At the age of 43, Montreal freelance artist Maria Ellsworth (not her real name) wants to buy a house. There's a problem, however, because her annual net income, $34,320, is based on fluctuating contract work.
It is not dependable enough to qualify her for a conventional mortgage for the three-room condo she would like to have. A condo would let her escape escalating rents, provide a place in which she could retire, and offer the possibility of tax-free gains when she sells it.
Maria's family is willing to give her $50,000 for a down payment, which she would take if she goes ahead with the condo purchase, and she could get another $20,000 from her registered retirement savings plan, but there remains the central question: Is it better to rent at a prospective cost of $500 a month for her share of an apartment or go for equity in a condo that could, she fears, make her house-poor for years to come. Maria is single and has no plans to change that status.
"I've shared apartments for 15 years to keep my costs down," Maria says. "Even the costs of sharing are rising out of my range,' she says. "I have to contain my living costs. Home ownership seems the way to do it."
What our expert says
Facelift asked Caroline Nalbantoglu, a fee-only financial planner at T.E. Financial Consultants Ltd. in Montreal, to speak with Maria in order to clarify her choice.
The planner's conclusion: "Maria has the right idea in wanting to buy a condo. Her challenge will be to maintain a steady cash flow even though her income is uncertain."
The buy or rent question is not unusual, but in Maria's case, the issue is more difficult, Ms. Nalbantoglu says. Maria, who has no car, needs to be near the downtown area in order to have access to public transport. Whether renting or buying, she has geographically limited choices in a very hot market.
Maria has already done a good deal of homework to prepare for a possible house purchase. Her financial situation comes down to what she can allocate to a mortgage.
With expenses of about $22,600 a year, Maria has $11,700 a year of potential savings.
In the past, she has invested this money in her business.
Maria had obtained a preapproved mortgage loan for up to $150,000 for five years at 4.7 per cent. Lack of swift action in closing a deal on a condo led to a loss of the guarantee, the freelance artist says.
Should Maria buy now or wait for prices to come down? Rising interest rates tend to push down house and condo prices, the planner says. Five-year rates hover around 6.7 per cent with a 25-year amortization and could go higher.
"Sooner may be better than later," the planner says.
Maria can add money to her potential house purchase budget, Ms. Nalbantoglu suggests. She could take $20,000 from her $40,000 RRSP, but she should leave that money for retirement, the planner recommends. Her down payment is therefore $50,000 and payments on the remaining $100,000 mortgage will be about $681 a month. On top of that, she will have monthly costs of $100 for condo maintenance fees and $100 for property taxes, Ms. Nalbantoglu adds.
Maria should not leverage all her cash flow on the house, the planner warns. After she buys the house, she should put $500 a month into a savings account in order to have a safety net of at least one or two years' savings. After she establishes that reserve, she should work toward putting $6,000 a year into her RRSP.
That is possible, for in buying the condo, Maria will save the rent she now pays, adding $6,000 a year to her theoretical savings account. If the $500 a month she adds to the current $40,000 balance of her RRSP grows at 6 per cent a year, she will have an RRSP balance of $350,000 at age 65.
If Maria lives to age 90, she can generate an average of $27,000 a year from her registered retirement income fund in addition to receiving payments of approximately $500 a month from the Quebec Pension Plan and $466 a month from Old Age Security, all in 2004 dollars. Maria should be able to have a comfortable if not luxurious retirement, Ms. Nalbantoglu says.
Were Maria to continue renting, she could use all of her savings to build up her retirement fund. Outside of her RRSP, she would build an additional $170,000 in 20 years, assuming the money grows at 4.2 per cent a year after taxes.
But Maria will still be paying rent at unknown and really unpredictable rates. On the other hand, the $150,000 condo would have appreciated to $271,000, assuming a 3-per-cent annual rise in market value, the planner says. As Maria's principal residence, it will generate a capital gain not subject to tax.
In retirement, if the various pensions Maria has built up are insufficient, the condo could then support a reverse mortgage, the planner says. Or, better than an inflexible reverse mortgage with its high internal costs, she could just sell the condo, take the proceeds and buy a life annuity in a competitive market, Ms. Nalbantoglu says, using the annuity's cash flow to pay for other accommodation.
"Maria can make this plan work," Ms. Nalbantoglu says. "She has done a lot of homework on her intended condo purchase and she has the drive to make her switch to home ownership a reality. The bottom line is that if she increases her monthly housing expense and becomes a home owner, she will escape the renter's dilemma of being unable to predict the cost of housing long into the future."
"Caroline has confirmed my instinct that buying a home is the right thing to do," Maria says. "My income is unstable and I am afraid that if I don't move into a home of my own, I might one day be unable to afford to pay rent. Caroline has shown me that I can afford to buy a condo."
Interested in a free Financial Facelift? If so, then drop a line to the writer at
444 Front St. W., Toronto M5V 2S9
Maria Ellsworth, 43, lives in Montreal, sharing half the rent on a $1,000-a-month apartment. She wants to know if it is better to continue renting or to buy a condo.
Assets: RRSPs, $40,000.
Net monthly income: $2,860.
Monthly budget:: Rent, $500; utilities, $160; Internet, $50; food, $350; restaurants, $100; bus and taxi, $150; clothing, $150; cat food, et cetera, $50; hair dressing, $105; entertainment, $100; miscellaneous and charity, $170; savings, $975. Total: $2,860.
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