I had another post responding to this and other comments, but it appears to have been lost in the ether.Originally Posted by HaroldCrump
Yes, the proceeds from our house are basically the amount of my wife's chequing account. And you're right, we don't have much in terms of accesible assets.
As to the other questions, we're currently renting and looking to buy a primary residence down the road, not a "second" house. I should have stated that more clearly...
I think paying off the couple debts will make you feel great and will probably make it easier if you can retire these couple debts.When we had multiple debts I tried to focused on the highest interest first but when i had many debts with very similar interest I tackled the lowest balance as each time I paid something off in full it really made me feel great.Banks seem more accepting of student loan debt than cars/credit cards so would be great if you can wait to buy a home until you have no debt except the student loan debt.
I was in a very similar situation as a graduating medical resident about 6 years ago but we didn't have your assets or your present income.
We owed $75K on my LOC at 5.5% interest.
We had no house proceeds, TFSA didn't exist and we had no money in the bank.
I made about $60K and my wife made about $20K but she was pregnant and about to leave the workforce permanently.
What we did have was a LOC of up to $200K so we had $125K available space.
We also knew my salary would increase to somewhere in the neighbourhood of $150-200K/yr on graduation which we figured was plenty to carrry the two of us.
We also wanted to buy a home worth about $400K.
What we ended up doing was borrowing in advance $100K from my LOC and put it in the bank to use for our downpayment. We claimed to the bank that the money was going to come from a loan from family and that we owed $175K on my LOC. The bank then assumed a salary for me of $150K as I was a graduating professional and approved us for a mortgage of up to $350K. So in combination with my downpayment we could go up to $450K but would be left with $525K debt and no assets other than the house.
So we did it the high risk way and used LOC to maximize the downpayment and avoid CMHC fees and then got by the skin of our teeth with the $25K left in LOC space to buy stuff for our baby and furnish our new place (we had been renters before so didn't have much furniture).
In retrospect I do think I took on too much risk and cut it too close with too little reserve in case of a mishap and this was not sound financial management. In the end it worked out fine as my income greatly exceeded expenses and my LOC (peaked at about $195K 3 months after my graduation) was paid off in about 2 years.
At the time I remember initially obsessing about saving every last little bit on the CMHC but in retrospect there was too much risk in my approach and I would have been better off with a smaller downpayment, more financial flexibility in case of mishap and more peace of mind and better nights sleep.
I would suggest that you reserve some of your liquid assets outside of your house. You can do this one of two ways - pay a smaller downpayment (say 10%) and then use the extra income you have to pay off the remainder of your loans starting with those that have a larger interest rate but always keeping 4 months expenses in the bank/liquid TFSA.
The other way to do this would be to delay your house purchase by another year so you have more wiggle room. Then you should have time to earn money to pay off your debts, maximize your downpayment and maintain an adequate emergency fund. I really don't think you will miss out on much if you delay your purchase a year as housing will be flat over the next couple of years and may decrease as house:income ratio is out of whack and due for a correction. If you have saved up money you will be in the driver's seat of a buyer's market at that point.
If you decide for lifesytle reasons that you want to house earlier I would strongly encourage you to pursue a smaller downpayment and maintain a safety fund. It really won't make much difference to your financial endpoint 25 years from now whether you put down 10% or 20% and whether you pay off your credit cards now or in 6 months but I know at this stage of your life you are used to sweating over every dime. It really won't matter all that much once your income increases and you will chastise yourself for putting your financial well-being at risk by over-leveraging yourself at a tenuous point in your life with your new house and new baby and new job.
So my suggestion is set aside 10% for your downpayment and this will be your temporary safety fund.
Use your excess money to pay off your highest loans.
As you continue to save keep the money with your downpayment fund and work until you have an extra 5% for closing costs and then an extra 5% for furnishing your home. Now keep that money aside until you buy your home and it will be your emergency fund until you have saved up an emergency fund.
Now start saving a separate pile of money which is your safety fund with at least 3 months of expenses as your first fund will be depleted with the home purchase.
Now once those piles are complete use any excess money to pay down your debts.
I know if will be painful to pay interest on accounts when you have money sitting around but given your priorities of a new house I think this is the safest way for you to do it for you and your family. There is probably a cheaper way to do it where you pay off all your debts first, then save up the money for your 20% downpayment to avoid CMHC and buy your house and then use your freed up CC/LOC as your emergency fund but this strategy is fraught with peril for someone who is highly levered as they can be taken away from you at the drop of a hat making you a beggar in a possible future liquidity crunch which is not a position you want to be in.
