Remember Laurence, our reader planning to buy a house? His case allowed us to establish that the CELIAPP represents the preferred tax tool for taxpayers who wish to acquire an eligible home. Her case allows me this week to assess the financial profitability of her dream of becoming a homeowner, a dream that she shares with several Quebecers. Theoretical comparisons have already demonstrated that it is possible to finance your retirement and achieve financial independence by remaining a tenant. Does this observation still hold with the considerable increase in house prices and rents?
I asked Laurence for some additional data: she earns a little over $100,000 per year, her partner, $70,000. They benefit from a defined benefit pension plan and already have certain savings habits. Their personal cost of living is $5,000 per month. The monthly rent for the 3 and a half apartment they live in is $990, and the heating, electricity and insurance costs are $220. Their budget is $400,000 for the purchase of their first home, which seems realistic in their market. Our reader estimates that they will each have raised $21,000, using RRSPs and CELIAPP.
Setting up the down payment
In talking with Laurence, I noticed that she was confusing the down payment required to obtain financing from a mortgage lender with the initial cost of her project. She was thinking of using the full balances of their CELIAPP and RRSP in order to have a down payment of at least 20% and thus avoid CMHC fees. The intention is noble, but it is a lack of planning that could cost them dearly.
The initial cost of a residential acquisition project must include other elements. We must add the transfer costs (around $4,200 in this case), but also all those costs that new buyers tend to underestimate consciously or unconsciously: moving costs, urgent renovations, painting , the new furniture and all those “so to speak” added under the influence of emotion. If the mortgage package does not include these expenses, there is a great risk that our buyers will resort to credit card debt in the months following the real estate transaction.
This speech may seem moralizing or even a killjoy. However, it influences the financial profitability of the acquisition of a house, which must be calculated with financing and a down payment that take into account all these expenses. For Laurence, for example, the most realistic arrangement includes a reduced down payment of $20,000, in order to plan for installation costs of $22,000. With an interest rate of 4.3%, projected mortgage payments increase by a little more than $120 per month over 25 years.
Buy or rent?
The conclusions are clear to Laurence. Remaining a tenant longer in order to buy a house while taking into account your financial capacity does not mean that you are falling behind financially or that you are becoming poorer. The simulation carried out even shows that it is theoretically possible for her and her partner to become rich without becoming owners.
In the scenario where they remain tenants all their lives, their cash surpluses would be significant. If these were used to be invested in their RRSP and TFSA accounts and in non-registered investments, with an assumption of return according to a balanced profile (4% per year), the projected net value of their balance sheet would be $7.6 million at age 95.
In a scenario involving the purchase of a house, housing-related expenses have been modified, notably insurance ($250 rather than $40 per month) as well as electricity and heating ($300 rather than $140). ), in addition to property taxes of $3,500 per year. An annual budget item of $5,000 was added to the cost of living for basic maintenance and small jobs and a hypothetical sum of $10,000 every five years was planned for major renovations. The financial picture thus changed: rather than cash surpluses, several years presented a slight deficit, significantly reducing their savings capacity.
Ultimately, the retirement objectives of Laurence and her partner were achieved in both scenarios. However, when we index the market value of the house at the rate of 3%, the projected net worth of their investments is reduced to 3 million for our clients at age 95. To take this thinking further, we made a third scenario with a rent cost of $2,000 per month, anticipating a potential desire of our clients to live as tenants in more spacious accommodation. When we compared this scenario with that of buying a house, it was more or less equivalent, with a slight advantage for the purchase.
Choosing comfort is not a financial strategy
This type of simulation has an infinite number of assumptions. This does not take into account that housing costs in retirement may be greater in an assisted living facility. The annual increase in the market value of a home is limited to 3%. This theoretical comparison, although imperfect, reminds us of the importance of making a realistic pre-purchase budget, based on one’s financial capabilities. And follow him!
It might be easy for the couple to be tempted by a home $100,000 more expensive, because there are so many of them on the market. But the projected cash deficits would jeopardize their healthy financial situation.
Buying a house is not an investment, but a choice, that of living with more comfort. Life is more than just a financial plan, after all. For those who choose to rent, enrichment requires a clear financial plan and a disciplined investment of cash surpluses made possible thanks to lower housing expenses. Otherwise, they will become poorer. This is why buying a house is often seen as a form of forced savings. What clan are you from?