Lifestyle | Can we afford to buy the family chalet?

Mathieu*, 53, and Lucie*, 49, are married and parents of two teenagers aged 15 and 17. Their family lifestyle is very active, but managed in a reasonable way according to their income, while taking care to maintain a good balance sheet of assets and free of debt. Their next big project: buy the chalet from Lucie’s elderly parents to keep it in the family heritage, while continuing its shared use between the immediate family and occasional rentals to friends and acquaintances.

The situation

This purchase of the parental cottage is expected to be around $300,000, an amount that Mathieu and Lucie intend to finance with a new mortgage loan and cash taken from their tax-free savings accounts (TFSA) or registered savings plans. -retirement (RRSP), according to the advice of the analyst.

Moreover, they anticipate that the purchase of the parental cottage will involve the addition of some $20,000 in expenses (mortgage, taxes, maintenance, etc.) to their family budget. This budget would thus increase from $75,000 to around $95,000 per year.

“Considering our already busy family lifestyle, but still reasonable in relation to our income [environ 165 000 $, auxquels pourraient s’ajouter quelques milliers de dollars en locations occasionnelles du chalet], do we have the means to buy the parental chalet without weighing too much on our current budget and our long-term financial planning? ask Lucie and Mathieu during an interview with The Press.

Also, they add, “how to optimize the financing of this purchase of the parental chalet according to [leur] financial and fiscal situation in the short and medium term? »

For the moment, the family financial balance sheet of Lucie and Mathieu seems rather favorable. There are some $628,000 in financial assets (RRSP, TFSA, registered education savings plan – RESP – for teenagers), to which must be added the family residence valued at $530,000, which is free of mortgage debt.

As for their financial planning for retirement, planned in about ten years, Mathieu and Lucie can already count on life annuities from federal and provincial public sector pension plans.

The situation of Mathieu and Lucie was submitted for analysis and advice to Alexandre Beaulieu, who is a financial planner and financial security advisor at DMA Gestion de patrimoine, located in Brossard, on the South Shore.

Mr. Beaulieu is also a member of the board of directors of the Quebec Institute of Financial Planning (IQPF).

Advice

Before considering the financing options for the purchase of the parental chalet by Mathieu and Lucie, Alexandre Beaulieu first wants to reassure them about their financial situation in view of retirement.

“They have the advantage of having defined benefit pension plans with indexation, in addition to their savings assets in various registered accounts. In the absence of costly unforeseen events over the next few years, Mathieu and Lucie are in an excellent financial situation to maintain their current lifestyle until their death, notes Mr. Beaulieu.

“And this, even in the event of an early retirement to 62 for Lucie, as her pension plan would allow. »

That said, regarding the financing options for the purchase of the parental chalet, Alexandre Beaulieu suggests two in particular:

– traditional financing with a mortgage loan using available cash (in current savings accounts and TFSA accounts) for the down payment;

– financing through a home equity line of credit that is linked to the net value of their principal residence, which is already debt-free.

“Each option has its pros and cons when it comes to financial planning. But with each option, Mathieu and Lucie will benefit from maximizing the repayment of this debt according to their budgetary capacity over the years,” points out Mr. Beaulieu.

Traditional mortgage

Thus, with the option of a traditional mortgage loan, i.e. an amount of $240,000 at a fixed rate of 5.6% over a term of five years, Alexandre Beaulieu suggests that Mathieu and Lucie build up their down payment ( 20% or $60,000) by drawing equally ($30,000 each) from their current savings accounts and their TFSA (tax-free registered savings) accounts.

Under these conditions, he estimates at $17,800 per year the disbursements for financing the cottage (interest and capital) that Mathieu and Lucie should add to their family budget, in addition to the various costs of ownership and use of the cottage (property taxes , energy, maintenance, insurance, etc.) which he estimates at around $9,000 per year.

In total, it’s at least $27,000 in additional disbursements that Mathieu and Lucie will have to integrate into their family budget during the first five to ten years of their ownership of the family chalet.

Home equity line of credit

As for the second option of financing the purchase of the chalet, that is to say by a mortgage line of credit linked to the net value of their family residence, Alexandre Beaulieu points out two elements to be considered by Mathieu and Lucie.

First, because “financial institutions normally grant a maximum of 65% of the value of the property as a mortgage line of credit”, Mathieu and Lucie could use it up to $340,000.

“They would have all the financial space necessary for the purchase of the chalet”, observes Alexandre Beaulieu. However, “as the interest rate [sur marge de crédit hypothécaire] is higher than that of a conventional mortgage loan, it would be all the more relevant for them to reduce the amount borrowed by using the maximum available cash in their savings accounts and TFSA accounts to increase the down payment”.

Benefits and precautions

What is the advantage of doing it this way?

“Since this is a home equity line of credit, Mathieu and Lucie will have the flexibility to make principal repayments – in addition to base interest payments – in different amounts and at different times depending on the evolution of their family budget over the years, explains Alexandre Beaulieu, before adding a few usual precautions concerning lines of credit.

First, “in order to maintain the same amortization over 25 years as for a conventional mortgage loan, Mathieu and Lucie should budget payments on the line of credit (interest + principal) of at least $2,100 per month”.

Then, warns Mr. Beaulieu, they must consider that a home equity line of credit is “much riskier” than a traditional mortgage loan since it is a financing lever based on the value of their principal residence, and that it could have serious consequences in the event of a marked deterioration in the economic context and the real estate market.

Finally, to facilitate the tax optimization of their eventual rental income from the chalet, Alexandre Beaulieu advises Mathieu and Lucie to use the line of credit only to finance the purchase of the chalet, rather than to finance other lifestyle.

Why this precaution?

This is in order to clearly identify the interest paid on the line of credit for the purchase of the chalet, and therefore deductible from the rental income of the chalet before their inclusion in their personal taxable income as owners of a second income residence. .

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