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Lorraine landed her first big job, can she afford to buy a house in three years?

Lorraine has set her sights on an older single-family home over the next three years.Kate Dockery/The Globe and Mail

At 26, Lorraine is well on her way to becoming a well-paid professional. She recently landed her first big job and now hopes to buy a detached house in the southern Ontario town where she lives and works.

Lorraine’s new job comes with an annual salary of $85,000, a substantial increase from her previous position. She also has a group registered retirement savings plan.

“I’m wondering how best to invest my extra cash so that I can reach my goal of buying a house in about three years,” Lorraine wrote in an email. “Should I maximize my RRSP contributions or invest in a personal portfolio of non-registered stocks and bonds? So far, she’s racked up an impressive savings of $110,945.

Lorraine pays about $1,575 per month in rent, home insurance and electricity.

Because she lives in a college town, she would consider renting a room to help with the shipping costs of the new house. She expects her annual income to reach $100,000 over the next three years.

We asked Barbara Knoblach, Certified Financial Planner and Financial Coach at Money Coaches Canada in Edmonton, to take a look at Lorraine’s situation.

What the expert says

“Lorraine set her sights on an older single-family home near a city park and trails,” says Knoblach. Homes in this neighborhood are listed in the $750,000 range. Lorraine, who is single, wants to buy the property on her own without depending on her parents, who she says have done enough by helping her with college tuition.

Lorraine contributes 3% of her base salary to a group RRSP at her new job and receives a matching contribution from her employer. She also has a group RRSP from a former employer and contributes the maximum each year to her tax-free savings account.

Excluding her TFSA contributions, Lorraine’s living expenses are about $3,105 per month, about half of which goes to housing. She has a surplus of $920 per month to spend on a down payment on a first home.

Lorraine plans to use most of her savings for a down payment, including her TFSA and $35,000 from her RRSPs under the federal Home Buyers’ Plan. She plans to set aside the savings in her non-registered investment account for long-term capital appreciation.

Although not specifically requested by Lorraine, Ms. Knoblach analyzed the feasibility of Lorraine’s plan, comparing the cost of continuing to rent or buying a $750,000 home. If Lorraine saves and invests her surplus by early 2025, when she closes the purchase, she could accumulate $83,300 in her TFSA and another $35,000 in non-registered savings and investments, the planner says. With the $35,000 from her RRSP under the Home Buyers’ Plan, she would have $153,300. This assumes a rate of return of 4.5%.

Subtracting $15,000 for closing and other costs, he would be left with a down payment of approximately $138,000. If she can’t provide a 20% down payment, she will need mortgage insurance, which will increase the cost.

The planner stress tested Lorraine’s potential mortgage payments using both a 3% and 5% mortgage rate. At 5% on a $612,000 loan, Lorraine’s mortgage payments would be $3,559 a month, Knoblach notes. At 3%, she would pay $2,896. Property tax would add about $500 more per month.

“Assuming utilities cost about $500 per month, home insurance $150, and maintenance and repairs $625 per month (1% of home value per year), housing costs de Lorraine would climb to $5,334 per month,” the planner said. said.

Even if Lorraine rented a room for $800 per month, she would still pay $4,534, which is $3,024 per month more than she currently pays. With a 3% mortgage and a rented room, she would pay $2,361 more per month.

“For these reasons, I strongly advise Lorraine to re-evaluate its current strategy,” says Knoblach. Lorraine could either buy a less expensive property or “delay the purchase further into the future to arrive at a more substantial down payment”. By then, her income may have exceeded the projected $100,000 a year.

Lorraine must also consider the long-term ramifications of land ownership, says the planner. Will the costs allow him to save enough for his retirement? Could she miss work if she decides to have children at some point? “Or will she remain house rich and money poor as long as she owns the property?”

Lorraine can take certain steps to make it easier to save for a down payment.

All of Lorraine’s investment accounts are part of a balanced portfolio of exchange-traded funds with approximately 65% ​​equities and 35% fixed income securities. There is no distinction in asset allocation between accounts that will be accessible for down payment and those that will be retained for the long term. Lorraine should use a separate investment strategy for each, says Knoblach.

Accounts intended for the long term should be invested aggressively in 80-90% equities and only a small portion in fixed income investments. “This reflects Lorraine’s long-term horizon until retirement and ensures maximum long-term growth in these accounts,” explains the planner. Lorraine could use cost averaging to weather financial market fluctuations, she says.

For savings on the down payment, Lorraine should immediately reduce the equity component to around 50% and invest only in high-quality, dividend-paying stocks, according to the planner. She should gradually reduce the percentage of shares held as she nears the actual purchase date so that within a year of purchase she should have no more than 20 to 30 percent, Ms Knoblach says.

The remainder should be invested in guaranteed investment certificates with maturities coinciding with the earliest possible date of purchase.

Most of Lorraine’s RRSP investments are in group plans and only a small amount of money is in her personal RRSP. It may not be possible to withdraw funds from a locked-in RRSP or a group RRSP. “However, many employers allow their employees to transfer funds from a group RRSP to a personal RRSP, which is accessible,” says Knoblach.

If Lorraine can move funds from her group RRSPs, she should focus on saving extra in her non-registered investment account, says the planner. Lorraine might consider opening a second non-registered account to have a clear separation from her existing account, which is for long-term investments. Conversely, if it turns out that Lorraine is unable to use her group RRSPs, she should focus on contributing to her personal RRSP to ensure that she will have $35,000 time of home purchase.

Status of customers

The person: Lorraine, 26 years old

The problem: Can she accumulate enough in three years for a down payment on the type of house she wants in her favorite neighborhood?

The plan: Consider buying a cheaper house or putting off the purchase until she can save more and her salary is likely higher.

Gain : Avoid being house poor for many years.

Net monthly income: $4,535

Assets: check for $5,635; non-registered investment account $8,860; TFSA $58,255; Personal and group RRSP $38,195. Total: $110,945

Monthly expenses: Rent $1,510; home insurance $25; electricity $40; transportation $355; groceries $500; clothing $70; gifts, charity $70; vacation, travel $100; meals, beverages, entertainment $200; personal care, club membership $20; sports, hobbies $25; subscriptions $10; health care $20; telephones, television, internet $160; TFSA $510. Total: $3,615

Passives: None

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Some details may be changed to protect the privacy of profiled individuals.

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