The current situation: Lise, 40, is currently on maternity leave, taking care of 11-month-old Gabrielle and two-year-old Ethan. “Being on maternity leave is a financial drain,” says Lise, a sales trainer who earns $65,000 annually. “We started our family late and we’d like to know if we can achieve our biggest financial goal—to pay off our mortgage in 12 years, when we will be 52.”
The couple has a $185,000 mortgage at 5.94% on their bungalow in Sonya, Ont., northeast of Toronto. Soon the couple will add the $25,000 from their line of credit to their mortgage. “Right now we pay $615 semi-monthly on the mortgage,” says Kevin, who earns $109,000 annually as a manager with Toyota Canada. The couple face high commuting and daycare costs, plus they’re contributing $5,000 a year to their children’s RESPs, $5,000 to Lise’s RRSP, and $6,500 to Kevin’s. “Everything is hitting us all at once,” says Lise. “Are we on track to catch up?”
The verdict: According to Jason Heath, a fee-only Certified Financial Planner with E.E.S. Financial Services in Markham, Ont., the couple is not currently on track. The only way they can achieve their goal is by redirecting some money from their RESP and RRSP savings to their mortgage.
Assuming their interest rate averages 5% over the rest of their mortgage, they will need to increase their semi-monthly payments from $615 to $968 when their $25,000 line of credit is added to the principal. They will likely have to trim their RRSP and RESP contributions in order to make those larger payments.
Stopping Lise’s RRSP contributions for a few years and having Kevin use a spousal RRSP for her makes sense, since Kevin already has a good pension plan at work. Also, because he’s in a higher tax bracket, contributing to Lise’s RRSP will give them a larger refund. Second, since the kids are still young, the couple can limit RESP contributions to a couple of thousand dollars annually and catch up later. If they make these changes, they should be able to pay off their mortgage in 12 years.
Kevin’s RRSP: $62,000
Lise’s RRSP: $30,000
Total assets: $444,000
Mortgage (including line of credit amount): $210,000
Total liabilities: $210,000
NET WORTH: $234,000 (total assets minus total liabilities)