Lifestyle | How to pay for “expensive work”?

A couple with three children seeks to do so without harming family finances

The situation

Spouses Michel* and Josée*, in their forties and parents of three teenagers, are preparing interior remodeling work for their family home.

The completion of this work, estimated at $75,000, which includes a contingency budget, is planned for next spring.

“This is important work which could be quite expensive in total,” indicates Michel during a discussion with The Press. This is why we are looking for advice on the best way to pay them without affecting our financial situation too much.

“For example, should we dip into our TFSAs, at the risk of reducing our future retirement savings assets? Should we instead borrow this amount by adding it to our mortgage loan balance, when it is renewed in August 2025? »

A glance at the financial situation of spouses Michel and Josée suggests that they could benefit from a good margin of maneuver to pay for their residential work without too much impact on their medium and long-term financial planning.

For example, their family financial statement shows a net asset value approaching $1.3 million, including $840,000 in financial assets in registered savings accounts (RRSP and LIRA, TFSA, RESP, RDSP). This family asset also includes an amount of $475,000 which arises from the property value of their family home ($700,000) less the balance of $225,000 on their mortgage loan.

As for the family budget managed by Michel and Josée, we immediately see that their good level of income ($320,000 gross per year) combined with a reasonable lifestyle for a family of five ($75,000 per year in costs residential and lifestyle) allows them to maintain good savings habits.

These years, Michel and Josée direct about $100,000 per year of their disposable income toward contributions into their respective RRSP and TFSA accounts, as well as into the education savings accounts (RESPs) of their two children, aged 14 and 16 years old still eligible.

Obviously, Michel and Josée manage their family budget and medium- and long-term financial planning priorities well.

It is in this context that they are seeking advice in order to optimize the financing of their residential work, which they estimate at approximately $75,000. All this, while minimizing the impact of these costs on the good continuity of their family financial situation and their retirement savings in the medium and long term.

The situation and Michel and Josée’s questions were entrusted for advisory analysis to Julie Paquin, who is a financial planner and vice-president of private management at Optimum Gestion de placements.

The advice

From the outset, financial planner Julie Paquin notes that “Michel and Josée have been able to develop an excellent savings capacity and rigorous budgetary management, which are essential bases for building solid assets and achieving their objectives.”

In this favorable context, “several possibilities are available to Michel and Josée” for financing their project to redevelop their family home. First option to consider: withdraw from the TFSA the $75,000 planned for residential work.

Consequently, it recommends that they estimate the potential return on their TFSA assets using the standards recommended by the Financial Planning Institute of Quebec.

“The estimated return of a balanced portfolio [60 % en actions et 40 % en titres à revenus fixes] is of the order of 5.23% per year, but before the deduction of management fees, summarizes M^me Paquin.

“Assuming management fees of approximately 1.14% per year, we obtain a potential net return of 4.09% per year. In Michel and Josée’s TFSAs, maintaining an investment of $75,000 with an average return of 4.09% per year gives a potential value of $204,000 in 25 years. »

TFSAs or mortgage?

Looking ahead, would such an anticipated return be more advantageous in the long term than borrowing more with their mortgage? The answer to this question depends above all on the evolution of interest rates over the coming months, indicates Julie Paquin.

Hence the second option to be considered by Michel and Josée to pay for their next residential work: instead of withdrawing $75,000 from their TFSA, they could increase the balance of their mortgage loan when it is renewed in August 2025.

“Like a large number of households, Michel and Josée will have to renew their mortgage loan in 2025. Despite the context of falling rates, they will face a mortgage rate and payments higher than what they have been paying for years. And this, even before having added $75,000 for residential work,” warns M^me Paquin.

How to estimate this increase in mortgage costs? “I formulated the hypothesis that with a mortgage loan balance of around $221,000 when it is renewed in August 2025, and the addition of $75,000 for the cost of residential work, a new loan at a rate increased to 4.09% over 25 years would imply payments increasing from approximately $1,000 to $1,570 per month, indicates Julie Paquin.

“Where will mortgage interest rates be in August 2025? While waiting for this to become clearer, it will be important for Michel and Josée that they update their borrower profile and their budgetary capacity to assume such an increase in their mortgage payments. »

TFSA and RRSP before the mortgage?

In the meantime, Julie Paquin suggests that Michel and Josée consider a third option for financing their residential work, while continuing to optimize their retirement savings in registered accounts with tax advantages.

“In the absence of a work-related pension plan, it is a priority for Michel to maximize his personal RRSP and reduce his high tax rate by using the available contribution room,” says M.^me Paquin.

How to do it? “Michel and Josée could use their TFSAs to make a lump sum contribution of $75,000 to Michel’s RRSP, which will allow him to recover most of his balance of $86,000 in unused contributions. By contributing $75,000 to his RRSP by the next annual deadline, at the end of February 2025, Michel could obtain approximately $49,000 in tax savings,” calculates Julie Paquin.

Then, this tax saving could be used to repay a portion of their TFSA withdrawals, or reduce their mortgage balance before its renewal in August 2025 at a higher interest rate and a borrowing amount increased by the cost of residential work.

How to choose between these two uses of tax savings? “In August 2025, Michel and Josée will know the new interest rate for their mortgage renewal. They will then be able to compare it to the anticipated rate of return on their TFSA assets,” says M.^me Paquin.

If this long-term net return promises to be higher than their new mortgage interest rate, Michel and Josée may then decide to prioritize their TFSA contributions rather than accelerate the repayment of their mortgage balance.

“But if the anticipated rate of return and the interest rate were comparable, it would then become a more personal choice than a financial one,” considers Julie Paquin.

“On the one hand, the interest rate on loans is always known while the anticipated rate of return remains an estimate. On the other hand, there is the psychological factor of paying off debts as quickly as possible, which is also a way to get rich in the medium and long term. »

* Although the case highlighted in this section is real, the first names used are fictitious.