If Pete and Penny save up enough money, they figure they could find a condo in their own neighbourhood in the $750,000 to $850,000 price range.Tijana Martin/The Globe and Mail
Now in their late 20s, Pete and Penny are joining a growing number of millennials moving back home to save for a down payment on a place of their own. They want to stay in the Vancouver-area neighbourhood where they grew up.
“Pete and I have been together for nine years now, and got married in 2021,” Penny writes in an e-mail.
“We have recently decided to move at the end of the summer from our current rental into my parents’ suite to save money,” she writes. “Instead of paying rent, we will be paying them a proportion of taxes and utilities, about $500 a month.”
Pete is 29 and earns $85,000 a year in health care. Penny is 28 and works in communications for the local government, making $73,000 a year. “Pete and I are both thrifty people who prefer not to spend large amounts of money if it can be avoided,” Penny adds.
If they save up enough money, they figure they could find a condo in their own neighbourhood in the $750,000 to $850,000 price range. “We know prices in this area are high, but we really like where we live since it is where we both grew up and has all the outdoor activities we love.”
They also might want to have children at some point.
The parents are willing to contribute $125,000 toward a down payment.
We asked Jason Maule, a certified financial planner at Objective Financial Partners Inc. in Markham, Ont., to look at Pete and Penny’s situation.
What the expert says
A good first step for the young couple is to check out an online mortgage calculator or work with a mortgage broker to get a preapproval so they understand what they can afford, Mr. Maule says.
This will show them the maximum the bank will lend, “although they might not want to go all the way to the top of that budget.” That’s because mortgage payments alone doesn’t factor in the true cost of home ownership.
“Once they have an idea of what they are looking for and how much they want to spend, my recommendation is to start playing house,” the planner says. “Pretend you now own that house. Set up a budget with your new mortgage payment, property taxes, maintenance fees, utilities, insurance, cost to furnish, home improvements, and any other additional costs that may come with your new purchase,” he says. “I will typically work with clients to forecast what those costs realistically are to get a better sense of home ownership instead of simply what the mortgage cost is.”
Their long-term goals, such as starting a family, moving to a bigger house, and eventually retirement, all come with increasing costs, Mr. Maule says. “Plot out what costs might be associated with starting a family,” the planner says. “You don’t want to buy so much house you can’t afford to become parents.”
Pete and Penny are paying down student loans at a rate of $1,000 a month, more than the B.C. loan program requires, the planner notes. “Getting rid of this and reallocating that $1,000 to saving for the down payment will give them a significant boost.” As well, having other debts affects what you can borrow on a mortgage.
They are also making contributions to First Home Savings Accounts, which is great, Mr. Maule says.
They will each get tax deductions for their FHSA contributions of up to $8,000 a year and $40,000 cumulatively, he says. They could also take advantage of the federal home buyer’s plan by contributing to their registered retirement savings plans.
Like the FHSA, they can claim tax deductions, but they need to repay RRSP withdrawals used for an eligible home purchase over 15 years. The 2024 budget proposed an increase in the home buyers plan withdrawal limit to $60,000 from $35,000 each. “They can fund contributions from their tax-free savings accounts and turn $10,000 in TFSA money into $10,000 in their RRSPs and a $3,000 tax refund.”
As Penny and Pete get closer to their potential home purchase date, their investments should become more conservative, Mr. Maule says. “You’d hate to be all-in on stocks and have a bear market cause your down payment to be slashed by 20 or 30 per cent.”
If Pete and Penny can keep their housings costs to 30 to 33 per cent of their after-tax income, it should allow them to continue saving after the home purchase and redirect the money to their longer-term goals, the planner says. “Hopefully, their incomes continue to increase, which will create more opportunities for saving, spending, and growing their family.”
What can Pete and Penny afford? “With their income, the maximum mortgage they could likely afford is between $300,000 and $350,000,” Mr. Maule says. “For simplicity, I rounded up to $700,000 for a decent apartment with a down payment of $350,000.” On a $350,000 mortgage, the monthly payment would be about $2,065 assuming a 25-year amortization, he says. “To this number I add condo fees, property tax, utilities, insurance and general maintenance to get a figure of $3,084 a month of housing costs, or about 32 per cent of their after-tax income.”
The down payment would include the $125,000 from their parents. “Also, I redirected $1,000 a month toward the down payment when student loan is paid off.” Living with their parents would allow Penny and Pete to save an additional $1,950 a month, the planner says, so they might have enough saved to buy in two or three years.
If $700,000 does not get them into the home they are hoping for, they may need to reduce their spending to afford a more expensive home or find ways to increase their incomes, he says. Otherwise, they risk compromising some of their long-term goals.
Can they buy in their neighbourhood? “It’s certainly not impossible,” Mr. Maule says. “It’s really a matter of what kind of home they are looking for and what their price point would be.”
They also need to think about insurance, the planner says. “Do they have life insurance in place? What happens to their new home and mortgage if one of them passes away prematurely?” Do they have disability insurance? What if one of them is not able to work for an extended period? How do they protect their future children from the unexpected if something should happen to either of them?
Most lenders offer mortgage insurance but the premiums are expensive, the planner says. If they don’t have sufficient coverage at work, they could look at purchasing their own coverage for both life and disability. “A personal policy may provide more extensive benefits and coverage options and potentially more flexibility should they change jobs.”
Client situation
The People: Pete, 29, and Penny, 28.
The Problem: Can they afford to buy a condo in their own neighbourhood?
The Plan: Move back home and save up as much money as possible. Aim for a 50-per-cent down payment to keep living costs reasonable.
The Payoff: The dream of home ownership realized.
Monthly net income: $9,500.
Assets: Cash $12,000; guaranteed investment certificates $8,060; her FHSA $16,150; his FHSA $8,825; her TFSA $90,000. Total: $135,035
Monthly outlays (current): $2,040; transportation $685; groceries $830; clothing $50; loan $1,000; charity $325; vacation, travel $260; dining, drinks, entertainment $505; sports, hobbies $175; subscriptions $85; household goods, crafts, gifts $345; dentists $40; cellphones $50; FHSAs $1,335; TFSAs $1,165; her pension plan contribution $485. Total: $9,375.
Liabilities: Student loan $15,000 at zero per cent.
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