Yasmin will be making more money, but what are the pros and cons of buying a condo in pricey Vancouver?Jennifer Gauthier/The Globe and Mail
With a newly signed contract in her pocket, Yasmin is feeling flush – so much so that she wonders if she can buy a place of her own in or around pricey Vancouver.
It could be a condo on the East Side or a cottage on the Sunshine Coast, or maybe on one of the Gulf Islands. She could go in with a partner or on her own; it’s up in the air. As it is, she’s paying rent of $1,565 a month.
“After decades of low-paying work, I finally have a high-paying job on a multiyear contract,” Yasmin writes in an e-mail. She’ll be earning more than $130,000 a year. She’ll also be contributing to a locked-in defined contribution pension plan.
“I’d love to go from renting to buying property,” she writes.
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Yasmin is 55 years old with two children, aged 16 and 24, both with registered education savings plans to cover their schooling. Yasmin is in a relationship and her partner lives in her own mortgage-free condo. The partner might consider renting out her condo and moving in with Yasmin, contributing $1,000 a month, but she is “reluctant to risk equity,” Yasmin says.
Yasmin has savings, investments and a defined contribution pension plan from a previous employer - all totalling about $533,500, excluding RESPs. For the most part, she lives frugally, taking a lunch, biking to work and getting by on “quite a sparse work wardrobe.”
“Can I afford to enter the Vancouver property market with or without the help of my partner?” Yasmin asks. “Is buying a property a good idea for someone in my situation? Will I be able to cover the mortgage payments in future through my pension?”
She hopes to retire the year she turns 64 with spending of $75,000 a year after tax, but that’s just a guess, she adds.
We asked Shay Steacy, a certified financial planner at advice-only Modern Cents in Oakville, Ont., to look at Yasmin’s situation.
What the expert says
With her new job contract, Yasmin is excited at the prospect of buying a home of her own, Ms. Steacy says. Her budget is $675,000.
She wants to know whether she can afford the mortgage payments now and after she is no longer working.
In preparing her forecast, Ms. Steacy assumes Yasmin buys on her own and does not share the carrying costs.
Based on her net income of about $8,145 a month and her desire to spend more on travel, Yasmin can afford to spend $66,000 a year when she retires, less than her initial target but more than the $63,480 she is spending now. This assumes level spending each year, adjusted for inflation and doesn’t build any buffer for future health care costs.
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As for her savings and investments, the planner suggests Yasmin set aside three to six months’ worth of expenses in an emergency fund apart from her tax-free savings account, and that she use the TFSA for long-term investing instead.
First, Ms. Steacy looks at the scenario in which Yasmin continues to rent. She assumes Yasmin saves and invests everything above her $63,480 a year of expenses, and doubles her travel budget from her first year of full retirement to age 80; she’d leave a projected estate of $400,000 in today’s dollars at age 96.
“If she continues to rent to keep her living costs low, Yasmin is on track to a comfortable retirement with a built-in safety net for future health care costs,” the planner says.
“She could increase her base living costs and still not outlive her investments, but there would be a trade-off for the future unknowns of an increased life expectancy or higher health costs in future years.”
In the second scenario, Yasmin buys a condo this year for $675,000 with 20 per cent, or $135,000, down. Closing costs are estimated at between $10,000 and $15,000, including legal fees of $2,500; land transfer tax of $3,500; and moving expenses and home items, $5,000 to $10,000.
Assets available are $76,000 from her TFSA ($106,000, less recommended emergency fund of $30,000); RRSP withdrawal under the first-time home buyers plan $32,000; first-home savings account $24,000 (after 2026 deposit); non-registered withdrawal $38,000 after estimated tax on unrealized capital gain.
Yasmin would have a total of $170,000 for a down payment and closing costs.
She’d take on a mortgage of $520,000, which would cost $2,800 to $2,900 a month based on current rates. As well, she’d have an increase in home expenses because of property tax, condo fees, utilities, and homeowner’s insurance of upward of $1,000 a month. The planner recommends a contingency fund for maintenance, upkeep and special assessments of $500 a month.
“Altogether, Yasmin could be facing housing costs of $4,500 a month if she buys, compared with less than $1,600 a month now. Her cash flow would swing from positive to negative and she’d have no more to contribute to her TFSA and RRSP.”
Looking ahead to when she retires, Yasmin would run out of investable assets before the mortgage is paid off, Ms. Steacy says. She’d be forced to sell her home at age 74. When she went to rent again, she could face higher rental costs than she otherwise would have had she stayed put.
“If she invests the proceeds of the sale, she’ll be able to meet her desired spending goals,” the planner says. “But her safety net for future health care would be smaller than if she didn’t buy, with only $100,000 in today’s dollars of estate value at age 96.”
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A further caution: “While we can illustrate what selling the house could look like using financial projections, being forced to sell your home because of lack of cash flow is not something people like to experience in real life,” Ms. Steacy says.
Yasmin must ask herself: “Why does she want to buy a place? Is it because she feels she is throwing money away on rent? Maybe home ownership would make more sense if moving in with partner is the right step in their relationship. She should step back and assess before making a rushed decision,” Ms. Steacy says.
Yasmin may also want to buy because she’d enjoy the pride that home ownership can bring, the planner says, but it would also bring the potential of being house rich and cash poor. Paying off a mortgage is a good forced saving, but the growth in value of real estate is unknown, she adds. “Is she buying because she thinks the only path to financial security is real estate?”
Yasmin should not be looking at a principal residence as an investment. “It’s a cost of living.” Alluring rates of return on real estate recently “are missing key elements; in particular, the cost of ownership compared to what an investment portfolio could have achieved.”
“Long-term, well-diversified investments can outperform real estate after you consider all the extra costs,” the planner says.
Client situation
(Income, expense, asset and liability numbers are provided by the applicant.)
The People: Yasmin, 55, and her two children.
The Problem: Can she afford to buy a condo for $675,000 without jeopardizing her financial security?
The Plan: Measure carefully the pros and cons of renting versus buying. Buying doesn’t leave her much of a buffer for health care in her old age and she’d probably have to sell sooner than she might want to anyway.
The Payoff: A better understanding of the decision before her.
Monthly net income (current, estimated): $8,145.
Assets: Cash $10,000 in the bank; mutual funds $41,500; TFSA $106,000, RRSP $32,000; DC pension plan $320,000 ($163,000 locked-in, $157,000 non-locked-in); and $24,000 in a first home savings account. Total: $533,500.
Monthly outlays: Rent $1,565; insurance $15; transportation $65; groceries $400; clothing $120; gifts $30; charity $500; vacation, travel $500; other discretionary $675; dining, drinks, entertainment $605; personal care $100; pets $20; sports, hobbies $30; subscriptions $15; health care $90; communications $110; pension plan contributions $450. Total: $5,290. Surplus: $2,855.
Liabilities: None
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Some details may be changed to protect the privacy of the people profiled.
Editor’s note: An earlier version of this article contained incomplete details describing the client’s pension plan assets. This version has been updated.
