At 32, with a well-paying health care job, Ashley wants to buy her own home in expensive Toronto. She has other goals as well – she may want to have a child at some point and she hopes to leave the workforce at 60. But it’s still a long way off.
Ashley earns $ 110,000 a year – a number that could increase over time. At age 65, his defined benefit pension plan will pay him a life annuity of approximately $ 60,000 per year, indexed to inflation.
Of course, a lot could change by then. For now, Ashley wonders if her goal of homeownership might overlap with her other goals.
“Will I be able to afford a down payment on a principal residence of $ 800,000?” Ashley asks in an email. “I think I would need $ 100,000 for a down payment, and it might take me three more years to save that amount,” Ashley writes. “I checked with an online calculator and would qualify for a mortgage for the balance. Would buying a house and taking on such a large mortgage leave her feeling poor?
We asked Stephanie Douglas, financial planner and co-founder of Harris Douglas Asset Management Inc. in Toronto, to review Ashley’s situation.
What the expert says
“Buying a home could be one of the most important financial decisions Ashley makes, and it could well affect her ability to meet her other goals, so it’s important to take a close look at what that might. involve, ”Ms. Douglas said.
Ashley has saved $ 53,500 so far and contributes $ 200 per month to her Tax Free Savings Account. It has an annual surplus of approximately $ 22,000.
“If she saved her surplus on top of the $ 200 per month she was already saving, Ashley could reach her goal,” says the planner. “She would have about $ 130,000 in three years,” assuming an interest rate of 1.25% on a savings bank account.
In addition to her down payment, Ashley will need enough money to cover closing costs and land transfer tax, which would normally add up to around $ 25,000 on an $ 800,000 property. The tax will be reduced to about $ 16,000 because she is a first-time buyer, according to the town planner. Other closing costs, such as legal fees and title insurance, could add an additional $ 4,000.
If Ashley deposits less than 20%, the loan will be considered a high ratio mortgage and she will need mortgage default insurance. “Based on the purchase of a property for $ 800,000 with a down payment of $ 100,000, she would consider mortgage insurance estimated at $ 21,700, plus provincial sales tax,” said Ms. Douglas.
Instead, Ashley might want to save a little longer. “Even if it would take Ashley longer to save a 20% down payment, she could avoid the added cost of mortgage default insurance,” the planner explains. She suggests that Ashley meet with a mortgage broker when she’s ready to buy so that she can get a more accurate estimate of all the costs involved. “It will also ensure that she is aware of any new first-time home buyers.”
(For example, the federal government offers a first home ownership savings account for people under 40 to save up to $ 40,000 for a down payment.)
To qualify for mortgage insurance from the Canada Mortgage and Housing Corporation, Ashley would need a debt service ratio of less than 39 percent, says Ms. Douglas. “This means that payments of principal, interest, taxes, heat and half of condominium fees, if any, cannot exceed 39% of his gross income, or $ 3,575 per month depending on his current income, ”says the planner. “Getting pre-approved before you start home hunting is the best way to get a better idea of what she can spend. “
The five-year fixed mortgage rate is about 2.5%, which, on a mortgage of $ 721,700 (assuming she incorporates the cost of mortgage insurance into her mortgage), would mean a monthly payment of $ 3,233, according to planner. This assumes 25 years of amortization, the longest possible for a high ratio mortgage.
“That means she could spend at most an additional $ 342 per month on taxes, heating and 50 percent of condominium fees,” says the planner. “Given her lifestyle expenses, including her TFSA savings, and assuming $ 3,575 per month for housing, she would only have a surplus of $ 155 per month,” says the planner. “That doesn’t leave much room for his other goals. “
While Ashley’s situation might change over the next few years – she might get pay raises that would make her home purchase more achievable, for example – “I would suggest that she save longer or consider buying. cheaper property, ”says Ms. Douglas. “She might also look for areas of her budget to cut over the next three years to increase her down payment – for example, get creative with freebies to reduce the $ 250 monthly she currently spends,” the planner explains. “I suggest keeping housing costs at a maximum of 30% of gross income, which in Ashley’s case would be $ 2,750. “
Before buying a property, Ashley should also put money aside for an emergency fund.
Not having one could lead to a spiral of debt if unforeseen costs such as home repairs arise, according to the planner. She recommends setting aside three to six months of living expenses, or about $ 12,000 to $ 25,000. Ashley is expected to increase that number after buying the property to reflect her higher housing costs.
Ashley invested her savings in a mix of equities and fixed income exchange traded funds. While the performance has been good – and may help her make her down payment sooner if the market is doing well – if the market falls, it could derail her three-year plan, notes Ms. Douglas. “Because investing is very emotional, she can panic and sell her stocks at a loss, especially if the market is approaching her target date.”
If that happens, Ashley may have to delay buying her home, buy a cheaper home, or make a smaller down payment – potentially taking out a larger mortgage in the process, according to the planner. Keeping funds in cash would also allow it to profit from a potential drop in house prices.
Ashley is in a high tax bracket and is a first-time home buyer, so it might be a good idea for her to take advantage of the federal government’s Home Buyers’ Plan, where $ 35,000 in an RRSP account can. be used to buy a first property, the planner says. Ashley has $ 40,900 in unused contribution room. “The advantage of using the Home Buyers’ Plan is that she will be able to reduce her taxable income by claiming RRSP contributions, which will allow her to save even more for her down payment,” says Ms. Douglas. “It could get him to reach his down payment goal faster. “
The funds withdrawn under the Home Buyers’ Plan will have to be repaid into his RRSP over a period of 15 years, starting two years after the first withdrawal. Borrowed funds must have been in the RRSP for 90 days or more before they can be withdrawn.
The person: Ashley, 32
The problem: Can she afford to buy a house for $ 800,000?
The plan: Try to save at least 20% down payment, plus closing costs, to avoid paying mortgage default insurance, even if it means you have to wait a little longer.
The reward : A realistic idea of how to proceed.
Monthly net income: $ 7,000
Assets: Bank accounts $ 30,000; TFSA $ 23,500; defined benefit pension plan contributions to date $ 18,000. Total: $ 71,500.
Monthly expenses: Rent $ 1,800; home insurance $ 25; transportation $ 265; groceries $ 200; clothing $ 150; gifts, charity $ 300; vacation, travel $ 200; meals, drinks, entertainment $ 600; personal care $ 100; sports, hobbies $ 200; subscriptions $ 50; health care $ 50; health and dental insurance $ 15; life insurance, disability $ 110; communications $ 130; TFSA contributions $ 200; contributions to the pension plan $ 700. Total: $ 5,095. Surplus $ 1,905.
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