# How to balance out desire to buy a larger house vs saving for retirement



## Misscrazed (Sep 19, 2013)

Hubby and I just entered our 30s, are current home owners but would like to upgrade to a larger home for the kids in the next few years. The area were considering is in the 750k region. Our townhouse is around 550k so that would mean an increase in our mortgage by 200k. We can save 3k a month based on our budget and I would love to put it all towards the eventual upgrade so our mortgage only increases by closer to 100k. However I hear about people maxing out their rrsp contributions and this scares me as we are nowhere close to that. How much really should we be putting away for retirement vs saving for the down payment? Any help/thoughts are appreciated!


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## Spudd (Oct 11, 2011)

Do you have pensions from work? If not, you will need to save more for retirement than someone who has a pension.


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## My Own Advisor (Sep 24, 2012)

I can relate Misscrazed. 

Although not on the same scale, my wife and I in our 30s owned a townhome in Ottawa worth $330K and wanted to upgrade by at least $100k a few years back.

At the time, our jobs were steady, so we made the move. We love our home and have been here for 3 years and don't intend to move for decades.

The key reasons why we decided to do this, make the home upgrade:
1. We had a pension plan at work, so if RRSP savings didn't happen (as much) with new home purchase then we'd be fine, 
2. Most importantly, our jobs were stable at the time.

I am still not comfortable with our debt load but we're working on that. If we stayed in the townhouse, our mortgage would have been paid off in 2015. Our mortgage will now be paid off in 2020.

I think income security is the biggest factor. If something happens to your jobs and you now have more debt, that will be an issue.


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## mcoursd2006 (May 22, 2012)

We were in the same conundrum a few years ago when we had our third child. We have a three-bedroom townhome in which we were quite comfortable. We thought about upgrading to a larger four-bedroom, and with an additional ~200k mortgage. Although my job is quite stable and I do have a pension, we are a single-income family, and having paid off the mortgage on our current home more than five years ago we decided that our current home was enough for for the five of us. The freedom that comes from not having a mortgage is something that's hard to replace. Most of the would-have-been-mortgage money is going straight toward RESP, TFSA, and spousal RRSP. We're not wealthy by any stretch, but we don't worry much about money any more.

You have to keep things in perspective. Just because all my friends and family have bigger house shouldn't mean that I need one. I grew up in a semi-detached home of much smaller than the one I own now with two siblings. We did fine. We don't want to have to live by standards others have set. Smaller house means that costs such as property tax, heating and cooling the home is lower, and I think overall it leaves a smaller carbon footprint on the environment.

Ultimately, we had to ask ourselves, would we be happier in a bigger house? How would be enhanced/enriched by having the extra space? The answer to the first question is no, and it renders the second one moot.


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## kcowan (Jul 1, 2010)

We upgraded for the first 13 years of marriage, then held for 14 years, then downsized.


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## uptoolate (Oct 9, 2011)

At some point an upgrade makes sense if your family expands. We lived in our first house for 8 years then upgraded and have owned the same place for the last 18 years and will downsize from here in another 5 years or so. We have 4 children so upgrading wasn't really an option as our 'starter' house wasn't large enough. It was a great house which we had done some nice renovations on but still sold for a small loss due to the real estate market downturn at the time. Good news was that we bought back into the same soft market.


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## Plugging Along (Jan 3, 2011)

We are constantly having this conundrum. We live in a small house (by comparison)in a rather affluent area. 

We see everyone else with larger houses, and often we want to join the jones. We paid off our mortgage a few years ago, and have been using that money towards maximizing our rrsps, and the other part is for saving either for investing outside of rrsps. This non registered account is what we will use to buy the bigger house. We have agreed that we will not take out another mortgage. Us forcing ourselves to save before we upgrade will make us really think before we are ready to buy as to how big of a want this really is. Perhaps when we have the extra $200k saved we will not want to part with it and find our house is just fine.


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## AltaRed (Jun 8, 2009)

I look at it in life phases. From about age 25-40, one is busy establishing themselves including a 'nest' to call home and that one is 'happy' with. Age 40-60 (or 65) is the wealth accumulation phase developing an investment portfolio that will become the retirement nest egg. Age 60 (or 65) onwards is reaping the rewards of one's plans via retirement and somewhere in that phase, downsizing. 

