Jenny Reed is ready for a change. Though the Cassels Brock & Blackwell LLP associate and her husband Chris Franco have been happy in their rented apartment in Toronto’s Bathurst and St. Clair neighbourhood, the dream of home ownership is becoming more alluring by the day.
“We’re sick of paying rent and now feels like the right time,” says Reed of the $1,310 their two-bedroom apartment costs them each month. “We just don’t have the experience or time to plan the financial side of it.”
Together, Reed and her husband make around $180,000 each year. However, Chris, a student in his last year of medical school, will see his salary increase to around $60,000 a year during his residency, and to about $225,000 the following year when he begins practising. Still they worry about Chris’s student debt of $53,500.
Precedent asked certified financial planner Jason Heath of E.E.S. Financial Services in Markham, Ontario, to look at the couple’s needs and numbers.
“Using rough numbers, I figure you guys could be approved for an $800,000 mortgage quite easily,” Heath tells them. Reed’s jaw not-so-subtly hits the floor, but Heath isn’t finished: “That said, what a bank will approve and what’s in your best interest are often different things.”
Heath says the couple should buy only if they plan to live in the property for at least five years. That’s because transaction costs can add up quickly and negate the benefits of buying versus renting.
He cites the example of buying a $600,000 property, with a five percent down payment of $30,000 (the most they can afford if they’re set on buying within the next couple of years). Then there’s Ontario and Toronto land transfer taxes of about $8,000 each (though they’ll get a $3,725 rebate on the latter), plus $16,000 for required CMHC insurance (a down payment of 20 percent would be required to avoid CMHC insurance). The total cash they’d need at time of purchase is about $50,000.
He adds that they will see a major jump in their monthly housing costs, from $1,310 to $3,000. “But you have enough cash flow to afford it,” he says. Heath advises the couple to focus on paying down Chris’s student debt and then building the $50,000 — a process he says should be possible within 12 to 18 months.
Heath also has some surprising advice: “Stop contributing to your RRSPs — for now.” Reed has accumulated $26,500. Though Heath says RRSPs are important in the long term, he urges her to take advantage of the Home Buyers Plan which lets first-time buyers make a one-time tax-free withdrawal from their RRSPs of up to $25,000.
After mulling over Heath’s advice, the couple has decided to follow his recommendations and aim for a $600,000 mortgage in the next 18 months. Though Heath says 90 percent of the time a variable mortgage is best, today’s low rates are at the “sweet spot” and advises choosing a fixed-rate mortgage.
For Reed, getting this financial advice has been a step in the right direction. “I was surprised there were so many costs involved,” she says. “But now that we have a good sense of how everything fits together, Chris and I are eager to get into a house as soon as we can.”
Tips for buying real estate
“Lawyers tend to think they know everything about buying a home,” says Zoe Kalmanson, a residential real estate lawyer at Torkin Manes LL P. But a real estate course in law school isn’t enough. “Just because you’re a lawyer, doesn’t mean you get it.” Here, Kalmanson’s tips for lawyers buying real estate:
What’s in a name:
If you’re a partner, consider putting your property in a spouse or child’s name. If you or your firm is sued, having the deed in someone else’s name provides extra protection.
Protect your title:
Title insurance is essential when buying any new property. Is your neighbour complaining you built too close to the property line? Title insurance protects your interest in your property against any claims made against it.
Photo by Daniel Ehrenworth