Mortgage payments a pressing concern among elder Canadians

Personal finance advisor outlines case study on this overriding apprehension

Mortgage payments a pressing concern among elder Canadians
Would-be retirees who are looking to get their own properties are most worried about the price of mortgage—a punishing cost for many Canadians considering the currently overheated housing market.
In a contribution piece for the Financial Post, personal finance advisor Andrew Allentuck provided a case study that highlighted this concern. Recently widowed “Margaret” of Ontario is approaching her 60s, and takes home around $6,437 every month after taxes and other deductions.
“I am renting now at $2,000 a month, but I would like to buy a home in my area,” Margaret queried. “I would then be a retiree with debt. Will taking on a mortgage cripple my retirement?”
Compounding matters is that Margaret holds an outstanding car loan, as well as a pension buyback payment option costing $15,408.
According to certified financial planner Guil Perreault, Margaret “can pay these off with cash she holds from the settlement of her late husband’s estate. The question of whether it is beneficial to buy a home depends in part on how these obligations work out.”
The first step to take would be to pre-pay the car loan. “The current amount outstanding is $17,529 with a 4.9 per cent interest rate. She has $200,000 in cash earning about one per cent a year and she saves $2,017 a month after expenses. Spending one per cent to save 4.9 per cent is a good deal.”
Next would be the pension buyback, which would be ultimately helpful as it would add $1,254 to Margaret’s per annum pension, provided that it starts on early 2017.
“If her life expectancy is 25 years, the implied rate of return is 6.5 per cent. If she lives 20 years, the income stream of the pension implies a 5.3 per cent rate of return. Either one beats the one per cent return on her savings account.”
Only then would be Margaret in a tenable position to buy her home. Taking into account her non-registered investments totalling $383,302, “her best bet is to use an investment loan to make the interest on a mortgage deductible.”
“Assuming Margaret has done her pension buyback, her income if she retires at 60 will consist of a $55,000 basic pension with no indexation plus $1,254 from the buyback and the CPP survivor benefit of $6,720, for $62,974 year,” Allentuck explained.

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