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financial facelift

Rafal Gerszak/The Globe and Mail

Her career established, Elspeth is starting to save a little money and wants help devising a financial plan. Most of all, she wants a home of her own.

"The biggest question is when can or should I go from renting to buying, particularly in Vancouver's real estate market," Elspeth writes in an e-mail. She is 26, single and earning $68,000 a year.

To pay for the condo she envisages – a small one-bedroom in the city's core – she could draw on her savings, including borrowing from her registered retirement savings plan, and perhaps even tap her parents for a loan.

Elspeth is careful with money and a good saver. Her rent is low because she shares with a roommate and she has just bought a used car. As well, she has taken full advantage of her employer's defined contribution pension plan, where she contributes 6 per cent of her salary each year and the employer matches it.

For someone her age, she takes a long view. She wants to know how much she should be saving for retirement, and she wants to build a rainy day fund to help her parents and grandparents with medical expenses if necessary.

"I'd like my savings to grow but would also like to leave enough liquid for one-off expenses that may come up, such as furniture and a laptop upgrade in the next year or two, and vacation expenses," Elspeth writes.

We asked Keith Copping, a fee-only financial planner with Macdonald Shymko & Co. Ltd. in Vancouver, to look at Elspeth's situation.

What the expert says

If Elspeth draws on all her resources, she could buy a condo now, Mr. Copping says. But she would be better off waiting until she has enough savings to put 20 per cent down and still have some money left over.

"She could certainly qualify for a mortgage to purchase a condo in the $250,000 [to] $300,000 range," the planner says. "However, assuming a down payment of 10 per cent to 15 per cent or more, this would deplete her savings."

If she keeps renting, she can save about $18,000 a year. If she buys a condo, her housing expenses will rise to about $1,800 a month from about $970 a month now. That assumes a mortgage of $240,000 at 3.75 per cent, amortized over 25 years, and all the other expenses, such as utilities, condo fees and insurance, Mr. Copping says.

To fund the down payment, she would have to borrow from her RRSP under the federal Home Buyers' Plan (maximum $25,000), money she would have to repay. "She would have no personal RRSP savings remaining." If she borrowed from her parents, she would have to repay that money as well. All the additional expenses would slash her savings capacity to about $5,000 a year from $18,000 now, Mr. Copping notes.

Elspeth would also expose herself to interest rate risk if and when interest rates climb to more normal levels. A $240,000 mortgage at 3.75 per cent would cost $1,235 a month. That same mortgage at 6 per cent would cost $1,550, an increase of $315 a month. If she can't come up with 20 per cent down and has to pay for mortgage insurance, that could add another $4,000 to $5,000 in fees, the planner says.

"She may be better off to keep renting for awhile."

Because she is saving for a down payment, Elspeth should keep her investments safe and liquid – high-interest savings accounts are ideal for this purpose.

Longer term, Elspeth wonders if she will be able to retire at age 65 with an after-tax income of $70,000 a year. This would require a gross income of about $92,000.

If she takes out the maximum mortgage allowed, her savings in future might be limited to her employer's defined contribution plan, Mr. Copping says.

"To reach this goal, assuming life expectancy of age 95, would require a high level of annual savings, perhaps in the $38,000 range – assuming she earns at least 2.5 percentage points more than the inflation rate on her investments."

Mind you, Elspeth is a long way from retirement age and many things could change between now and then. Her employment income likely will increase, which would help her to achieve her goals. She may decide to get married.

"Based on her current potential savings – including the employer's portion – of about $22,000 a year, she may be able to achieve an income level of about $64,000 gross at age 65 or $52,000 after tax," the planner concludes.


Client situation

The person

Elspeth, 26

The problem

When can she afford to buy a home in pricey Vancouver?

The plan

Keep renting and saving money until she has enough to put 20 per cent down and still have money left over.

The payoff

The comfort that comes from not being stretched to the limit, as well as not having to pay mortgage insurance fees.

Monthly net income



Cash in bank $7,000; TFSA $7,300; investment portfolio $2,200; RRSP $26,000; employer DC pension $26,000. Total: $68,500

Monthly disbursements

Rent $800; insurance $20; utilities $80; food, clothing, $340; TV, Internet $50; cellphone $20; grooming, dining out, entertainment, sports, subscriptions $725; travel, vacation $250; transportation $430; charity $200; health, dental insurance $75; RRSP $340; TFSA $460; work pension $340. Total: $4,130. Surplus: $380



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