British Columbia couple who used their home as an ATM amid housing crisis

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Editor’s note: After more than a decade analyzing the financial numbers of hundreds of Canadian families, Andrew Allentuck hangs up his hat as the FP’s Family Finance columnist. This will be his last column. Don’t miss the new Family Finance, coming soon.

A couple we’ll call Ernst, 52, and Molly, 48, live in British Columbia. They have a combined gross income of $178,000 a year from their jobs in technology and hospital administration, respectively, and bring in $10,075 a month after taxes. They are in the process of buying a new home, but the market has thrown them a curveball: rising interest rates have lowered the price of their current home and increased the monthly mortgage cost of the one they are buying. They have spent most of their savings and are now running out of money. It’s a serious financial bottleneck.

They thought their current home would easily sell for $900,000, but have no offers on an asking price of $850,000, barely above the $790,000 mortgage they are carrying. They also agreed to pay $1,050,000 for a new house, on which they made a down payment of $50,000. They need $275,000 to close on the new home and will need to cover $40,000 to sell their old home, including $35,000 in fees if they wish to exit their existing mortgage. That’s a total of $315,000 in cash they need to complete the two transactions. They have $90,000 in cash, a drop in the bucket.

The closet is bare

Other than money and houses, their other assets are meager: only $11,000 in mutual funds and a $27,000 car. They don’t have an RRSP or a TFSA. Everyone will have a defined benefit pension, but the capital behind the pensions belongs to the insurance companies who will pay the pensions. It would be expensive to access it as cash value and only with hefty taxes and deep discounts, but it’s an option they’ll need to consider to top up the down payment.

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Their liabilities include the mortgage on the old house of $790,000 and the mortgage on the new house of $1,050,000.

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, BC to work with Ernst and Molly. The couple’s problems are not financing retirement, but rather paying for their new home.

“They have minimal net worth on their balance sheet, but they’re not poor,” says Moran. “There is a big difference.” The old house is not a financial disaster, he says. They paid $615,000, so they got what amounts to free housing with a capital gain. However, rather than paying off the mortgage over time, they used their capital as an ATM. He’s catching up with them now.

Rental suite

A rental suite in their new home can be valued at $250,000. The rents they will receive will make it possible to finance themselves and therefore generate additional cash flow.

They should ask a real estate agent to provide a written opinion on the value of the rental suite, suggests Moran. The related mortgage cost will be tax deductible, so they should pay it back slowly and concentrate the payments on the cost of their own housing, which will not be deductible.

They could get a two-tier mortgage – one for their own home and one for the rental. This would keep their accounts clean for ARC reporting, Moran suggests.

retirement income

Were it not for the large mortgage balance caused by overspending, they might retire earlier. However, to compensate for this, they have agreed to work until Molly turns 65, when she will receive an indexed pension of $35,000 per year. Ernst, beginning the same year (when he turns 68), will receive a non-indexed pension of $26,703 per year. Each partner can expect Canada Pension Plan benefits of $15,043 at age 65, the current upper limit. At age 68, when he retires, he will receive an increase of 8.4% per year, which will bring his CPP to $18,834 per year. At age 65, Molly will receive the base amount.

Each will have full Old Age Security, $8,000 per year with available premiums of 7.2% per year for each year they postpone the start beyond age 65.

Molly’s annual pension will be $35,000 and Ernst’s will be $26,703 plus $18,834 enhanced CPP and $9,728 enhanced OAS. Molly can add her own OAS of $8,000 and CPP of $15,043 at age 65. This would make a total income of $113,308. After income splitting and average tax of 17%, they would have $94,045 per year or $7,837 per month to spend.

Solve the cash flow problem

Ernst and Molly still need to find $275,000 to finalize the purchase of their new home. Selling their old home for an estimated price of $850,000 less $40,000 in fees and paying off their $790,000 mortgage will leave them with $20,000 to add to the $90,000 they could recover, but they would still be way short. . Commuting one of their pensions is an option, but it would permanently reduce their retirement income. Relying on credit cards is never a good long-term solution, but in this case, it might help them out. Income from the rental suite and money that was used for savings could be diverted to repay this debt. Taking out a loan from a relative would be another option, or a combination of all of the above.

They are in their dilemma because rising interest rates have dealt them a double whammy: deflating the market for their old home while increasing the cost of the mortgage for the new home. Over time, their debt will decrease and they will be able to deduct some of the cost of the rental unit mortgage. Molly and Ernst have a money problem rather than a date with insolvency.

“Provided they repay their debt under the current low to mid-single digit interest rate outlook, they will emerge from their cash crisis in good shape,” Moran said.

Retirement Stars: 2** out of 5

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