I graduated with almost 100k in student loans. Three years later, my (then) girlfriend graduated with almost 100k in student loans. Both of us became lawyers. It's been 15 months since my (now) wife graduated and we are still paying off our loans. Mine will be done in October, hers... not sure when...
We also made the decision, while she was still in school, to buy a house. Prices were on a dip here in Calgary, and I was making 80k (going up consistently each year). My parents gifted me 15k for a downpayment, which, coupled with my savings got us to the 10% threshold (still requiring some CMHC).
We bought a house for $372k in March 2010. Had zero savings and 150k in student loan debt at the time. In retrospect, it looked risky, but I knew my salary trajectory would be increases of 20-40% a year for a while and the wife was entering the workforce as an articling student and would be making a lot more once that was done.
Fast forward to today and I make 135k and my wife is on pace to make 100k this year (with a ton of writeoffs, likely the same take-home as I have). The inital plan was to maintain our student lifestyle as long as possible, but it has been hard to not spend a little on durable material goods. We have had to do some maintenance to the house and upgraded some of our furniture. However, given those incomes, I am convinced we will crush her debt in short order and then move onto filling up our TFSA/RRSP.
I never felt the need to have a safety net (mostly because my parents are well off and could help us out if needed), but the idea of money just sitting there doing nothing annoys me anyways.
Thanks for the last couple of responses. I replied, but my replies don't seem to be surviving the moderation process for some reason.
Will respond in detail tomorrow.
Last edited by VoxPopuli; 2012-04-11 at 11:05 PM. Reason: [for some reason, this one made it through]
So we went ahead and paid off the RBC LOC ($10,000 at 6.99% interest) and all our credit card balances, including a 1.99% offer that would have expired at the end of the month. I transferred $20,000 into my wife's TFSA and put 15,000 of that into a "high-interest" savings account (1.1%) and $5000 into a Canadian index fund. We've also contacted the credit union that holds the vehicle loan about paying off the balance (approximately 13,800 at 7.29%).
A couple of decisions to make now:
1) We have a decision coming up about what to do with our second car. Our plates come due on May 9th, to the tune of $1300 for the year. I walk to work every day, but once every two weeks or so I need a vehicle to drive to Court. Right now my wife alternates weeks as the driver in a carpool arrangment. We only need a second car once a month or so, so it might make sense to eliminate our second vehicle. Will think on this.
2) We have a standing balance transfer offer on one of my wife's RBC Visas, for up to $6500 at 1.99% through February 13, 2012. We could take the full $6500 and put it against one of our student loans (effectively at 4.86%). Savings would be around $200 between now and next February. Will think on this as well.
I think most of your decisions above are very good - get rid of any high-interest debt you can deal with now.
I've used one of those 1.99% loans before and the deals are legit - just be super careful to pay off that loan a couple of weeks in advance so that you don't get dinged with a big charge at the end of the loan.
I would be careful about putting any money into the market that you want to use in the next couple of years. The markets have been very, very rocky and you could be risking a capital loss in the short-term of up to 40% as per market history. I really don't think you have a huge amount to gain by going into the market right now but I do see the potential for another market collapse as we are still arguably in a cyclical bull market inside of a secular bear market that many expect to last 3 to 8 more years.
The vehicle thing definitely makes sense if you rarely need both vehicles - it is a huge drain on one's finances to operate a vehicle.
Two cautions:
(1) You will be losing the tax credit on the student loan interest when you pay it off this way. This will reduce your savings by 15%*the interest otherwise paid in the calendar year.
(2) Often balance transfers charge an additional up-front fee of 1% of the amount transferred - in this case, $65.
If both of these conditions hold true your actual savings might be considerably less.
If you're going to keep money in a high interest savings account, you should consider opening one at an institution that actually pays a bit more interest. for my wife and I that is currently CTFS, but there are other options. check out the chart here: http://www.highinterestsavings.ca/chart/
Thanks. No doubt there's risk putting some of our money in to equities when we will likely need it again in the short term, but we've discussed it and we're okay with the risk. Right now we've got 20% of our "downpayment fund" in the index fund, with the rest in a high-interest savings account. That proportion will drop as we deposit new money into the savings account.
Thanks, Moneygal. I'd taken the loss of tax savings into account- the nominal interest rate on the student loans is 5.25%, which becomes 4.67% if we get to use the full tax credit it provides. Still a decent gap between that and 1.99%. This particular offer does not have any balance transfer fee, though I have encountered those before with MBNA.
Thanks for the link. I'll have to do some research- my concerns are a) we'd need the ability to get money in easily via internet banking, and b) that the higher rates may not last.
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