Hey there, time traveller!
This article was published 15/6/2012 (1416 days ago), so information in it may no longer be current.
Hoyt and Summer are what you'd call your average indebted university graduates. They're a couple of years out of school. They're working full time, but not yet pursuing careers. And they are renting a cheap apartment while trying to pay down debt.
Mixed among their priorities and goals is saving for a down payment on a condo in Osborne Village -- a central location for the carless, bus-riding couple.
"My New Year's resolution was to get my finances in order and to start saving for a house," said Summer, a 20-something administrative worker with a post-secondary institution.
Recently, they were notified their apartment will be renovated and rent will increase substantially from the $485 they pay every month.
So their goal to buy a condo has moved to the top of the to-do list.
"We had the rug pulled out from underneath us with having to move out of our apartment, but it made us realize all the rent we paid over the last four years," said Hoyt, a health-care worker in his early 30s.
"We figured maybe we should make the switch to ownership so in five years, we'd have some equity."
But the couple, earning about $75,000 combined before taxes, also wants to pay off their other debts -- about $21,500 worth -- and save for the future.
"I want to pay off my debt, start contributing more to my RRSPs and open a tax-free savings account," Summer said.
"We'd also like to travel -- maybe go to Europe -- and we'd just like some security in the next five to 10 years."
They've been approved for a $220,000 mortgage with a five-year, fixed interest rate of 3.2 per cent, and they are considering making an offer on a condo priced at $187,000.
With an $11,000 down payment from their parents and a $1,500 tax refund for Hoyt to cover closing costs, they're fairly confident they can afford the price and meet their goals, but they're looking for some guidance on budgeting.
"We're wondering what we can really afford," Summer said.
Debt counsellor Christi Posner said Hoyt and Summer are wise not to mortgage themselves to the hilt.
"I congratulate them for questioning how much they can truly afford in a home, and not maxing themselves out just because they had the pre-approval," said Posner, lead credit counsellor with the non-profit Credit Counselling Society in Winnipeg.
If they had purchased a condo for $220,000, it's unlikely they could have managed it on their budget, she said.
Their monthly mortgage payment would be about $1,064 amortized over 25 years.
"A $220,000 mortgage with all of the added in homeowner costs does not leave enough for Hoyt and Summer to ever pay down their $21,000 of debt," she said.
After condo fees, mortgage insurance and property taxes, they'd be paying about $1,534 a month.
They earn about $4,088 a month after taxes, so their mortgage payment and other housing costs would be more than 35 per cent of their income -- generally a sign of potential trouble. But they also would need to make -- at least -- minimum payments on their other debts, more than $8,000 of which is credit card debt ranging from almost 20 to 30 per cent interest.
Posner said her budget for them included cutting back on discretionary spending.
While she increased Hoyt's and Summer's budget in some areas by including costs for emergencies, gifts and haircuts, omitted from their original budget, she also scaled back their spending on dinners out and non-essential shopping.
In fact, she said it will be their ability to control discretionary spending that will make or break their condo ownership, debt elimination and other financial goals.
"Their initial budget reflected that they spend $300 a month on clothing and miscellaneous shopping combined with $450 a month on restaurants," she said.
These expenses are more than $9,000 a year.
"They don't need to cut them out completely, but I think they could each scale back to $150 a month."
This would save them about $5,400 a year, money that would help cover increased housing costs and pay down debts.
And it will be welcome cash flow if they do buy that newly renovated condo in the Village.
With the $11,000 down payment, at 3.2 per cent interest, their mortgage would be about $781 a month amortized over 30 years.
Including condo fees, mortgage insurance, CMHC premiums and property taxes, their monthly payment would be about $1,255 a month. Once their utilities are added in, the total housing cost should be approximately $1,615 a month.
"If they include all their other costs -- like groceries, transportation, a little bit of fun and savings contributions -- their total monthly expenses would be about $3,233, leaving them with $855 available for debt repayment."
Providing they can stick to this fairly austere budget, they should be debt-free in about 21/2 years and afterward, they'd have more than $800 in additional cash flow. That money, if saved over the two years to follow, would total more than $19,000 -- more than enough for a trip to Europe. They'd also be able to save more for retirement and other big-ticket goals -- maybe a first car.
Of course, these numbers are based on everything going smoothly.
Their expenses may be higher than anticipated. They may have difficulty reining in their discretionary spending, or other unforeseen events may negatively affect their ability to manage expenses, pay down debt and save for their goals.
"For instance, interest rates could increase, making debt payments more expensive, someone could lose their job, or they could face a temporary income reduction, such as short-term disability due to illness or maternity/paternity leave."
Fortunately, by adding emergency savings into their budget, they will have some breathing room to ride out stormy weather.
And if they're concerned whether they can actually manage all of the new costs, Posner said the best way to find out is to test drive their mortgage before they move into the condo.
"This will help them understand what it feels like to carry that amount of debt while they're living in their apartment," she said, adding any money they save in the process over and above their old budget can go toward their down payment or pay down credit card debt.
And if they find living austerely is too much financial drudgery for their liking, then they know they have to revise their budget.
"And that's when they will really need to start talking about financial goals and priorities."
Summer's and Hoyt's financials
Hoyt: $37,019 ($1,900 monthly net)
Summer: $38,926 ($2,188 monthly net)
Monthly: $3,233 (future budget with mortgage costs)
Summer Visa: $1,698 at 19.99 per cent
Summer Sears: $5,565 at 30 per cent
Summer Student loan: $6,583 at 5.5 per cent
Hoyt MasterCard: $1,461 at 19.97 per cent
Hoyt credit line: $5,900 at 7 per cent
Mortgage down payment: $11,000
Hoyt RRSP: $6,998
Summer RRSP: $1,102