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Mike Murphy and Sandy Taylor (not their real names) have one overriding criterion in their search for a home: They want to be on the subway line in Toronto.

"We're urban people," Mike explains. "We're simply not interested in moving to the 'burbs. We like being able to walk to shops and restaurants."

By staying on the subway line, they also figure they can stretch the life of their car, a 1994 BMW.

But in Toronto's hot real estate market, the question for the recently married couple is how much house they can afford, particularly since a centrally located house is going to come at a premium. They currently live in a one-bedroom condominium that Mike bought in 1997 but are finding the marriage of their possessions is making things tight. Adding to their desire to move to a bigger space is the fact they plan to have children within a couple of years.

The two are trying to decide whether they should sell the condominium and put the proceeds toward a bigger property or whether they should keep it as an investment, rent it out and settle for a smaller down payment on a second home.

"We think it would be a good investment opportunity to have someone else pay for the mortgage on the condo," Mike says in explaining the appeal of the latter scenario.

If they sell the condo, the couple figure they could afford to pay about $450,000 for a house, given that the condo has been appraised at $190,000 and has an outstanding mortgage of $95,000. Mike calculates they could ask between $1,400 and $1,600 in rent for the unit. Currently, the couple are paying $900 every two weeks in mortgage and taxes.

If they were to hang on to the condo, they figure they could access about 60 per cent to 70 per cent of the equity for a down payment and swing a second property valued at about $350,000.

Life is comfortable for Mike and Sandy. He makes $72,000 plus a bonus as a software consultant and she makes $82,500 plus a bonus as a consultant in the financial services industry.

Beside the condo, the couple's assets include his registered retirement savings plan, which stands at $82,000; hers, which has a value of $52,000; an emergency fund of $12,100 and investment club stocks of $10,700.

While they have gone on-line to look at what's out there, "we won't seriously start looking until May or June," Sandy says, noting that gives them the time to decide how to finance their next home. "We don't want to get into a bidding war."

The upside, however, is that "at least we know that if we're buying high we're also selling high," Mike adds. What our expert says "Mike and Sandy should be congratulated for doing many right things, especially paying themselves first by making RRSP deposits and the property purchase," says Adrian Mastracci, president of KCM Wealth Management Inc. in Vancouver. "It's refreshing to see a couple not spending 150 per cent of what they earn."

The decision on what kind of property to buy and how to finance it is ultimately a personal choice that reflects their way of life, Mr. Mastracci stresses, but adds there are potential pitfalls the couple need to remember when mulling over the possibility of becoming landlords.

Even by renegotiating their mortgage, at best the net rental income would likely be small after all expenses, he notes.

"What with mortgage, taxes, insurance, repairs, they would face all the expenses associated with ownership," Mr. Mastracci says.

But one of the biggest problems the couple could face would be the possibility of vacancy, he adds, noting that carrying two properties could become an expensive burden for Mike and Sandy and eat into their savings.

"It would be a shame to see a couple like this find themselves with too many things in the air, given the discipline they've demonstrated," he says.

Selling the condo and buying a house with the proceeds presents more obvious benefits, he adds. With only one mortgage, their expenses would be predictable, because they would not need to factor in a tenant, Mr. Mastracci notes. And with more money to put toward their purchase, they'd be in a better position to afford a property that would accommodate their plans for a family.

Assuming the net cash from the sale of the condo was $85,000, they could accumulate more of a down payment from existing sources, such as the investment club funds, he adds. Since Sandy has not owned property on her own she could access funds for the down payment from her RRSP under the home buyer's plan.

As the home would be the couple's principal residence, the mortgage interest would not be deductible and so Mr. Mastracci recommends opting for as short an amortization period as possible to save thousands of dollars in interest.

To demonstrate, he suggests looking at the arbitrary example of a $100,000 mortgage, amortized over 25 years.

Assuming, for the sake of the example, an interest rate of 6 per cent, the couple's monthly payments would be $640, and they would pay $91,400 in interest over the 25-year period. But if the amortization rate were shortened to 20 years, monthly payments would rise to $712 and the interest paid would drop to $70,900, for a savings of $20,500.

"This couple should keep it simple," Mr. Mastracci says. "They should concentrate on getting rid of their mortgage and keeping up their RRSP contributions. It's a one-brick-at-a-time approach." Interested in being considered for a free Financial Facelift? Drop a line to the writer at 444 Front St. W., Toronto, M5V 2S9, or at the address below with details of your situation.

Client situation Mike Murphy, a software consultant and Sandy Taylor, a financial services consultant, are in their early 30s. Annual income Their combined annual income is $154,500, plus bonuses Assets Condominium, $195,000 ($95,000 mortgage outstanding); 1994 BMW, $5,000; RRSPs, $134,000; non-registered investments, $10,700; cash $14,000; jewellery, $20,000. Monthly household expenses Mortgage and taxes, $1,800; condo fees, $315; parking, $175; savings account, $1,500; cable, phone, Internet, $200; groceries, $200; restaurants, $500; gas, $100; mobile phones, $70; bus pass, $90; RRSPs, $2,700; car and home insurance, $165; life insurance, $230; investment club $200; grooming and clothers, $300.

Correction

One spouse cannot be eligible for the Home Buyers Plan if the other spouse has owned property as a principal residence within the past four years. Incorrect information was published Dec. 28. (Saturday, January 4, 2003)

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