Laying A Foundation For First House


In Toronto, an engineer we'll call Robert, 36, and his wife Vicky, 31, an administrator, work in large organizations. They want to buy a home in or near Toronto. But with monthly combined after-tax income of $6,600, net worth of $4,500, and a plan to have Vicky take a year's maternity from her job, their resources are limited.

"We just want to put down roots in three to four years," Robert says.
"But we don't want to be trapped by a mortgage that's too big for our income," Vicky adds.

What our expert says

Facelift asked Derek Moran, head of Smarter Financial Planning Ltd. of Kelowna, B.C., to work with Robert and Vicky in order to find a way to finance a house purchase.

"Making this work is going to require shuffling some assets and doing diligent saving," Mr. Moran says. "This is not an easy case, for a starter house in the Greater Toronto Area would cost $300,000 to $350,000."

Robert and Vicky already have an income property and they use it a small part of the time for personal purposes. This doesn't disqualify them from using the Home Buyer's Plan, because it has never been their principal residence.
The 2009 federal budget bumped up the Home Buyer's Plan RRSP withdrawal limit to $25,000 per spouse from $20,000. This money must be repaid over 15 years. If the couple can amass $50,000 in their RRSPs and if they use all of that money for a Home Buyer's Plan loan, they would have to repay $1,666.68 each a year to their RRSPs.

There is also a First-Time Home Buyer's Tax Credit of $5,000 on a qualifying home acquired after Jan. 27, 2009. The credit would provide up to $750 in federal tax relief beginning this year, Mr. Moran says.
They could sell their income property and harvest $14,000 net worth in equity, but selling costs might reduce that sum. Moreover, Robert and Vicky feel that the rental property will generate profit equal to expenses, including the mortgage, by the third season of their ownership, which will be in 2011, the planner says.

Robert and Vicky have a combined total of $6,700 in their RRSPs, $700 in a Tax-Free Savings Account, and $2,500 cash. Robert has $21,580 of contribution room for the 2008 tax year, Vicky has $26,330. Robert is in a higher tax bracket, so the couple should funnel their savings to her plan, Mr. Moran says. He gets the tax refund and she gets the RRSP growth.
Robert and Vicky need to save $1,400 a month, as they expect to do by fall, to bring their present RRSP balance up to $50,000 within no more than three years. Tax refunds from RRSP contributions should add to savings, Mr. Moran says.

If the house they choose costs $325,000 and if they have $50,000 for a down payment, they will have to borrow $275,000. If they obtain a 5-per-cent mortgage with a 25-year amortization, they will have to pay $1,600 a month until Robert is 61. There will be other costs, including repayment of a total of $280 a month for the Home Buyer's Plan and property taxes of about $275 a month. They currently pay $1,125 monthly rent. Ownership costs will be at least $2,355 a month.

Having children will further strain their budget. Vicky's income will decline during maternity leave. Toronto real estate prices could soften in the next few years, providing a buying opportunity.
In three years, if they have been frugal and perhaps have postponed having children, they can swing it, using the $1,125 cash they now pay for rent and their present cash retention of a total of $1,400 each month, Mr. Moran says.

They should put their money into a conservative asset class, perhaps GICs that are cashable when they anticipate buying their home.
Stocks and equity portfolios are no place for short-term savings, he says.

Looking 30 years ahead to retirement, the couple can expect that Robert's present defined benefit pension plan will offer $25,000 at age 60 and $34,000 a year at age 65. If he chooses to retire at age 60, he will get a workplace bridge pension to age 65 of $7,390 a year.
Vicky will have a defined benefit pension as well of an estimated $19,380 a year. Neither plan is indexed. Robert will receive CPP benefits that currently have a maximum payment of $10,905 and Old Age Security benefits that currently pay a maximum of $6,204 a year.

If Robert qualifies for the maximum CPP benefit and Vicky half of the maximum, they would receive public pensions of $28,798 a year.
On top of their employment pensions, they could have total retirement income in 2009 dollars in a range between $53,748 and $82,128, the variable being how long Vicky will work and what she will earn and when each retires.

"If Robert and Vicky can be disciplined savers and cut a few expenses, then they can take advantage of deals that may be available if the present softness of the Toronto housing market continues," Mr. Moran says.

Client situation

The People

Toronto couple in their 30s hoping to buy a first home.

The Problem

Little savings and minimal net worth for a house purchase.

The Plan

Make use of Home Buyer's Plan and federal grants, build RRSPs.

The Payoff

Ability to afford a first house and to retire with moderate income.

After-tax monthly income



Rental property $150,000, RRSP $6,700, TFSA $700, cash $2,500, car $1,500. Total $161,400.

Monthly disbursements

Mortgage on income property $795, taxes & upkeep on income property, $340, rent $1,125, utilities, phone, Internet $265, food & restaurant $440, entertainment $340, clothing $150, savings for RRSP and TFSA $1,400, car fuel, repairs $200, car & home ins. $100, travel $200, student loan repayments $260, line of credit repayments $450, gifts and charity $125, misc. $300. Total $6,600.


Mortgage on income property $136,000, line of credit $13,500, student loans $16,400. Total $165,900.

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