Mathieu*, 53, and Lucie*, 49, are married and have two teenagers aged 15 and 17. Their family lifestyle is very active, but managed reasonably according to their income, while taking care to maintain a good balance sheet of assets and free of debt. Their next big project: to buy the chalet from Lucie’s elderly parents to keep it in the family heritage, while continuing its shared use between immediate family and occasional rentals to friends and acquaintances.
This purchase of the parental cottage is expected to be around $300,000, an amount that Mathieu and Lucie plan to finance with a new mortgage loan and cash taken from their tax-free savings accounts (TFSA) or registered savings plans. -retirement (RRSP), according to the advice of the analyst.
Moreover, they anticipate that the purchase of the parental cottage will involve the addition of some $20,000 in expenses (mortgage, taxes, maintenance, etc.) to their family budget. This budget would thus increase from $75,000 to around $95,000 per year.
“Considering our already busy family lifestyle, but still reasonable in relation to our income [approximately $165,000, to which could be added a few thousand dollars in occasional rentals of the chalet], can we afford to buy back the parental cottage without putting too much strain on our current budget and our long-term financial planning? ask Lucie and Mathieu during an interview with La Presse.
Also, they add, “how to optimize the financing of this purchase of the parental chalet according to [their] financial and tax situation in the short and medium term?” »
For the moment, the family financial balance sheet of Lucie and Mathieu seems rather favorable. There are some $628,000 in financial assets (RRSPs, TFSAs, Registered Education Savings Plans – RESPs – teenagers), to which is added the family residence valued at $530,000, which is free of mortgage debt.
As for their financial planning for retirement, planned in about ten years, Mathieu and Lucie can already count on life annuities from federal and provincial public sector pension plans.
The situation of Mathieu and Lucie was submitted for analysis-advice to Alexandre Beaulieu, who is a financial planner and financial security advisor at DMA Heritage Management, located in Brossard, on the South Shore.
Mr. Beaulieu is also a member of the board of directors of the Institut québécois de planification financière (IQPF).
– Early retirement life annuity: $58,000
Financial assets :
– Registered Retirement Savings Plan (RRSP): $133,000 – Tax-Free Savings Account (TFSA): $62,000 – Current Savings Account: $12,000
– Employment income: $107,000
Financial assets :
– Registered Retirement Savings Plan (RRSP): $243,000 – Tax-Free Savings Account (TFSA): $90,500 – Current Savings Account: $18,000 – Quebec public sector (RREGOP): expected at 40% of salary from age 62
Assets on family balance sheet:
– Principal residence: $530,000 (debt free) – In Registered Education Savings Plans (RESP): $70,000
Annualized family income: $165,000
Annualized family disbursements: $75,000
($20,000 for family residence, $48,000 for family lifestyle, $7,000 in contributions to registered savings accounts)
Before considering the financing options for the plan to purchase the parental chalet by Mathieu and Lucie, Alexandre Beaulieu first wants to reassure them about their financial situation for retirement.
“They have the advantage of having defined benefit pension plans with indexation, in addition to their savings assets in different registered accounts. In the absence of costly unforeseen events over the next few years, Mathieu and Lucie are in excellent financial position to maintain their current lifestyle until their death, notes Mr. Beaulieu.
“And this, even in the event of an early retirement at 62 for Lucie, as her pension plan would allow. »
That said, when it comes to financing options for the purchase of the parental cottage, Alexandre Beaulieu suggests two in particular:
– traditional mortgage financing using available cash (in current savings accounts and TFSA accounts) for the down payment;
– Home equity line of credit financing that is tied to the equity in their already debt-free primary residence.
“Each option has its pros and cons when it comes to financial planning. But with each option, Mathieu and Lucie will benefit from maximizing the repayment of this debt according to their budgetary capacity over the years, ”points out Mr. Beaulieu.
Thus, with the option of a traditional mortgage loan, an amount of $240,000 at a fixed rate of 5.6% over a five-year term, Alexandre Beaulieu suggested that Mathieu and Lucie build up their down payment ( 20% or $60,000) by drawing equally ($30,000 each) from their current savings accounts and their TFSA (tax-free registered savings) accounts.
Under these conditions, he estimates at $17,800 per year the disbursements for financing the cottage (interest and capital) that Mathieu and Lucie should add to their family budget, in addition to the various costs of ownership and use of the cottage (property taxes , energy, maintenance, insurance, etc.) which he estimates at around $9,000 per year.
In total, it’s at least $27,000 in additional disbursements that Mathieu and Lucie will have to integrate into their family budget during the first five to ten years of their ownership of the family chalet.
As for the second option of financing the purchase of the chalet, that is to say by a home equity line of credit linked to the equity of their family residence, Alexandre Beaulieu points out two elements for Mathieu and Lucie to consider.
First, because “financial institutions normally grant a maximum of 65% of the value of the property as a mortgage line of credit”, Mathieu and Lucie could use it up to $340,000.
“They would have all the financial space necessary for the purchase of the chalet,” notes Alexandre Beaulieu. However, “since the interest rate [on a home equity line of credit] is higher than that of a conventional mortgage loan, it would be all the more appropriate for them to reduce the amount borrowed by using the maximum available cash in their accounts. savings accounts and their TFSA accounts to increase the down payment”.
What’s the benefit of doing it this way?
“Since this is a home equity line of credit, Mathieu and Lucie will have the flexibility to make principal repayments – in addition to base interest payments – in different amounts and times depending on the evolution of their family budget over the years, explains Alexandre Beaulieu, before adding a few precautions regarding lines of credit.
First, “in order to maintain the same amortization over 25 years as for a conventional mortgage loan, Mathieu and Lucie should budget payments on the line of credit (capital interest) of at least $2100 per month”.
Next, Mr. Beaulieu warns, they should consider that a home equity line of credit is “much riskier” than a traditional mortgage loan since it is a financing lever based on the value of their principal residence, and that it could have serious consequences in the event of a marked deterioration in the economic context and the real estate market.
Finally, to facilitate the tax optimization of their eventual rental income from the chalet, Alexandre Beaulieu advises Mathieu and Lucie to use the line of credit only to finance the purchase of the chalet, rather than to finance other lifestyle.
Why this precaution?
This is in order to clearly identify the interest paid on the line of credit for the purchase of the chalet, and therefore deductible from the rental income of the chalet before their inclusion in their personal taxable income as owners of a second income residence. .
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