Jeremy and Kate live in a smallish home in a nice part of Toronto with their two-year-old son.
"He has been such a joy that we wanted to grow our family," Kate writes in an e-mail. Grow it they will – they're expecting twins soon. Kate is 36, Jeremy 38. Both work full-time at executive-level jobs.
"Everything we have needs to expand with our newest arrivals," Kate says. "Our small semi-detached house was tight for three, unmanageable for five," she adds. "Our car can't fit three car seats and the costs of daycare or a nanny will be going through the roof!"
Fortunately, they earn good incomes and are "good savers," Kate says. "It looks like we are going to need it." To accommodate the children, they want to move up from their existing house – valued at $800,000 – to a larger one in the same neighbourhood. Estimated cost: $1.5-million to $2-million. They'll also need a minivan in addition to their car and a live-in nanny, which they calculate will be cheaper than paying daycare fees for three children.
Longer term, they want to make sure they can pay for their children's education and extra-curricular activities and still have money to invest for their retirement. Kate's income will drop substantially during her parental leave.
"Can we afford the size of house that we are looking for without changing our lifestyle and sacrificing our savings in light of the expenses that we will be taking on?" she asks.
We asked Stephen Osborne, a financial planner at E.E.S. Financial Services Ltd. in Markham, Ont., to look at Kate and Jeremy's situation.
What the expert says
Mr. Osborne looked first at how much Kate and Jeremy's expenses might rise. A live-in nanny could cost double what they are paying now for daycare, adding another $13,000 to their monthly bill. Next, he raised their food and clothing budget by two-thirds, or $1,600 a month. While that may seem like a lot for two infants, Kate and Jeremy have little in their budget for future children's activities – sports, music, dancing. Their budget is also light on items such as vacations and dining out, costs that will rise as their family grows older. A second vehicle will add another $10,000 a year.
But the biggest cost will be a larger home. To estimate how much they can afford, Mr. Osborne takes the midway point of their estimate – $1.75-million – and rounds it up to an even $1.8-million. Buying a home that expensive means they would be increasing their mortgage by $1-million. He took the mid-point to provide for things such as real estate commission, land transfer tax, moving expenses and any work that may need to be done on their new home before they move in.
Their existing mortgage is $235,000 at 2 per cent. If Kate and Jeremy were to lock in a new mortgage of $1,235,000 at 4 per cent for 10 years and amortize the payments over 25 years, their monthly mortgage costs would rise from $2,100 currently to $6,500.
"Their mortgage payments alone would increase by almost $53,000 a year," Mr. Osborne says. As well, they would not have the mortgage paid off by their target retirement age of 60 so they'd have to work longer.
A $1-million increase in home value could translate into $8,000 of additional property taxes each year, which the planner included in his calculations. He did not include higher utility, repair, maintenance, renovation or furniture costs. The couple would also have to increase their home and life insurance.
Indeed, their plan requires that they both keep working at least at their current income level.
If she takes a one-year parental leave, Kate's only income will be employment insurance benefits of $485 a week. To supplement their cash flow over the next year, the planner suggests they cash in their tax-free savings accounts. In the future, he suggests they contribute $2,500 a year for each child to a registered education savings plan to take full advantage of the federal government grant.
Altogether, Kate and Jeremy would need another $50,000 a year in pre-tax income just to break even, Mr. Osborne says. Their best bet would be to buy a home costing no more than $1.4-million, below the bottom end of their price range, the planner says. That would reduce the amount of mortgage they take on by $400,000. Even at that, their budget would be tight.
Kate, 36, and Jeremy, 38, and family
Can they afford to buy a bigger home now that twins are on the way?
Set their sights a little lower, limiting themselves to spending no more than $1.4-million on a larger home, recognizing that this will leave them with very little in the way of financial flexibility if one of them lost their job.
By not taking on too high a mortgage and other expenses now, they might have room for a few extras if they surpass their goals – such as a special family vacation. As well, they will have their mortgage paid off earlier, perhaps allowing them to retire at age 60.
Monthly net income
Bank accounts $50,000; term deposits $7,000; stocks $82,000; TFSAs $35,000; his RRSP $209,000; her RRSP $111,000; RESP $5,400; residence $800,000. Total: $1,299,400
Mortgage $1,833; property tax $800; water, sewage $172; property insurance $615; utilities $115; maintenance $135; auto expenses $755; groceries $725; child care $1,100; clothing $1,885; charitable $50; vacation, travel $50; discretionary (includes beauty, club, sports, dining out, entertainment, alcohol, subscriptions) $525; dentist, prescriptions $90; life insurance $155; telecommunications $190; RRSP $800; TFSA $800; other savings $1,200. Total: $11,995
Special to The Globe and Mail
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