Put another way, upgrade from your starter home once to be comfortable based on family size/location , but with a view to ensure the mortgage is paid off by age 40. Carrying debt past age 40 is a sure way to short circuit wealth accumulation for your retirement strategy. As an example, I retired all debt by age 40 and it allowed me to put away a lot of money and retire very comfortably by age 57. The key to that success is to be disciplined enough to not spend the 'newfound' money once the mortgage is paid off. Direct it to investing.


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## OnlyMyOpinion (Sep 1, 2013)

Good comments.
OP - Wondering if moving from townhouse to house for family is a necessity or an option re/ space? Wondering what the total mortgage would be (it wasn't clear that your mortgage would necessarily be $550k and increase to $650k or $750k) and what % of take home pay your monthly payments would be. The point being not to over-extend yourselves.

Seems to be the story we read about each week, 50+ boomers with nothing saved for retirement. Tough when we have a monthly mortgage, especially if we are saving to pay it off ASAP, we have nothing left for RRSP's. 

In our case, we chose a middle path. We used a portion of our saved money to make RRSP contributions (maybe not be the maximim?) and applied the tax refund to the mortgage paydown along with the other saved money. There is probably an optimal benefit re/ paying down versus RRSP contribution and growth but we weren't that sophisticated. The focus was to pay down the mortgage and it was a time of major 'frugality' for us. It helped that we bought a modest 1,100sqft, 3 bedrm home. It was actually all we could afford, but the location re neighbours, quiet street, access to work and schools were all good so we've stayed - maybe think about whether its a home you'd be happy to be 'stuck in for the rest of your life' ? 
We agree with the comments about the financial freedom and flexibilty that comes when the mortgage is paid off, and how unpalatable the thought of another mortgage is. A larger home would have delayed this. With good market timing we could have upsized and then downsized and come out ahead, maybe substantially so, but home #1 was always sufficient (forces you to really 'clean house' every few years though). Now it looks just right for when we eventually retire.

OP - maybe running some 'scenarios' would help? There are lots of on-line calculators for simple forecasting of saving for retirement, mortgage costs, etc. 
Yahoo has a few we like playing with such as this one 'How Much Should I Save for Retirement' (with links to other calculators on the right of the webpage):
http://finance.yahoo.com/calculator/retirement/ret02/

Good luck!


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## Pluto (Sep 12, 2013)

Misscrazed,

Here is my opinion: picture the end game, and work back to the present. The end game is you and hubby are in your 60's in this great big house that you bought for 750,000 decades ago. The kids are gone, and it is way too big. You are tired of watering shrubs, mowing the lawn, and shoveling snow. besides, you can now sell it for more than twice the cost of a very nice townhouse on the outskirts of town where land is cheaper. Previously you wouldn't dream of living where land is cheaper because it was too far to get to work and downtown. but now you don't care because you are retired. So you sell the house, and bank hundreds of thousands of dollars tax free, and move a bit out of town. Obviously I tilt toward the great big house vs the RRSP (in the beginning). Part of the reason is the leverage. You end up controlling a 750,0000 asset virtually overnight. But no one will likely loan you that much to buy stocks, or bonds. The other part is the tax free capital gain on the great big asset. 

Too, if you buy the big house, consider getting one with some rental space in it, or easily convertible to rental space with a private entrance. I knew a couple 14 years ago who bought their dream house. Then the tech bust came. Then one of them lost their job. They knew they had to sell the house, or did they? Suddenly they realized their house was easily convertible, so they sacrificed and moved downstairs, and rented the upstairs. Previously, they never dreamed of being land lords. A few years later, they were both working again, the tenants moved out, and they all lived happily ever after. 

I'm a big believer in rental income helping buy the great big primary residence before loading up the RRSP. But even if you know for sure you will not be landlords, when you go shopping for that house, keep an eye out for a structure where part can be rented out, just in case. 

Stock brokers and real estate agents compete with each other, one claiming the other is better. But I look at the banks. They are no dummies. They play both sides. They have their mortgage business, and their RRSP/mutual fund business. I think we should copy the banks. Use the banks money to become small time landlords with the mortgage helper suite, and later get the RRSP. But don't fall for their mutual fund salesman for the RRSP, buy the bank stock so you can benefit from all the profit they make managing those funds.)

