Newly married and with good jobs, Ruby and Dave want to be sure their future plans are firmly grounded. Some time soon, they want to buy a house and have a couple of children. But can they afford to buy?
Dave and Ruby are both 35 and bring in $154,000 a year between them. They have recently joined their employers' defined benefit pension plans.
"With two incomes and no kids, we figure we can afford to buy a three-bedroom home (for $600,000 with 10 per cent down) within the next year," Ruby writes in an e-mail. "But we worry that we would not be able to afford the additional costs of home ownership while on parental leave, or while paying for full-day daycare," she adds. They are paying rent of $1,100 a month for their apartment.
"Should we instead rent a house (for $2,000 to $2,500 a month) until our two hypothetical babies are in school?" Ruby asks.
Their income and expense forms show a big surplus which presumably goes toward saving – a surplus that will shrink and perhaps disappear once they have a house and children.
Is their plan achievable?
We asked Ross McShane, vice-president of financial planning at Doherty & Associates, an investment management firm in Ottawa, to look at Dave and Ruby's situation. Mr. McShane holds several designations, including chartered professional accountant (CPA).
What the expert says
Ruby and Dave want to buy a $600,000 house within the next 12 months and start a family within the next two or three years, Mr. McShane says. They plan to put 10 per cent down.
"They should strive to make a 20 per cent down payment, which will require $120,000 and result in a $480,000 conventional mortgage," he says. "This allows them to avoid fees associated with a high-ratio mortgage."
He assumes a 2.49-per-cent mortgage rate fixed for five years, resulting in principal and interest payments of $2,500 a month. Property taxes, increased utilities and other costs of owning are estimated to add $15,000 a year, but they will no longer be paying rent, so the net additional cost (before mortgage) is estimated at $2,000 a year.
Next, the planner looks at the couple's expenses. "It is imperative that they are accounting for all current and anticipated expenses," Mr. McShane says. Just in case, he has added $10,000 a year to their current budget.
For the down payment, Dave and Ruby can draw on their tax-free savings accounts and registered retirement savings plans (under the federal Home Buyers' Plan). Because they can each withdraw $25,000 under the plan, Dave should contribute $7,000 to his RRSP for the current year to top it up to $25,000.
"Watch the 89-day rule," Mr. McShane says. Funds must be in the RRSP for 89 days before being withdrawn or they will be denied the deduction.
They will not lose their TFSA contribution room by withdrawing money to buy a house. They can contribute again at a later date. "Be careful to wait until the beginning of the following calendar year to contribute again," the planner says.
As well, they should be able to save a fair sum over the next year based on their cash-flow surplus. "Keep funds for the down payment liquid in a daily-interest savings account," he says. "Given the short-term nature of these funds, preservation of capital is a top priority."
In drawing up his plan, Mr. McShane made a number of assumptions. The first child arrives in 2019 with daycare costs ($1,000 a month for each child) starting in 2020, with the second child two years later. Ruby brings in $42,430 a year while she is on mat leave because her employer tops up her employment insurance for 16 weeks.
"It looks like they can balance their new budget with house and children," Mr. McShane says. "Looking ahead, though, their annual surplus will be significantly eroded." Mortgage rates could be higher when it comes time to renew, he notes. The house itself may need work. "Is the roof in good shape? The furnace? Does the house need landscaping or new blinds?"
What if Ruby decides she wants to stay home until the children are in kindergarten? Their income would be lower for longer. Children's activities – sports, music lessons, summer camp – will also cost. They'll need new vehicles at some point.
During the early years, the planner has not included saving for the children's higher education. Once Ruby is back at work, she and Dave will want to open registered education savings plans for the children to take advantage of the federal education savings grant. So they'll have to find the money for that.
All this uncertainty leads Mr. McShane to wonder: "Would a $400,000 home suffice as a start?" Ruby and Dave could always move up to a larger, more expensive house later as they become better established financially, he adds.
"Keep yourselves honest and don't let emotion lead you to buy more house than you need to start."
The people: Ruby and Dave, 35
The problem: Can they afford to buy a $600,000 house, or should they continue to rent?
The plan: Get a firm grip on expenses, present and future. Tap registered savings to buy, but try to save up 20 per cent down. Consider buying a less expensive house.
The payoff: A cash-flow cushion and less financial stress.
Monthly net income: $9,845
Assets: Her TFSA $39,642; his TFSA $20,733; her RRSP $51,690; his RRSP $18,160. Total $130,225
Monthly outlays: Rent $1,100; home insurance $40; maintenance $70; utilities $100; food $600; clothing $420; cable/cellphones $200; dining, drinks, entertainment $540; hobbies $60; gifts, donations $120; travel $415; personal discretionary $65; transportation $420; loan payment $300; RRSPs $715; pension plan contributions $330. Total: $5,495 Surplus (part goes to TFSAs) $4,350
Liabilities: Car loan $10,000
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