Lifestyle | Expand the family home? Financial guide…

How to finance a family home expansion project without harming the progress of the family’s budgetary and financial state of health?

Martin Vallieres
The Press

The situation

Spouses Martin*, 44, and Karine*, 35, and their two school-age children form a family whose financial situation already appears to be well established. In the family budget, employment income of $213,000 per year well covers lifestyle expenses, which are around $107,000 per year.

Martin and Karine also have the ability to save in registered accounts (parents’ RRSP and TFSA, education savings plans [REEE] children). Thus, they were able to accumulate some $150,000 in financial assets, to which must be added the value of their house, estimated at $400,000. In addition, as retirement savings assets, Martin and Karine each benefit with their respective jobs from a solid Quebec public sector defined benefit pension plan.

On the other hand, Martin and Karine’s family balance sheet shows liabilities of $140,000 made up of the balances on three mortgage debts: two loans ($54,000 at variable rate and $66,000 at fixed rate) maturing in five years, as well as a balance of $20,000 on a pre-arranged line of credit of $235,000.

It is with this statement of financial situation that Martin and Karine prepare their first major project to expand the family home acquired ten years ago. “With our jobs which will continue in part by telecommuting at home, and the children who are growing up, we need additional space in the house, explains Martin in discussion with The Press. That’s why we want to add a closed garage with a new telecommuting room upstairs. The cost of this expansion work on the house is estimated at $125,000. We hope to begin this work next fall. »

In the meantime, Martin and Karine wonder about the adequate financing of this work. On the one hand, depending on their budgetary capacity and their short-term financial situation, with the prospect of rate increases on variable-rate borrowings. On the other hand, Martin and Karine are keen to manage the financing of these house expansion works while taking into account the optimization of their financial and fiscal planning.

The concerns of Martin and Karine were submitted for analysis-advice to Daniel Lanteigne, who is a financial planner and senior partner at the firm Reverber Financial Strategies, in Quebec.

Advice

From the outset, Daniel Lanteigne appreciates the fact that “Martin and Karine have their financial situation well in hand” as they prepare the financing for an expansion project for their house. “It’s a real estate investment which, if done well, will increase the value of the family home,” notes Mr. Lanteigne. And to finance this project, estimated at $125,000, Martin and Karine already have the advantage of “having easy access to the amount available on their mortgage line of credit”.

However, notes Daniel Lanteigne, with this increase in mortgage payments of around $8,000 per year, it is in terms of their family budget for the next few years that Martin and Karine will have to remain very vigilant. “According to their figures, their budgetary situation between net family income [après impôt] and their total disbursements seem relatively balanced around $110,000 per year, says Lanteigne. Consequently, in the absence of additional income, Martin and Karine must plan adjustments to their family budget in order to be able to increase their mortgage payments by $8,000 per year without compromising the continuity of their financial situation. »

How to do it ? “First, I suggest that they revise their family lifestyle expenses, which could be ‘compressible’,” replies Daniel Lanteigne. Among other things, do they still need two vehicles instead of just one, considering that their teleworking situation is now established? Or, can they revise their travel and entertainment expenses, as well as the costs of their various telecommunications services? »

Secondly, Daniel Lanteigne advises Martin and Karine to review their contribution priorities to their various registered savings accounts (RRSP, TFSA, RESP) in anticipation of the increase in mortgage disbursements in their family budget.

Daniel Lanteigne recommends that they “take a break” for a few years from contributing to Karine’s RRSP because of their lower yield in “tax recovery” in the family finances. In addition, recalls Mr. Lanteigne, Karine’s RRSP contribution room will continue to accumulate in anticipation of better use in a few years.

In return, Daniel Lanteigne advises Martin to continue contributing to his RRSP (approximately $6,000 per year) because their short-term tax yield is favored by his higher employment income and tax rate than those of his spouse Karine. Also, adds Mr. Lanteigne, “in order to encourage Karine to interrupt her RRSP contributions to facilitate the financing of the expansion project of the family home, her spouse Martin could contribute $2,000 to his own RRSP and $4,000 to the spouse’s RRSP. in favor of Karine while benefiting from a total of $6,000 as a deduction from her income”.

As for the parents’ TFSAs and the RESPs of their two children, Daniel Lanteigne observes that the “contributions to the parents’ TFSAs are of no use to them at present” in the process of optimizing the family’s financial situation. “These contributions of a few thousand dollars a year would be more productive as additional RESP contributions for their two children. With priority given to the RESP of the eldest of 10 years in order to maximize the tax return until the age limit of 17 is reached,” explains Daniel Lanteigne.

* Although the case highlighted in this section is real, the first names used are fictitious.

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