PS: get a variable rate mortgage via a mortgage broker. Put all the money you save monthly in GIC's. When your mortgage payments start to inch up with rising rates, you have the cash if you need it, in GIC's. I bet dollars to doughnuts, in 5 - 10 years you will have a ton of money in GIC's that you would not have had if you locked in at a higher rate. If you get a variable rate, and you don't have cash left over at the end of the month, you probably borrowed too much (or you spent too much at the furniture store to fill up that great big house). Budget as if you had the higher locked in rate, save the difference.


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## marina628 (Dec 14, 2010)

My kids are almost 11 years apart and in 2001 we were in the situation as you are now. We decided to wait a few years and in 2009 we had the home we wanted and need built ,the price difference between the two was about $200,000 and we do not regret it for one minute. There is a period of time when the kids get a bit older and they have their friends around that will drive you nuts if each kid does not have their own space ,sanity to me was worth buying up and some people consider their home a big part of their retirement because once kids are raised you can downsize and pocket a bunch of tax free money. There are people that will disagree with this idea but as long as you are not house poor and can carry the bigger payments and still be able to save something then I would not be afraid to do it.


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## mcoursd2006 (May 22, 2012)

Marina, I agree with you, that as long as you are not house poor and have a stable job it's not a big deal to upsize and take on another mortgage. I still go on MLS periodically, just to see what's out there in our comfortable price range, and who knows, we may decide to do it one day. We do have a contingency plan with our current home; we could turn a second floor family into a fourth bedroom. We have already finished the basement so that the kids could have more space to play with their toys. We may feel differently once the boys are in high school and bringing home friends. But hopefully we will have saved enough to upsize without taking too big a mortgage by then.


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## Just a Guy (Mar 27, 2012)

My first house was a sub 1000sq ft. place. The basement wasn't finished when we bought it. We had our first kid there and everything was fine, I even finished the basement doubling the space. When my wife got pregnant with our second, she decided that the place was too small and we needed to upgrade. 

Ironically, the original owners raised three kids in the place with an unfinished basement. Perhaps that says something about our generation. 

The other thing I'd point out is that there is probably a major housing correction on the horizon. I've been picking up places that are more than 50% lower than they were three years ago. While rare, I think they are an indicator of things to come. What costs you 200k to upgrade today, may be worth a lot less in the future.


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## mcoursd2006 (May 22, 2012)

I think for us a better plan would be to purchase another property for rental purpose instead of up-sizing. So I'm hoping that there is some kind of correction in the market soon. I'm not crazy about the prospect of being a landlord, but I know it's a great way to build wealth, especially if you can pick something up in a down market.


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## tiffbou2 (Jul 4, 2013)

I can definitely relate. We moved into a larger house 4 years ago when in our early 30s. Our kids were 2 and 4 years old at the time. We sold our house for $200K and moved into a house that cost $350K. We were not financially ready at all. It would curl people's hair on here if I said what our finances were like at the time. We were house and debt poor for a couple years, but thankfully that eased up as our salaries increased and we got consumer debt paid off. We still owe $270K on our house, and have 15 years left on our mortgage. If we stay on this current path, we won't have the house paid until we are in our early 50s. Despite all this, I still think it was a good decision for our family. We lived in a different city than where we worked, and our mornings trying to juggle kids and commute were crazy. Now we live a block away from my parents in the neighbourhood we want to spend our lives in. This has been so helpful as my parents help with my kids a lot and I help with my disabled sister who lives with them - it will be ideal down the road as my parents age as well. My kids will not have to be uprooted or change schools. THe house has been large enough for us to grow into. There's no fighting for a single bathroom. I can ride my bike to work....I could go on and on. 
So, in short, although financially stupid, upgrading our home added immeasurably to our quality of every day life. For us, that has been worth the financial sacrifice. We do want to grow our wealth, but we also want to live our life.


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## Four Pillars (Apr 5, 2009)

You don't give enough financial info for anybody to give any kind of accurate advice regarding the balance of bigger house/retirement plans.

