Am I on track to buy a home in five years?

If Rob and Lisa can make their home ownership dreams come true, but it will mean they’ll have to start aggressively paying down their debt.

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From the magazine.

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Rob Hamilton, 37, and Lisa Aldworth, 33, rent a two-bedroom apartment in Toronto with their one-year-old daughter, Piper. They would like to own a home, but they are $61,600 in debt. “We think saving for a down payment and buying our house in five years is a more realistic strategy,” says Lisa. They would love to stay in the city, but are also considering Guelph, Ont., since it is more affordable and closer to Lisa’s parents.

Each year this couple spends $9,600 on debt repayment, $5,000 for transportation, $18,000 for Piper’s daycare, and $11,820 for rent—a steal in Toronto. With incidentals their expenses hit $53,920. Rob makes $35,000 working for an arts organization while Lisa earns $74,000 as a social worker, giving them a combined after tax income of just $82,328. That leaves them with $28,408 annually to pay down debt and save for their house. “Should we contribute to RRSPs or stick to Tax-Free Savings Accounts?” asks Lisa. “My parents want to give us a $20,000 gift when we’re ready to buy. That will help. Are we on track?”

The verdict

If Rob and Lisa start aggressively paying down their debt, they can buy a house in five years. “The focus has to be on both paying down the debt and saving,” says Barb Garbens, a fee-only financial planner in Toronto. “They have to do both to make the plan work.” With $28,400 a year in disposable income this couple can afford to nearly double their current debt repayment rate to $1,500 a month—or $18,000 a year. That would wipe out their debt in four years. “They should start by paying off the highest-rate debt first and work their way down to the student loan debt,” says Garbens.

With the remaining $10,000 in disposable income they should contribute $5,000 a year each to Tax-Free Savings Accounts to save for their down payment. “I wouldn’t do an RRSP,” says Garbens. “TFSAs give them more flexibility if they have an emergency. Plus, they can use that RRSP room more profitably later in their careers when they’re earning more.” Once their debt is paid off, they can put the $18,000 they were spending on debt towards their down payment, giving them a total of $73,000, with a 2% annual return compounded monthly. “Coupled with the $20,000 gift from Lisa’s parents, they’ll have about $93,000 to put towards their home in either Guelph or Toronto, whichever suits them best.”

Do you want MoneySense to see if you’re on track to meet your own financial goal? If so, drop us a line at letters@moneysense.ca

7 comments on “Am I on track to buy a home in five years?

  1. It's very important that Rob and Lisa remain dedicated to their plan in buying a home in 5 years. Emotional purchases can easily derail them.

    Reply

  2. I think they'll make it if they can find a way to increase their income. Hopefully, either better paying jobs can be found, or second jobs or even a series of small opportunities. Every $50 you find participating in a market testing panel or whatever buys another bag of groceries.

    Or (dream of dreams) maybe they will find a way to have high quality child care for their child that doesn't cost $18,000 a year. Is there any way they could work alternate times so that one of them could be at home with the child at all times? It's very hard on the marriage, but great for the child, and much less expensive. (I doubt it, though, unless the arts job could be time-shifted to evenings and weekends?)

    One comment for MoneySense itself: Is it reasonable to show a straight subtraction of RRSP/LIRA assets against liabilities? The minimum tax bracket in Ontario is about 20%. Shouldn't only 80% max of the deferred-tax assets be applied against the liabilities?

    I hope if a few years we'll hear an update saying all is well with this family!

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  3. Really, they spend less than $800 a month on everything else not mentioned including groceries, clothing, insurance premiums (they do have insurance, right?), direct medical/dental, recreation, gifts, etc.? If they really do have $2,400 a month income that is available, I assume their bank account is currently growing by that much every month.

    You know the saying about garbage in, garbage out and I wonder how achievable their goal is. It can be disheartening when progress towards a goal becomes slowed because unrealistic assumptions were used to begin with.

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  4. In 5 years he will be 42 and she will be 38. According to the profile, they have effectively no actual assets (of any substantial amount).

    Honestly, I think they should instead focus on saving for a house, they should focus on saving as much $ as possible and investing. That will give them some faint hope of retiring and NOT be a burden on their kids….

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  5. fat hope. expenses will only grow faster as the kid grows.

    become debt-free in 5 years seems a more realistic goal.

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  6. The verdict is pretty logical. It certainly is the recommended option. However, as Joe says the expenses on the children will grow, and keeping on track is really hard. If they really want it, they should make a good plan and follow it. Mathematically, things can happen but there are some unexpected factors that might come along the way. I wish every young family to have a nice home for their children. Great post!
    Best regards,
    Barry / Go Cleaners London

    Reply

  7. Buying a home should be a priority. I mean as long as it makes life more convenient for them.

    Reply

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