National Post (National Edition)
Couple needs to pay down debts to start saving for home they would like
In Ontario, a couple we'll call Louis and Kathy, 48 and 43, respectively, are raising 13-year-old twins. They bring home $6,730 per month including the Canada Child Benefit. In this family, Kathy is the principal breadwinner. She works in technology. Louis, formerly a football coach, is unemployed. He has not worked since the beginning of 2020.
It's been a tough year, for Kathy was also laid off in the spring. She got a severance package, then found a new job with higher pay than her former job provided. Her income is now $130,928 per year before tax. Her pay boost made up for the $30,000 Louis used to earn before tax.
At present, they pay rent of $1,947 per month. They have $41,203 in debts including $15,000 for a car loan, $17,330 for a personal loan, and $8,873 for their credit cards. The sum, $40,618, is an anchor slowing their migration from renting to owning. They would like a home with a $600,000 price tag, to provide an education for their children and then to retire when Louis is 65.
Family Finance asked Eliot Einarson, a planner who heads the Winnipeg office of Ottawa-based Exponent Investment Management, to work with the couple.
Louis' present unemployment and Kathy's unemployment in 2020 hampered their savings plans. Their RESP with a present balance of $13,077 with contributions of $200 per month or $2,400 per year plus the 20 per cent CESG grant of $480 per year would grow to $26,800 by the time the kids are 17. That sum would provide each with $3,350 per year for post-secondary education. Summer jobs would be needed to meet basic costs not including room and board at most institutions in Ontario.
Louis and Kathy see buying a house as a high priority. They do not have much cash for a down payment — indeed, paying off existing debts has to precede acquiring fresh debt for a house.
For now, their budget has a $500 surplus, which they save. It's not much of a buffer given their ambitions.
If they were to refinance and combine the $705 debt-service charges they already support plus the $1,947 rent they now pay, total $2,652, they would still not have enough to purchase a $600,000 house with a 25 per cent down payment. They do not have $150,000 up front for a conventional mortgage. If they could make that down payment, then a 30-year loan at 2.5 per cent would cost them $1,778 per month.
If they were to go the route of an insured mortgage, then after a $35,000 down payment, they would have a $565,0000 balance to pay. The CMHC fee in Ontario would be $22,600 and leave them owing $2,753 per month for, say, 22 years to Kathy's age 65. With property taxes and insurance, say $500 per month, their total monthly bill for ownership would be $3,253. They can't afford that, at least not yet.
They do, however, have $40,000 in cash on hand from Kathy's severance pay. She is keeping $10,000 for tax and another $10,000 for an emergency fund. She has $9,976 in her TFSA and adds $95 per month. She has an RRSP and a spousal RRSP with a total value of $124,651 to which she adds $210 per month through a payroll deduction. They have two Registered Education Savings Plans with a total value of $13,077 to which they add $200 per month, half the allowable annual limit. They also have two cars worth a total of $35,000. Take off $41,203 liabilities and their net worth is $181,501. It is not much of a base for buying a home, but it could work, Einarson says.
If they use $40,000 from Kathy's severance to pay off their debts, they would free up the cash flow they need to get into a house. They could then use $35,000 from RRSPs for a homebuyers' plan loan for the down payment.
Their $9,976 TFSA and future savings could be used as an emergency reserve.
Waiting for Louis to find another job would make this plan an even better bet.
If Louis can find another job which pays at least $30,000 per year with an estimated take-home of $24,000 after taxes and deductions, they could build retirement capital. Kathy, with the higher income, could contribute to a spousal RRSP for Louis. If she adds $1,320 per month to her $2,600 spousal RRSP then in 22 years at her age 65 she would have a balance of $503,195 assuming a rate of return of three per cent after inflation. That sum could provide taxable income of $28,055 per year for the following 25 years to her age 90.
Kathy's personal RRSP would have a new starting balance of $89,651 after the $35,000 Home Buyers' Plan withdrawal and see payroll contributions of $217 added each month. That account would grow with the same assumptions to a value of $253,684 in 22 years when she is 65. That balance would then be able to support payments of $14,465 per year for 25 years to her age 90.
Let's assume they retire when Kathy turns 65 and Louis turns 70 and the income from the RRSPs begins then. Louis could defer his OAS to age 70, adding 36 per cent to his base $7,362 benefit, pushing it to $10,023. We can estimate that he would also receive half the CPP maximum with a 42 per cent boost for deferral to age 70, net $10,018. Kathy would receive $7,370 OAS at 65 and $14,160 CPP at 65. Their total annual income would be $84,091. After splits of eligible income, they would pay average tax of 12 per cent and have $6,166 per month to spend. That's sufficient after their mortgage is paid and the kids are gone.
THEIR BUDGET HAS A $500 SURPLUS, WHICH THEY SAVE. IT'S NOT MUCH OF A BUFFER GIVEN THEIR AMBITIONS.