With 10-month-old Oliver and hopes for another child in the near future, Colin and Jenna G., both 38, want to trade up to a bigger house.
Like many homeowners looking to move to a bigger, and more expensive, property, the big question is whether the numbers make sense.
Colin and Jenna, who asked that their real names not be used, currently own a three-bedroom back-split in Stouffville, Ont., valued at $500,000. Since Jenna runs her own business from home, they would also like space for an office in their new home. Their wish list includes four bedrooms, a private backyard and enough room to entertain their large extended family. A guest bedroom would be a bonus, but they realize that may be challenging, given the $650,000 price range they've set for the hunt. They would like to stay in the Stouffville area or another community within reach of Toronto, such as Mount Albert or Uxbridge.
Jake Abramowicz is Mortgagejake, a Mortgage Edge broker in Toronto with 10 years of experience in the industry. He says the best strategy for any homeowner who is considering buying up is to know their mortgage figures before deciding what they can afford and committing to a purchase.
In Colin and Jenna's case, they have a $135,000 bank mortgage remaining at a 3.2-per-cent fixed rate. The expected maturity date for their existing mortgage is three years and the couple make monthly payments of $1,440. With a combined income of $150,000, they feel they can increase their monthly payments to between $1,800-$1,900. The couple have good credit scores, $40,000 in investments and a low debt load, but daycare for Oliver costs $1,225 a month.
Because Colin and Jenna make good money, have little debt and have been paying down their current mortgage aggressively, Mr. Abramowicz believes they're in financial shape to go ahead.
Mr. Abramowicz calculates that if they sell, paying about 5-per-cent real estate commissions, they should get $471,750 from their sale, including the HST. After subtracting their current mortgage of $135,000, they'll have $336,750 available for a down payment. With their target payment of about $1,850 per month, he says they can afford a mortgage of $435,000 and amortize it for 30 years, which is the maximum allowed. That means they could actually buy a house for as much as $771,000. However if they stick to their budget of $650,000, they will have a comfortable cushion. They should also continue to use their pre-payment options, as they have already been doing, to pay down the mortgage faster.
Alternatively, if they go to a 25-year amortization, then the maximum mortgage they can take to keep payments at $1,850 is $387,000. Combined with their $336,000 down payment, they could still spend $723,000 if they wish to get their dream home. Since their existing bank mortgage would cost a hefty penalty of $7,553 to break, he advises that they just transfer that mortgage. With three years left in their term, they won't have to worry about rates going up or down for a while, Mr. Abramowicz says. However, he thinks it would have been better had they gone with a lender that allowed them to extend their mortgage with a new five-year term so they would have the security of a five-year fixed rate. When it is time to renew, he suggests they shop around for more flexible options.
The wild card for their budget is daycare, which would double for about two years if they have a second child soon. Fortunately, Mr. Abramowicz says, lenders and banks don't look at childcare costs as a liability, simply because they're very short term, but they're a real-world cost that parents have to manage.
Mr. Abramowicz suggests homeowners looking to upgrade take the following three steps:
- They should find out what the penalty is to break their current rate, how much they have available and whether their mortgage is portable and transferable to another property.
- They should find out if their mortgage company is willing to give them a bridge loan. This is needed when they buy before their house is sold, or if there is a big gap between when they buy and take possession.
- They should decide how much they want to pay a month just for the mortgage principal and interest, not including property tax, maintenance and utilities. Then they will know what they can afford. Also they need to be sure to have $10,000-$15,000 available for closing costs, including land transfer tax and legal fees.
Financial planner Gordon Stockman, vice-president of Efficient Wealth Management Inc. in Mississauga, Ont., says Colin and Jenna have done a nice job of building net worth, primarily through the equity in their current home. He agrees that a home upgrade is realistic for them and likes that after the new purchase, the equity in their home will still be greater than 50 per cent. His concern is that their wealth is all in the house and their savings rate is substantially below their future needs. At their age of 38, he wonders if much of their income is consumed by their lifestyle as opposed to being saved.
He'd like to have seen Colin putting aside at least $10,000 to $12,000 beginning six years ago, and Jenna likewise at $5,000 to $6,000. Given current incomes, he advises that Colin's RRSP, or a spousal RRSP, would be the best vehicle for both their retirement savings. "A little bit of savings today goes a long way tomorrow."