Lifestyle | Renovate or move?

Olivier*, 33, and Justine*, 32, are a professional couple with a good income who have just welcomed their first child. They plan to have another child in two or three years.

The situation

Until then, Olivier and Justine wish to expand their residence. They live on the ground floor of a duplex which they have owned for three years.

This duplex has a value of $760,000 and represents Olivier and Justine’s main asset.

Their financial assets in registered (RRSP, TFSA) and non-registered savings accounts total some $288,000.

The apartment on the second floor provides them with a net income of approximately $8,500 per year, which totals $237,500 with Olivier and Justine’s employment income.

The balance of the mortgage is $600,000. This loan at an advantageous fixed rate of 1.75% will have to be renewed in two years, in 2025.

In anticipation of a capital reduction, Olivier and Justine have already set aside a financial asset of $27,000 in high-interest certificates of deposit in a TFSA account.

It is in this context that the couple seeks advice to decide on the continuation of their project to expand their family residential space.

“For the moment, we are considering three options, with rough budget estimates,” says Justine in conversation with The Press.

“A first option, estimated at $100,000, would be to take over the accommodation on 2^e floor of our duplex in order to convert it into a single-family house on two levels. A second option, which we estimate at $50,000, would be to convert the basement of our duplex into 2^e lower level than our current accommodation on the ground floor. »

Finally, concludes Justine, “a third option would be to resell our duplex and buy a single-family house already adapted to our family plans. Its purchase cost could be similar to the anticipated amount of the resale of the duplex, around $800,000 depending on what we observe in the real estate market. »

Advice

The financial advisory analysis of Olivier and Justine’s residential project was entrusted to Louis Morneau, financial planner and financial security advisor at the firm Aisance Gestion de Patrimoine in Brossard, on the South Shore.

At first glance, Louis Morneau considers that the analysis of Olivier and Justine’s residential project includes “two fundamental dimensions: the quantitative or quantified analysis according to the options considered by the couple, but also the qualitative analysis of the repercussions of each option over their personal and family life.

“For example, if they opt for remodeling work on their duplex, have they identified a trustworthy contractor? Also, are they prepared to deal with the stress linked to possible delays and cost overruns associated with the work? », Raises Louis Morneau.

“If they opt to resell the duplex before moving to a new house, have they thought about the impact of a change of neighborhood and neighbors on their quality of family and social life? »

That said, from a quantitative analysis point of view, Louis Morneau notes that Olivier and Justine’s financial foundations are well established in favor of the first two options of their project.

“The couple can consider a mortgage of $50,000 for the conversion of the basement, or $100,000 for the conversion of the duplex into a single-family home on two levels,” according to Louis Morneau.

By way of numerical examples, he estimates that a mortgage of $50,000 initially amortized over 25 years, at a fixed rate of 5.74% for the first five years, would result in an additional outlay of approximately $3,800 per year. year. In the case of a mortgage of $100,000, under the same conditions, this amount rises to around $7,500 per year.

“While the net family income of Olivier and Justine is around $159,000 per year, and their total expenses are estimated at $153,000, including savings contributions, these additional amounts of mortgage expenses m “financially viable options are emerging,” notes Louis Morneau.

Resell the duplex?

As for the third option considered by Olivier and Justine, namely the resale of their duplex and the purchase of a larger house of equivalent value, Louis Morneau’s consulting analysis reveals some financial yellow lights.

First, considering the still high amount of the mortgage balance linked to the duplex, i.e. $600,000, the net value of its resale at a price close to its property value, i.e. $760,000, is expected to be around $160,000. .

In addition, warns Louis Morneau, Olivier and Justine will have to assume the various costs linked to the preparation and completion of such a transaction: maintenance adjustments before the sale, real estate brokerage, notary, etc.

Ultimately, they will find themselves with insufficient financial capacity to make a down payment compared to their plan to repurchase a house at a price comparable to that obtained for the resale of duplexes, Mr. Morneau anticipates.

“At a purchase price around $780,000, for example, they would need almost $200,000 in down payment [à 20 % environ des coûts d’achat totaux] if they want to avoid the additional costs of a new mortgage loan to be insured by CMHC,” indicates Louis Morneau.

“To achieve such a down payment amount, Olivier and Justine will have to draw heavily on their various savings accounts, except their RRSPs. »

The second financial yellow light signaled by Louis Morneau regarding the project of resale of the duplex and repurchase of a single-family house concerns its impact on the total family income of Olivier and Justine.

“They must provide for the loss of rental income from the accommodation (on 2^e floor) of their duplex, which means a shortfall of around $8,500 per year,” warns Louis Morneau, based on income figures provided by the couple.

So, even if Olivier and Justine managed to reduce their residential costs by reducing their mortgage liabilities a little between the resale of the duplex and the repurchase of a house, Louis Morneau anticipates that the couple will have to revise their independent savings priorities (in RRSP , in TFSA, in education savings?) to compensate for the loss of this rental income.

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