“I want more space, particularly storage,” Susan, a retired professional, writes in an e-mail. “I have already downsized massively.” As well, she wants a yard where her dogs can run free, “particularly when I am no longer able to take them for lengthy walks.”
Ideally, the new house will have a separate suite “where I could house a possible helper if/when my health deteriorates,” she adds. “But most of all, I just want to live in a house.”
Apart from her condo, valued at $565,000, the bulk of her wealth (her savings as well as her late husband’s) is in a registered retirement income fund. To cover the cost of the new house, estimated at $750,000, she would borrow about $250,000.
“So the question is: Am I mad to take on a $250,000 mortgage at my stage in life?” Susan asks. “The bank will give it to me, and my trusted financial adviser says it’s okay, so why do I hesitate?”
We asked Ian Black, a fee-only financial planner at Macdonald Shymko & Co. Ltd. in Vancouver, to look at Susan’s situation.
What the expert says
Susan only has about $150,000 of tax-paid capital available, Mr. Black notes. The remaining funds would have to come from her RRIF and the associated income taxes would have to be paid – about $4,400 of tax for every $10,000 withdrawn. A mortgage would make more sense. Besides, the mortgage option would allow her to make lump-sum payments in the future if her cash flow allowed for it, he adds.
Susan can (and should) go ahead with the purchase, Mr. Black says. “She has enough flexibility in her spending that she can choose what expenditures are most important to her.”
As it is, Susan’s assets and income are enough to generate cash flow of $129,000 a year before tax from now until she is 99. (Some of that will be her capital.) If she takes on a mortgage of $250,000, her cash flow will fall to $107,000 a year. Real estate commissions and other moving costs will also eat into her savings.
Susan’s mortgage payment would be about $1,200 a month. She would also face higher maintenance costs with a detached house, but this could be offset by deferring property taxes. B.C. allows homeowners age 55 and older to put off paying property taxes until the property is sold. Simple interest is charged on the balance at a current rate of 1 per cent. Taking advantage of this could free up about $5,000 to $7,000 a year of cash flow – and extend Susan’s savings.
If she buys, it is likely the $150,000 pool of non-registered funds she has been drawing on to supplement her travel will be depleted over time. She should
make a point of keeping some liquid funds for emergencies. Depending on her level of discretionary spending (mainly travel), she could run short of funds in her early to mid-90s, the planner says.
“As with all financial planning, monitoring of her investment account balances and updating her financial plan will be necessary to ensure she’s still on track,” he adds. “While it is possible for her to purchase a house now, she can’t just set it and forget it.”
At a 5 per cent rate of return, for example, she could deplete her savings by age 93. “This is still several years away.” At that point, she would be left with Canada Pension Plan benefits, Old Age Security and her two small provincial government pensions – “still about $53,000 total, so pretty decent income by many standards,” Mr. Black says.
She’d still have the equity in her house (with about $150,000 remaining on the mortgage) to fall back on.
“A worst-case scenario is she could sell the house in future if her spending, or poor investment returns, have depleted her savings,” the planner says. “As she has no dependants, she has no financial responsibilities to anyone other than herself.” It’s likely Susan will spend less on travel as the years go by, Mr. Black says.
Susan’s plan does have some risks. Mortgage rates are likely to rise, at which point she would have to cut out some discretionary spending. A one-percentage-point increase in mortgage rates would raise her monthly mortgage payments by about $135. As well, she could one day need medical care costing more than could be covered by her income alone.
The person: Susan, 79.
The proble m: Does it make sense to borrow to buy a house?
The plan: Go ahead and buy, realizing that doing so could crimp her spending in future.
The payoff: The pleasure of watching her dogs run in their own backyard and the sense of well-being that comes from being queen of her own castle again.
Monthly net income: $6,875
Assets: Bank accounts $28,000; non-registered $150,000; residence $565,000; registered retirement income fund $800,000; estimated present value of DB pensions $325,000. Total: $1.87-million
Monthly disbursements: Housing expenses $1,205 (condo fees $270; property tax, home insurance $580; utilities $105; maintenance, garden $50; telecom, TV, Internet $200); groceries $650; clothing, dry cleaning $320; personal care $50; dining, drinks, entertainment $410; club membership $45; pets $250; subscriptions $55; other personal $200; travel $1,000; gifts $120; charitable $450; other discretionary $300; transportation $185; car loan $460; doctors, dentists $190; drugstore $90; health/dental/travel insurance $245. Total: $6,225. Unattached surplus: $650.
Liabilities: $5,000 car loan
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