Family file: first home

When will we catch up?

Financial Post Business January 08, 2008

Jennifer and Cory Hamin both turned 30 this year and have decided it’s time to move out of their tiny apartment in Vancouver’s North Shore and buy their first home. They have a lot of reasons for wanting to do so, among them the desire to get their belongings out of the basements of their parents’ nearby homes. Most importantly, though, the Hamins need a house because they want to start a family of their own. The only thing holding them back is Vancouver’s spiralling real estate market. Jennifer and Cory (not their real names) have been diligently putting money aside to fund their down payment, but they feel that they simply can’t keep up with the pace of local home-price increases. “It seems no matter how much money we save, it’s never enough,” Cory says.

And that’s not for lack of trying. The Hamins both earn professional salaries: Jennifer is a senior consultant and brings home $99,800 a year, and Cory is an engineer, earning $64,700. Along with $9,000 from interest on investments, their combined income is $173,500. But the Hamins live frugally. They space out major purchases, buy groceries and clothing on sale, and refuse to give in to the temptation to treat themselves to expensive cars or flashy toys. “We track everything we spend,” Jennifer says. “We certainly don’t live in poverty, but we’re trying to get our savings as high as possible because that’s the only way we can keep up with the real estate market.” In fact, their only frivolous expense is Cory’s small antique collection. Otherwise, their discipline in spending has, over the past five years, allowed them to build up cash reserves of $178,000, which they hold in an online savings account, and RRSPs worth a combined $78,900. That’s a lot of money to go house hunting with. But the Hamins want to have two children, so they’re eager to keep their mortgage a low as possible.

Their current plan is to spend their cash savings on a down payment along with $40,000 from their RRSPs, taking advantage of the federal government’s Home Buyer’s Plan, which allows them to each borrow $20,000, tax-free, from their registered savings. The dream is to stay on the North Shore, so they’ll be near their families, and the Hamins have budgeted about $750,000 for a home purchase. If real estate prices settle down, they figure that will get them a small place with a decent yard. “We don’t really want to buy a condo or an apartment,” Jennifer says, dismissing options that are taken by many first-time home buyers. But even that budget gives them cause for concern. The Hamins worry that even if real estate price growth tapers off, they’ll still be buying at the top of the market. And what if prices start to fall? They’d actually lose money.

So, the Hamins keep on saving, which raises a whole other issue: Where should they keep their money while they’re waiting to take the real estate plunge? Jennifer is a certified financial planner – although she’s not practising at this time – and is currently researching companies to build an investment portfolio that will offer better returns than the Hamins’ current cash account. But even with her expertise, both she and Cory aren’t feeling very comfortable. “What do we do with our money and our lives while we’re waiting for the market to be more reasonable?” Cory asks. “We missed the boat back in 2001,” he continues. “That’s when most of our friends were buying houses. They’ve really cashed in these past few years.” And what were the Hamins doing at the time? “We decided to travel,” Jennifer sighs. And now they’re 30, and kicking themselves.

What the experts say

Cory and Jennifer may feel like they missed the boat, says Gina Macdonald, a financial planner with Vancouver’s Macdonald Shymko & Co., but they are actually off to a great start, thanks to their remarkable capacity for saving. In fact, Macdonald says, their concerns about investing in real estate are no different from those of any first-time home buyer, and they shouldn’t drive themselves crazy trying to time the market. “They just need to get their priorities straight,” she says.

With a household income of more than $170,000, Macdonald says the Hamins may qualify for a mortgage of up to $583,000, based on the current five-year rate of 6.1%, and a 25-year amortization period. Add their savings to that, and they should have no problem paying for a $750,000 home. Their monthly mortgage payment would be about $3,770, which, along with taxes, utilities and other costs, would bring their total monthly expenditure for running their home to about $5,000. “It may seem like a significant increase from their current rent,” Macdonald says, but she notes that the Hamins already put more than that total into savings. Even if they direct a chunk of the money they now save into their mortgage, they’ll still have about $2,000 a month, based on their current spending, for RRSPs contributions.

If the Hamins wanted an added level of security, Macdonald says they should look for a house with a rental apartment in the basement. Her only caution is that Cory and Jennifer think twice about focusing their hunt for a home on Vancouver’s pricey North Shore. The Hamins can afford to stay there, based on their current incomes, she says. But what happens after the kids are born? Their total income may drop if one of them has to stay home with the children. Macdonald suggests the Hamins start out in a less expensive area, and move to the North Shore when their children are old enough to start school.

Adrian Mastracci, a planner with KCM Wealth Management in Vancouver, agrees with Macdonald, and says that the Hamins can afford the home they want. “One day you just have to say, ‘Let’s go for it,'” he says. If they’re worried about taking on a large mortgage, he adds, they can always start with a condo or townhouse, and move into a traditional home later on. “That may well be the safer way to go for them,” Mastracci says. “A child costs roughly $10,000 a year. Plus, Jennifer may not be able to work after she has children. And if she does, there are still expenses such as child care. They’re going to have to make sure they can afford those expenditures.”

In the meantime, if the Hamins decide they want to keep saving for their down payment, Mastracci advises against putting their money into the stock portfolio that Jennifer is designing. “If they’re looking to accumulate for a house, a safe return is a far better approach than trying to get the highest return.” His solution? Keep it simple: invest in secure vehicles like GICs and government bonds, which have guaranteed returns. Chasing stock market returns could deliver setbacks just as easily as it could deliver rewards.

And he also has a warning, should the Hamins decide to keep their savings in the bank: Don’t put all your eggs in one basket. Right now, they have $178,000 in a single account. That could cause problems if their bank collapses. The Canada Credit Deposit Insurance Corp. – the federal Crown corporation that insures bank deposits – only covers sums up to $100,000. While it’s highly unlikely that the Hamins’ bank will fail, if it did, they’d lose everything they’ve saved above that $100,000 maximum. For the sake of absolute security, Mastracci recommends the Hamins open accounts at different banks and never keep more than $100,000 in any one.

After that, both Macdonald and Mastracci say that the Hamins are ready to buy their first home. They simply need to sit and figure out how much debt they’re comfortable taking on, and to start developing a plan for how they’ll get through the early years with the kids. Once they’ve got that sorted out, they’ll be free to start house hunting whenever they choose. “There is no right or wrong answer to this,” Mastracci says. “The main thing is, don’t look at your house only as an investment. It’s also a personal expenditure. It’s something that people want to have. It may not make strict financial sense, but that’s okay.”

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