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financial facelift

Julie is 35 and has been practising law for the past year-and-a-half. She makes a comfortable salary, has some savings and is mulling buying a home in pricey Toronto.

Her living expenses are modest and she has been conscientious about tucking money away in her registered retirement savings plan and tax-free savings account each month. She wonders if she can buy within the next year or so, how much she can afford to put down, and whether she needs to save more money.

Julie has other goals as well, including travelling and eventually getting married. Longer term, she aspires to getting her LLM (Master of Laws) degree and being called to the bar in New York.

"Can I afford to buy a condo?" Julie asks in an e-mail.

We asked Stephen Osborne at E.E.S. Financial Services Ltd. in Markham, Ont., to look at Julie's situation.

What the expert says

Julie tracks her monthly expenses and has an automatic withdrawal plan in which $1,700 is directed toward her savings every two weeks, Mr. Osborne says. In months where her outlays are unusually high, she moves money from her savings accounts to keep up with her automatic savings plans. Her lifestyle expenses range between $1,800 to $2,400 a month – unusually low for someone earning $100,000 a year.

Julie's budget makes no provision for travel – one of her goals – and only a modest amount for dining out, Mr. Osborne notes. In assessing her situation, he has added $10,000 a year for these two items and another $2,500 for miscellaneous cash expenses.

Her rent, too, is unusually low for Toronto "and there will obviously be a significant increase in her outflows when she buys her own condo." To simplify the calculation, he assumes her current rent payments will cover her condo fees and property taxes, and that utilities will be included in the condo fees.

"That leaves her with mortgage payments," the planner says. If Julie buys a $312,500 condo and puts down 20 per cent or $62,500, her mortgage would be $250,000. At a mortgage rate of 5 per cent with a 25-year amortization, her payments would be slightly more than $1,450 a month. While 5 per cent is high, it is intended to provide flexibility against future increases in mortgage rates.

The planner looked at what Julie could afford after income taxes, payroll deductions, her current expenses plus an additional $12,500, maximum RRSP contributions of $18,000 a year and maximum TFSA contributions.

"A mortgage in the range of $250,000 to $300,000 suggests she could buy a condo costing between $312,500 and $375,000," Mr. Osborne says. Julie does not have a car and would prefer to live downtown, where units are expensive.

So can Julie afford to buy a condo? "To some degree, the answer is yes," Mr. Osborne says. "Should she buy one? That is another question."

Some of Julie's goals indicate any purchase she makes now could end up being a relatively short-term investment, the planner notes. The young lawyer, who works for a U.S. firm, is open to working in New York one day.

"As she works her way up the corporate ladder, does she see herself being relocated to the United States?" Mr. Osborne asks.

If she gets married, would she and her partner still want to live in the same condo? What if they decided to have children? Would they need a bigger place?

Julie is single with very little in the way of financial commitments at the moment, he notes. "A renter would have much more flexibility than a homeowner to relocate, be it for work reasons, to be with a partner or even just to move to a different neighbourhood for social reasons." Buying real estate for the short term can be expensive because of sales commissions, land transfer tax and the risk of short-term declines in the real estate market.



The person Julie, 35

The problem Can she afford to buy a condo in downtown Toronto?

The plan Consider sticking with her current rental arrangements for a while longer to see what the future holds. If she does decide to buy, stay within budget rather than digging deeper into her savings to finance a more expensive unit.

The payoff The flexibility to take advantage of future opportunities that have not come clearly into focus yet.

Monthly net income $5,800

Assets Bank accounts $41,650; mutual funds $89,752; TFSA $21,094; RRSP $36,911; locked-in retirement account $46,678. Total: $236,085

Monthly expenditures Rent $800; transportation $150; groceries, clothing, dry cleaning $250; discretionary $145; personal (grooming, entertainment, dining out, dance classes) $460; dentist, drugstore $35; telecom, TV, Internet $110; group benefits $220; law society dues $220. Total: $2,390. Savings capacity: $3,410

Liabilities None

Special to The Globe and Mail. Want a free financial facelift? E-mail Some details may be changed to protect the privacy of the persons profiled.