By David Dias
National Post
Financial Post Business
December 2006 Issue

Larry and Katrina want to have a baby -- soon. They'll need a bigger house. How much can they afford and still have money for savings and RRSPs?

Adrian Mastracci, fee-only portfolio manager at
KCM Wealth Management in Vancouver, says, "If only every young couple could start out this way. Larry and Katrina have done well."

Larry and Katrina Bryden are newlyweds figuring out their finances for the first time. They own a little townhouse in a co-op development in Port Coquitlam, B.C., about 20 minutes east of Vancouver. Larry works as a nurse, earning $60,000 a year. Katrina is a high-school teacher, earning $35,000. They're both only 30 years old, so retirement is far from their minds. Right now, their focus is on family and their hopes for a child in the near future. To prepare, they'd like to move into a bigger home. "You know, a bigger yard, a bigger house," says Larry. "Something to accommodate a family." Trouble is, they have no idea how much they can afford without burying themselves in mortgage debt.

What they do know is that they'll probably have to leave Port Coquitlam. Housing prices around Vancouver have skyrocketed over the past few years -- and that includes their own house. When Larry and Katrina (not their real names) bought it three years ago, they paid $188,000. It's now worth $340,000. Unfortunately, the same housing boom that's granted them a $150,000 windfall has also priced them out of the Port Coquitlam market. "We'd love to stay in the neighbourhood here," says Larry. "We're across the street from one of the top-rated elementary schools in the province. But detached houses are out of our price range." So they've started looking at places in Pitt Meadows, a community to the east where prices haven't risen as steeply.

The range that they've set for a new house is $375,000 to $450,000. Larry is financially conservative, so he'd be happy to buy something cheaper that he can fix up. Katrina is thinking more about lifestyle and would prefer to take on a bigger mortgage and tough it out for the next few years. But neither of them knows how much debt is too much.

Once they've figured that out, Larry would like to start thinking more seriously about saving for retirement. Katrina, on the other hand, isn't so interested. "Katrina is just not the type of person who saves money," he says. She earns much less than Larry and is used to living paycheque to paycheque. Also, Katrina has a good teacher's pension, so she figures that will take care of her retirement needs. Larry, meanwhile, has been careful to save 15% of his income, although he's investing only in GICs. Once their finances are in order, he'd like to move into more aggressive vehicles, like mutual funds.

Right now, though, everything is up in the air. The Brydens are focussed on their immediate need to buy a new house and prepare for a family, but Larry is worried that if they spend too much on immediate concerns, they won't have enough left over to save for the future. What they need is some way to determine how much they can afford to spend on a house, how much they should be saving for retirement and maybe even what sorts of investments they should start looking into.

WHAT THE EXPERTS SAY

The Brydens are in excellent financial shape, says Adrian Mastracci at Vancouver-based KCM Wealth Management. The $180,000 in home equity they've built up is a big head start on their new mortgage, so Larry shouldn't be too hard on Katrina for not saving. "If only every young couple could start out this way," says Mastracci. "Larry and Katrina have done well."

Right now, Mastracci says they need to be focussed on preparing for their new family and paying down the bigger mortgage that's on the way. The rule of thumb on mortgage affordability is that you should be able to cover the principal, interest and taxes on a 20-year mortgage with about one-third of your income, after taxes. For the Brydens, that amounts to $26,000 a year in annual expenses and a total mortgage of about $240,000. Add that to their current home equity of $180,000, and they should be able to afford a $420,000 home. Mastracci, however, says that if the Brydens really love their community, they could probably push that target by $50,000. "If this is their playground, I would try to make it work."

However, Carol-Ann Lang, planner, disagrees with Mastracci's estimates. For starters, she says a $450,000 home may be too much. "Is Katrina planning to take time off to raise the kids?" asks Lang. If so, the Brydens may not even be able to afford a $420,000 home. Lang suggests they plan on spending no more than $400,000.

After the Brydens settle into their new home, both planners say they should focus on preparing their finances for a family. The first step, according to Mastracci, would be to build a savings fund worth three months of expenses, since unexpected costs are bound to spring up.

Mastracci also says the Brydens don't need to jump into retirement saving just yet. Ideally, everyone should put aside between 10% and 15% of their gross income -- about $11,000 a year in the Brydens's case -- but Mastracci reminds Larry and Katrina that paying down their mortgage also counts as saving for the future.

Again, Lang disagrees. She says that, while paying down your mortgage is almost as good as saving in an RRSP, the Brydens need to be doing both. "If you start your RRSPs young, then you get used to investing," she says. "The longer you put it off, the easier it is to put off because it becomes overwhelming." She suggests they start by investing $10,000 a year in balanced mutual funds.

Finally, Lang says that, with kids on the way, the Brydens need to leave room for insurance. "If Katrina has a baby next year and something happens to Larry, they could lose everything." In particular, Larry should look at disability insurance and critical illness insurance. "Without coverage," Lang says, "they may just be rearranging deck chairs on the Titanic."

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NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.