Toronto couple makes $235K a year. Will interest hikes hurt them?

For Mei and Harold, both 27, the prospect of further rate hikes could spell trouble for their adjustable-rate mortgage.

The couple have a 30-year mortgage on a home they bought in Etobicoke earlier this year. “These recent rate hikes have really impacted our ability to spend and save,” Mei said. “With speculation that further increases will take place before the end of the year, we are concerned about how this will continue to affect our finances and our ability to plan for the future.”

Mei and Harold say they hope to start a family in the next few years. Before that, says Mei, the couple wants to save up for a big vacation and buy a new car. They also try to save for retirement. The couple wants to learn more about how they can balance their savings goals with the rising cost of their home.

As an occupational therapist, Mei brings in an annual salary of $80,000. Harold, on the other hand, is a software developer and earns $155,000. Generally, the two eat their lunch at home or pack one to take to work, and rarely go out to restaurants for dinner.

Weekends vary, but they typically go shopping, visit friends or family, go hiking in the GTA, and prepare meals for the week ahead.

“When we see friends, we usually host a meal at our house or go to their house or meet outside,” says Mei. “Sometimes we have special occasions with friends, family, or just for two for takeout or restaurants.”

The couple has $20,000 in a savings account but wonders if that’s enough cushion for the curveballs life might throw at them.

We asked the couple to split two weeks of their expenses to see if they could hit their financial goals.

The expert: Jason Heath, Managing Director at Objective Financial Partners.

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Mei and Harold are new homeowners hoping to have a family in a few years. You have an emergency fund of $20,000 and you’re wondering if that’s enough. There are typical rules of thumb for personal finances such as 3 to 6 months income or 3 to 6 months expenses. But I think there are a couple of ways to answer this question.

There’s something to be said for an emergency fund that will give you peace of mind. So the answer depends in part on your comfort level. A good night’s sleep is priceless. On the other hand, if you put more than 20% down on your home, you could have a secured home equity line of credit at a relatively low interest rate. For some homeowners, this is a sufficient emergency fund. And in the case of Mei and Harold, they could use their $20,000 savings for something else.

Some home equity loan limits increase when you pay off your mortgage balance, so you can use your $20,000 to pay off your debt and borrow it back if you need it in the future. That way, they pay less interest in the meantime. They’re probably paying off more than 5% of their debt, and their savings account might be paying off 2% or less.

Mei has a lucrative defined benefit pension plan at work, so beyond the contributions she and her employer make, she probably doesn’t have to worry about saving for retirement. Harold has a higher income and pays about a 15% higher marginal tax rate than Mei, so all of the couple’s RRSP contributions should be made by him. He is indeed a great candidate for RRSP contributions as he gets back about 45 cents for every dollar donated. He also has 30 or more years to amplify his RRSP growth and hopefully make retirement withdrawals at a lower tax rate.

If you plan to start a family in a few years, you should pay attention to the additional costs of children. So it’s good to know that they still have good cash flow when comparing their income to their expenses, and hopefully didn’t buy all the house they could afford. I’m fully in favor of their plan to do some big trips in the next few years before they have kids because it can be difficult when your kids are young. They also seem to have their financial house in reasonably good order.

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Mei and Harold cook in bulk to make sure they have leftovers for lunch. If you don’t already have one, a freezer could be a good investment for your new home. This way they can minimize food waste and ensure they always have a selection of leftovers on hand.

If interest rates rise, Mei and Harold could increase their mortgage payments. Adjustable rate mortgages may have a trigger rate at which payments must increase to cover the additional interest cost. The federal funds rate has already risen by 3% in 2022 and the Bank of Canada may not be done yet as it continues to try to fight inflation.

Results: They spent more. First week spend: $414.51. Week two spend: $1,037.25

How they think they did it: Despite spending more this week, the couple believe their money went to charity. Auto repairs, Mei says, are a necessary expense. Likewise, the birthday party they attended was “out of the ordinary, but a fitting and welcome expense in spending time with friends.”

And although their trip to Costco for groceries was more expensive than usual, they bought enough groceries to last about two weeks, Mei adds.

They consider some aspects of Heath’s advice on how to prioritize their money to work for them, and realize they had previously invested in a freezer to extend the life of some of their groceries. “We use (it) when we stock up on meat when it’s on sale.”

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Take away: The couple say it’s “reassuring” to hear they’re spending their money wisely.

“We’d like to consider Jason’s recommendation to consider a home equity line of credit in the future,” Mei said. At the moment, however, the couple are not eligible as their home’s equity has not appreciated enough since it was purchased. The level of security that a HELOC offers is something the couple appreciates and hope to pursue if they get the chance.

They are also considering increasing their emergency fund.

“We’re both young and healthy, but the possibility of Mei going on maternity leave at some point means we should have a little extra in the bank so we can live comfortably during this time,” says Harold.

The couple say they bought the house, which they could afford at the time of purchase. Her intention, Mei explains, is to grow into her home with her future children, delaying the move for a very long time — or at all.

“We realize that this means we’re paying a lot more on our mortgage than we would have bought for a smaller house or condo, which is a scary thought now with interest rates rising,” she says.

“With the latest rate hike, our monthly mortgage is $5,350, which is over $1,500 more than when we bought the house in March, and our ability to save is being severely impacted. We will continue to save when we can, do sales and use coupons, and look into a home equity line of credit in the future to keep up.”

Jenna Moon is a Toronto-based business reporter who focuses on personal finance and affordability. Follow her on Twitter: @_jennamoon

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