-$400 a month (depending on age)
Toiletries/prescriptions/medical: $100-$250 a month (especially for babies)
Kids activities: $500-$8,000 a year (choose your own adventure here, folks)
Kids camps: $200-$4,000 a year (again, this varies wildly)
Clothes: $500-$1,500 a year (everyone needs clothing, right?)
Kids birthday parties: $0-$300 a year (I’ve seen this as high as $1,000 per party)
Life insurance: $75-$200 annually per policy (most people get life insurance once they have wee ones)
Let’s not even talk about family vacations. That’s a whole other article.
In addition to these costs, your family budget needs to prepare for a drop in salary during maternity - or paternity - leave. In Canada, benefits cover about 55 per cent of a person’s pre-tax salary, up to $537 a week, providing you qualify. The first fifteen weeks of the benefits are available to the mother and the remaining 35 weeks can be taken by either parent. Read more about maternity leave here.
If neither of your salaries get topped up by your employer and you plan on taking the full year, you will need to save for the twelve months where one of you is getting paid $537 a week. This may mean that you have less for a house down payment and will instead use some of your savings to help subsidize the year after baby comes, reducing the amount of the home you can afford. (This is also a good time to have a conversation about whether both parents plan to return to work full-time once you have a family.)
Housing affordability is really about ensuring that these maternity leave and day care years won't stop you from being able to save for emergencies, holidays and/or retirement for an extended period of time. Check to make sure that your total fixed costs, including home, bills, utilities, taxes, transit, groceries, gas, debt payments, medical expenses and at least $1000 of additional child expenses, aren't more than 60 per cent of your after-tax household income. If your fixed costs are higher than 60 per cent, you may be signing up for a lifetime of financial stress, especially during the day care years. I like to think of the daycare years as financial training. If you can survive them financially, you’ll be fine down the road when your kid needs braces. Once your kids are out of daycare, simply substitute the cost of things like clothes, activities and birthday parties.
Long story short: Kids cost money and they may change your affordability equation. You don’t have to dress your kid in the fanciest clothes or throw a $300 birthday party, but you should factor in the additional cost of raising another human being (or two) before you buy a home that may leave you baby poor.