Rafal Gerszak FOR THE GLOBE AND MAIL
When they pulled up stakes in Ontario a couple of years ago and moved to Vancouver, Carrie and Jordan knew their biggest challenge would be to find a house they could afford.
She was going back to school to get a degree in a new profession, one she hoped would pay better than her previous career. He nabbed a government job. Now that Carrie has finished school, "we plan to put down roots in Vancouver because our families are close," Jordan writes in an e-mail. He is 30, she is 32.
Although their income will more than double once Carrie begins working, "we don't feel we can buy into the Vancouver real estate market because the costs are still astronomical," Jordan writes.
They are looking for a three-bedroom house because they are planning to start a family at some point.
"We're dead set against moving to the fringes of the city just to afford a house," Jordan writes. "We'd rather rent than give up our lifestyle."
Their question is twofold: What should they do with the down payment money they have saved – proceeds from the sale of their previous house plus savings – until they can afford to buy; and how long must they wait before they take the plunge into the high-priced Vancouver real estate market?
"We're highly risk-averse and want to protect our capital," Jordan adds. They also want to plan for future expenses such as children and retirement.
We asked Marc Henein, an investment adviser and financial planner at ScotiaMcleod in Toronto, to look at Carrie and Jordan's situation.
What the expert says
Carrie and Jordan have about $127,000 in cash in high-interest savings accounts, Mr. Henein notes. Jordan makes about $70,000 a year, while Carrie hopes to make $60,000 to $70,000 when she starts her new job. Because they are living comfortably on Jordan's salary alone, the couple should be able to save a substantial sum once Carrie starts to work.
They will need it, because even though the Vancouver market is cooling, the average house price is still about $700,000. Mr. Henein suggests they save enough money to put 25 per cent down.
"This should mean a down payment in the range of $175,000," he says. A 4-per-cent mortgage rate with a 25-year amortization would make for a monthly payment of $2,761.61, the adviser says.
Add in property taxes and other house-related expenses, and becoming a homeowner presents itself as an expensive proposition. Because they are paying much less in rent – $1,850 a month – "with the inflated house prices, renting may be the best option for the time being," Mr. Henein says. "Waiting three to five years to buy will put them comfortably over the 25-per-cent [down payment] and still have them mortgage-free before the age of 60."
The adviser recommends they set up an emergency savings account large enough to cover six to nine months' worth of expenses, or about $18,000. The remainder of the $127,000 they have saved toward a down payment can be invested for three to five years, along with whatever money they manage to save in future. If they decide to stick with guaranteed investment certificates, they could end up losing money after taxes and inflation, he cautions. Instead, "it would be prudent to add preferred shares to the portfolio. They yield an average of 4 to 5 per cent, have fixed terms and pay dividends."
Once they become parents, Carrie and Jordan should apply for the Universal Child Care Benefit of $100 a month for the first six years of each child's life. They can invest the money in a registered education savings plan. "Doing so will give you an immediate 20-per-cent return on your annual contribution," the adviser notes, because of the federal government grant. He suggests they contribute an additional $1,300 a year to qualify for the full $500 annual grant.
The RESP money could be invested in a provincial government bond that matures around the time the child turns 17.
As for retirement savings, the couple has a good base thanks to Jordan's defined benefit pension plan. Once Carrie starts working, she may have an employer-sponsored pension plan as well. He suggests they take full advantage of their registered retirement savings plans and tax-free savings accounts.
CLIENT SITUATION
The people
Jordan, 30, and Carrie, 32.
The problem
How to invest the money they are saving for a down payment on a home, and deciding when they will have enough.
The plan
Defer the house purchase a few years until they have enough to make a down payment of 25 per cent.
The payoff
A solid financial footing for the future and whatever changes it might bring.
Monthly net income
$4,165.
Assets
Savings for house $127,000; cash in bank $6,300; his TFSA $21,035; her TFSA $20,830; RRSPs $12,000; his pension plan $57,700. Total: $244,865.
Monthly disbursements
Rent $1,850; house insurance $30; transportation $155; groceries $325; clothing $25; gifts, charitable $70; vacations, travel $100; dining out, drinks, entertaining $335; sports, hobbies $50; health care $70; communications $140; professional association $35; group benefits $60. Total: $3,245.
Liabilities
None.