Housing costs in Vancouver are making life hard for a couple we'll call George and Colleen. George, a physician in a residency program, is 32. Colleen, a school teacher, is 34. With a combined gross income of $67,857, including government benefits for their year-old baby, they would be able to live reasonably well in most towns in Canada. However, in Vancouver, where the prices of houses have risen astronomically, they are just getting by.
George has another five years in his residency program. Colleen has been on maternity leave. She has reduced her work to just once a week to care for her daughter.
They rent a basement apartment for $1,200 a month. With net debt of $33,800 (excluding debts owed to their own registered retirement savings plans), more than half their gross income even when Colleen is working full time, they feel trapped.
"We would like to buy a place, but we have no money for a down payment," Colleen explains. "Even if I were working full time, we couldn't afford a mortgage. We haven't contributed to RRSPs in a few years."
What our expert says:
Facelift asked Derek Moran, a registered financial planner who heads the Kelowna, B.C.-based, fee-only consultancy Smarter Financial Planning Ltd., to work with George and Colleen. The goal: Devise a way to get through lean years until George can practice on his own, generating an income appropriate to a specialist, and Colleen can return to full-time teaching.
"They are sensible people living within their means in one of Canada's most expensive cities," he explains. "They are former home owners and want desperately to get in on the current real estate boom."
Modest though they are, the couple's finances are rather complex, Mr. Moran notes. The main liability is a $33,800 debt on a line of credit. There is another $25,268 due to be repaid to the couple's Home Buyers' Plan for a house they occupied in another city and for the Lifelong Learning Plan. Both programs allow registrants to borrow from themselves, so the debt is really a nullity. But the money, which has to be paid back to Colleen's RRSP, is not available to earn interest or generate other growth, he notes.
Their financial assets are $24,000 of RRSPs, $5,000 in cash and a great deal of human capital in the form of advanced degrees in medicine and science. Monetizing human capital is tough to do without a job or a product. George has a job and maternal duties prevent Colleen doing more with her own master's degree in her field of physical science.
There are ways for George and Colleen to escape the renter's trap and begin participating in the Vancouver real estate boom. Buying a house, even a modest one, would allow them to generate equity, adjust costs by selecting various amortizations and invest time and skill in improving their property.
George and Colleen have a sympathetic banker. He has offered to finance the purchase of a house with the understanding that there would be no payments until George has finished his training. That's very accommodating, but five years of compound interest would be a huge sum to pay, the planner adds.
George and Colleen could downsize their plans. A condo for $400,000 would be an alternative to a house. Some banks will lend up to the full value of a home. Without any down payment, a mortgage at 5.3 per cent with a 25-year amortization would cost $2,395 a month, not including property purchase tax, GST and mortgage insurance costs. It would be paid off by the time George is 57 and Colleen 59.
Is it worthwhile to take on a $400,000 debt to buy accommodations similar to those they already rent for $1,200 a month? In spite of the advantages of ownership, it makes sense to continue renting, Mr. Moran insists. Buying would cost twice as much each month in mortgage charges as current rent and would expose the couple to the risk of a housing collapse as well as property tax increases and rising interest rates. If they were to combine their rent payments of $1,200 a month with monthly savings and take money from a miscellaneous account, they could afford the mortgage, but they would have no spare change for anything else, he says. The conservative thing to do is wait until George is in practice and can manage a conventional 25-per-cent down payment, he suggests.
If George and Colleen find that real estate prices soften, they could save as much as $100,000 on a $400,000 condo. With the financing costs added in, that saving would actually be $296,368 by the time the mortgage is paid off.
George will be a specialist in five years. His income should rise to $158,535 after tax at rates applicable in 2005, Mr. Moran calculates. Even that sum will require some discipline, for he will have to educate his children, finance a home and save for retirement.
Colleen will be able to return to work full time by 2013 when their child will have entered elementary school. She will be able to earn a salary of $62,000 in 2006 dollars.
It is difficult to look 28 years ahead to George's retirement at 60, but the exercise may be worthwhile. Assuming that they want to have $75,000 in pretax retirement income, that they will each have full Canada Pension Plans that currently pay a maximum base rate of $10,135 a person, and that they qualify for full Old Age Security payments that currently generate $5,850 a person, they will need to produce $43,030 a year on top of government pensions that currently total $31,970 for the couple.
Assuming they each live five years beyond their life expectancy, then assuming a return of 6 per cent on financial assets and inflation of 3 per cent a year, the couple would require $706,340 of financial capital at the start of retirement at 60, Mr. Moran calculates. They would need to save $17,788 a year after George goes into practice to achieve the $75,000 pretax target income.
If they wished to boost their retirement income to $100,000 in 2006 dollars, George and Colleen would need capital of $1,116,714. To build up this amount, they would have to save $28,122 a year in the period following George's entry into full-time practice and until retirement. Based on a projected gross income of $300,000 or more in 2006 dollars when both of them are working full-time, that should be feasible, the planner explains.
"For now, the best thing this couple can do is to maintain their discipline and buy sufficient life insurance for their child," Mr. Moran says. For $500,000 on both their lives, the combined premium would be $580 a year, he adds.
"The lack of financial growth will be frustrating for this family for the next five years," the planner says.
"We have felt desperate to buy a house," Colleen says. "We understand from this analysis that patience may have a reward."
George, 32, and Colleen, 34, live in Vancouver with year-old daughter.
Net Monthly Income
$4,662, including child care benefits.
Car $2,000; RRSPs (Colleen) $24,000; cash $5,000.
Rent $1,200; food $800; entertainment $100; clothing $200; child care $400; car fuel, repairs $150; car, home insurance $100; life insurance $25; charity, gifts $60; miscellaneous $420; interest on loans $170; homebuyer's loan repayment $225; savings, $812.
Line of credit $33,800; RRSP Home Buyers' Plan $15,468; Lifelong Learning Plan 9,800.
Quote: "They are sensible people living within their means in one of Canada's most expensive cities. They are former home owners and want desperately to get in on the current real estate boom."