Laura Proctor/The Globe and Mail
At age 37, freelance writer and editor Marsha is torn between having a secure roof over her head and the elusive dream of having more living space. Marsha’s income, while a relatively high $100,000 after business expenses last year is volatile, even precarious. After two rounds of industry layoffs, she’s worried about the future and her livelihood.
With a live-in partner, Marsha’s one-bedroom Toronto condo doesn’t give her much space for a home office or a room for her mother to sleep when she visits. Marsha’s partner contributes $500 a month toward the rent but they keep their finances separate.
“We’d really like to live in a larger space, but things are so expensive,” Marsha writes in an e-mail. Her partner’s income also fluctuates. “We both work in creative industries and one of us is bound to have less profitable years,” Marsha adds. “I don’t want a massive financial burden on one person if that happens.”
She wonders if she should make extra payments on her mortgage in good years or contribute to a tax-free savings account or registered retirement savings plan. She hopes to maintain her existing standard of living after she is no longer working.
We asked Hannah McVean, a certified financial planner at fee-only Objective Financial Partners Inc., to look at Marsha’s situation.
What the Expert Says
Marsha’s three main goals – paying off her mortgage, upsizing her living space and saving for retirement – are pulling her in different directions, Ms. McVean says.
Marsha is considering a number of different housing options: buying a duplex with a friend, moving to the suburbs and buying a house there, renting out her condo and moving to a two-bedroom rental, or staying put.
Ms. McVean has some concerns. Increasing the mortgage size is not in keeping with Marsha’s goal of becoming debt-free in 10 years, the planner notes. A higher mortgage is riskier considering Marsha’s income variability, and moving to the suburbs might mean additional spending on cars and transportation.
Marsha has found duplexes available for $1.5-million, or $750,000 for each co-owner. She’d sell her condo for $600,000 and pay off her mortgage. After 5-per-cent selling costs, she’d have $277,000 for a down payment. Based on mortgage affordability calculators, Marsha could afford a property valued at anywhere from $576,000 to $636,000.
“With interest rates so high, she may not qualify for a large enough mortgage to buy a $750,000 property today,” Ms. McVean says. As well, Marsha’s “variable income creates another hurdle to mortgage qualification.”
Assuming she can get a mortgage for $473,000 (purchase price of $750,000 minus $277,000 down) at an interest rate of 5.5 per cent and an amortization of 25 years, the monthly payment would be $2,885. Add in estimated taxes, insurance, etc., at $600 a month and home maintenance costs at 1 per cent of property value annually, or $625 a month, and the total costs estimated for half a duplex would be $4,110 a month, the planner says. This is an increase of $1,575 a month over Marsha’s current housing costs.
“In this scenario, she is left with only $4,100 per year for savings, additional discretionary spending, and repaying the mortgage early,” the planner says. If Marsha paid an additional $4,100 annually, the new mortgage could be repaid by 2044, when she is age 58. This is not in keeping with her goal of being mortgage-free in 10 years or less.
Marsha could sell her condo and look for a suburban home but the price would likely be even higher than she would pay for half a duplex. While a move to the suburbs would give them more space, Marsha relies on public transit and cycling to get around and likes living in a walkable community, the planner says. Even if Marsha could finance and carry a place in the suburbs, “I question whether this option would suit Marsha’s lifestyle.”
Marsha is also thinking of renting out her one-bedroom condo and moving to a two-bedroom rental unit. She figures she could get $2,300 to $2,500 a month, which would cover expenses. She would pay $2,800 to $3,000 for a two-bedroom. If they found a place for $2,800 a month, for example, Marsha would pay $2,200 and her partner $600.
“Marsha has concerns about being a renter again,” Ms. McVean says. She’s worried about bad landlords and the risk of the rent increasing over time. “Plus, while not mentioned, I’m sure there’s also nervousness about bad tenants when renting out her own apartment.”
From an affordability standpoint – Marsha’s most pressing concern – renting a larger unit creates the least amount of additional expense, at less than $2,000 a year, the planner says.
Alternatively, Marsha could stay put, pay off her mortgage and save for retirement. What to do?
“Our role as financial planners isn’t to tell you what to do; it’s to provide information and guidance to help you in making your decisions, which are ultimately personal,” Ms. McVean says.
In her application Marsha asks “how much money a 37-year-old like myself should have saved right now for retirement.” The planner turns the question around to whether Marsha is on track to reaching her early-retirement goal based on her spending and lifestyle.
Marsha wants to retire at age 55. “I assume that Marsha will be eligible for full Old Age Security benefits and 55 per cent of Canada Pension Plan benefits at age 65, and that she will start saving for retirement at age 47 after paying off her mortgage,” the planner says. That assumes Marsha stays where she is.
She projects that in that scenario Marsha will be able to retire with a sustainable spending rate of $35,159 a year, more than she is spending now.
The planner’s assumptions include life expectancy of age 95, a rate of return on investments of 5.3 per cent, mortgage interest of 5.5 per cent and an inflation rate of 2.1 per cent.
Instead of putting all her surplus cash flow into the mortgage, in good income years Marsha could contribute two-thirds to the mortgage and one third to her investments, focusing first on her TFSA, Ms. McVean says. She is concerned that Marsha will have too much of her net worth tied up in her home and not enough other assets.
The planner also suggests Marsha increase her emergency fund to 12 months of expenses from six. “While this might be too robust for those with steady employment income, Marsha’s income was $30,000 lower in 2022 compared to 2023,” Ms. McVean says. “Combined with her uncertainty about the future of her career, a year’s emergency fund may provide the flexibility to find new work if she needed to.”
Client Situation
The person: Marsha, age 37.
The problem: Can she and her partner afford to move to a larger place? Should she pay off her mortgage or save for retirement?
The plan: Consider whether the risks of moving to a larger place are worth it. Contribute a third of extra income to a TFSA and two-thirds to prepaying the mortgage.
The payoff: A better understanding of the trade-offs she faces and ideally less worry about income insecurity.
Monthly net income: $6,230 in 2023, variable.
Assets: Condo $600,000; RRSP $19,000; bank account (emergency fund) $25,000. Total: $644,000.
Monthly outlays: Mortgage, property taxes, property insurance, utilities, and repairs $2,534; transportation, gas, car insurance, maintenance, parking $60; groceries $500; clothing $75; charitable and gifting $100; phone, internet, cable $95; vacation $200; entertainment, dining out, alcohol, hobbies, personal care $625; health care expenses $105; RRSP and TFSA contributions $0. Total: $4,294.
Liabilities: Mortgage $293,000 at 5.5 per cent.
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Some details may be changed to protect the privacy of the persons profiled.