One point - the transactional costs of buying/selling are pretty high, so if you go from a $550k house to a $750k house - that will likely mean increasing the mortgage by a lot more than $200k, unless you have a pile of cash handy.


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## MoneyGal (Apr 24, 2009)

^ What that guy said. The arguments are tending to come down into lifestyle camps ("buy as big as you can afford! you won't regret it!" vs. "keep it small and enjoy mortgage freedom earlier!"). While both of those positions have merit, neither of them are financial arguments. 

Also: in addition to transaction costs, there's all the extra costs of moving beyond the pure paying the RE agent and moving van stuff. There's all the paint, minor and major remodelling, new furniture, landscaping, etc. It's much harder to ignore that stuff in a $750K house; that's what "Keeping up with the Jones" refers to.


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## GoldStone (Mar 6, 2011)

Four Pillars said:


> You don't give enough financial info for anybody to give any kind of accurate advice regarding the balance of bigger house/retirement plans.


+1

You have to disclose more details if you want to get solid advice.

Do you have pensions?
How safe are you jobs?
How much do you make?
How much do you spend?
How big is your mortgage? RRSPs? TFSAs?
etc
etc
etc


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## Misscrazed (Sep 19, 2013)

Thanks everyone for your replies. I'll try to address as much as I can. 

So actually we do also have a condo that we put a down payment on and will be done in 2016-2017. We have 60k locked up in there and if we can break even with the selling costs we may take the money out to put towards our upgrade. It's a purchase we now regret but that's for another post. 

We do have work rrsps - I put in 4 percent and my company matches 2 and my husbands is similar. We have about 50k in there. 

If it was a sure bet that house prices will continue to appreciate then I definitely would upgrade since yes it's a tax free investment. But we really have a hard time believing that prices will continue to go up given that a couple like us with a good income have a hard time buying a single family home. As for the needed space, all the rooms are currently small and while we can be fine here I can see once the kids are bigger they will love to have the added space. We also like to entertain and without much common area space nor a backyard makes it a tight fit. 

We make 175k a year combined. Our monthly take home is 9500/ mth split equally. He also gets two extra paycheques a year (paid biweekly) that is earmarked for Xmas gifts and misc spending outside of our budget/extra savings. Our current mortgage is 350k and our fixed costs (mortgage, property tax, utilities, car/transportation costs, resps, daycare costs' life insurance etc is approx 4k.) Groceries, clothing, entertainment, gift/charity averages out to 400 a week, leaving us with approx 3k a month in savings. A larger home would likely decrease that savings by 1k given the bigger mortgage/higher rates in the future, higher utilities and property tax). 

As for the closing costs etc we do have cash right now which will grow with year end bonuses (we hope anyway). Bonuses in the past have been about 20-25k before tax combined but I know that's not always guaranteed so it's not included in our budget. Our jobs I feel are secure. 

Thanks again to everyone for your input. Both the husband and I very much appreciate it.


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## Retired Peasant (Apr 22, 2013)

MoneyGal said:


> Also: in addition to transaction costs, there's all the extra costs of moving beyond the pure paying the RE agent and moving van stuff. There's all the paint, minor and major remodelling, new furniture, landscaping, etc.


Not to mention the ongoing cleaning of what is likely a larger house.


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## Just a Guy (Mar 27, 2012)

Another aspect to remember is that for each 1% increase in interest rates, your mortgage payments will increase by $100/month for each 100k of mortgage you have. 

So when you go to renew next time, if interest rates increase from 3-5%, your current debt alone would cost you an extra $700/month....before you expand anything.


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## alingva (Aug 17, 2013)

Misscrazed said:


> How to balance out desire to buy a larger house vs saving for retirement


 can you eat your house? The answer is no. Can you eat your retirement savings? The answer is yes. Are houses (in general) overvalued? The answer is yes. Do you want to buy an overvalued liability and pay for it for 25y? The answer is ...fill the blank. It is a liability, not an asset, I never understood why people call an asset 100 bricks that they have to pay for insurance, mortgage, maintenance, taxes, 3 new roofs etc. An asset is what gives you money, a liability is what takes money from you so why would you call your house an asset? Is your computer an asset? Is your car an asset? So why your primary residence will be called an asset? So if you buy your home - it is not an investment but savings for retirement - is. Do not confuse the two


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## the-royal-mail (Dec 11, 2009)

^ Great post. 100% agreed. Too many people are the victim of the following rhetoric: "_I don't want to pay someone else's mortgage_!"


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## youngdad3 (Jun 29, 2013)

While I agree a primary residence is more a liability than an asset because it's not producing any income, let's not compare it to a consumer item either. Nor a computer or a car will increase in value over time.


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## GoldStone (Mar 6, 2011)

youngdad3 said:


> While I agree a primary residence is more a liability than an asset because it's not producing any income, let's not compare it to a consumer item either. Nor a computer or a car will increase in value over time.


Home prices increase in value in nominal dollars. They can easily decrease in value in real (inflation adjusted) dollars.

Robert Shiller:
Why Home Prices Change (or Don’t)


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## My Own Advisor (Sep 24, 2012)

Thanks for the link GoldStone....


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## Sampson (Apr 3, 2009)

I think the anti-buying camp is also filled with useless rhetoric.

The question here should not be about whether the OP is buying an expensive house, or anything like that. Who are we to judge how the OP should spend their money. The assessments should be on whether the decision is an affordable one. The major point is to what extent one should leverage a lifestyle. If things continue to go as is, then the OP's family will have enough money to buy such a house. Whether done now, or after accumulating more liquid assets...

I think you should wait until the isavings/investments are larger sum. The kids won't fully notice for a year or two anyway.

Wait for the business oftxhe investment condo to settle, keep saving, then pull the trigger when you havemore cash to put down.


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## Four Pillars (Apr 5, 2009)

Sampson said:


> I think the anti-buying camp is also filled with useless rhetoric.


+1


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## YYC (Nov 12, 2012)

Super fascinating article Goldstone, thanks for the link.


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## kcowan (Jul 1, 2010)

Thanks Goldstone for the article. And I agree that they need to unwind the condo purchase before digging the hole any deeper. If it was purchased as an investment property, then this will give them some real insight into that.


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## Rusty O'Toole (Feb 1, 2012)

"But I look at the banks. They are no dummies. They play both sides. They have their mortgage business, and their RRSP/mutual fund business. "

Good point, but don't forget they are buying mortgages while they are selling RRSP/mutual funds and GICs.


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## Four Pillars (Apr 5, 2009)

GoldStone said:


> Home prices increase in value in nominal dollars. They can easily decrease in value in real (inflation adjusted) dollars.
> 
> Robert Shiller:
> Why Home Prices Change (or Don’t)


Very good article.


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## sprocket1200 (Aug 21, 2009)

I think it only boils down to how,long you want to work. Work until 70 or 80 if you choose, get the upgrade.

Or retire extremely early (think 40) and enjoy life. A mortgage that takes more than 10 years to,pay off is an anchor!


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## AltaRed (Jun 8, 2009)

sprocket1200 said:


> A mortgage that takes more than 10 years to,pay off is an anchor!


That is unrealistic for the vast majority of Canadians but I would agree one should try and target 15 yrs to mitigate interest rate drain, and optimize the number of saving (investment) years.


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## snowbeavers (Mar 19, 2013)

GoldStone said:


> Home prices increase in value in nominal dollars. They can easily decrease in value in real (inflation adjusted) dollars.
> 
> Robert Shiller:
> Why Home Prices Change (or Don’t)


Best part of that article was the automated housing construction. How cool would it be to have a house made by a large scale 3D printer?!

http://www.contourcrafting.org/


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## sprocket1200 (Aug 21, 2009)

AltaRed said:


> That is unrealistic for the vast majority of Canadians but I would agree one should try and target 15 yrs to mitigate interest rate drain, and optimize the number of saving (investment) years.


Completely realistic is the terminology.
$225,000 over 10 years @3.5% is just over $2,000 a month to retire the mortgage.

Add in a measly $24,000 down payment ( over 10% and only a year of saving the payments) and the can afford nearly $250k. Ever year of saving is another $24k plus. Five years and they are nearly at $400k.

It is unrealistic to listen to anyone whine about how it is so unaffordable to have a place to live now...


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