Walk away

Allan and Bethany look good from the curb.

The house in a respected Calgary hood is upscale. There’s a late-model car in the driveway. Mom and toddler walk the safe suburban streets. Al’s gainfully employed.

Alas, looks deceive. “This situation,” he tells me, “is quite concerning.” Actually, I think he’s terrified. He sees what’s coming. “We need your expertise,” he says. ‘We need guidance.”

The Millennials are both 34. The kid is two. He makes $85,000 a year. She earns almost as much. But, sadly, Bethany was laid off three months ago, which came far too soon after that extended mat leave. “She took that time off to care for our son, and that contributed to our accumulating some debt. Now our financial circumstances have become increasingly challenging.”

Not challenging. A creeping disaster. An invisible, middle-class, Canadian fail.

While pregnant two years ago they bought the house for $675,000. The downpayment was 5%, leverage was 20x, and at a cheap mortgage rate of 3% the monthly was $3,000, plus taxes, insurance, heat and utilities. The mortgage now sits at $621,000 and the odds are high it won’t be 3% when renewal rolls around.

Meanwhile, they haven’t been able to live within their means. Saved nothing. A bank line of credit has increased to $55,000, at 11%. They’re now carrying $35,000 on credit cards (at almost 30%). And the car loan sits at $17,000 – at 8% interest.

“Given my wife’s job loss,” says Al, “we are considering several options to manage our situation, including:

“Selling our house, which could potentially sell for $750,000, to help alleviate our debts, though it would mean returning to renting.

Borrowing money from friends and family to delay selling the house in the hope that my wife can secure a new job soon, and then we could manage things.

Selling our cars and purchasing cheaper alternatives to eliminate the car loan.

Getting the basement renovated and renting it out, for additional income.

Renting out our house (it should rent for $2500 per month), while we rent a cheaper place elsewhere.”

“We are uncertain which course of action would be the most prudent and sustainable in the long term. We aim to stabilize our finances while also ensuring we can provide a secure and comfortable life for our son. Can you help?”

Of course. These Mills may have made bad choices – like thinking having a kid necessitated having a house then reaching for what they could not afford – but there’s always a path forward. The trick is to ensure more crappy choices do not follow the original ones.

So, Allan and Bethany, borrowing more money is off the table. It’s a gamble. You’ll put relationships at risk. Your finances will become darker as debt grows. This is a fast-track to failure. Selling the cars? Sure, that will trim some debt, but make zero difference overall. You’re still sinking – and will now be walking. Harder for B to get any job that needs a workplace presence.

Rent the basement? An option, but it will cost money to fit it out. Renos could jeopardize part of your PR cap gains exemption and you’ll end up with a stranger in the basement. The cash flow would help defray house costs, but it won’t pay off any of that debt. Moving out, renting the house and leasing an apartment elsewhere is the worst idea. That changes nothing, except you now have an unsaleable property (once tenants are ensconced they might refuse to vacate)  plus you’ll be in negative cash flow every single month.

Nope, you gotta sell. But even that is no slam-dunk. Realtor commish in AB would be $27,000. Legals two or three grand. The mortgage break fee at least nine thousand (three months) and the home loan repayment is $621,000. So of a $750,000 sale price (should you be so lucky) the net would be $90,000 (of which $38,000 was your downpayment) – not enough to retire expensive debt of $107,000.

However, owing $17,000 and paying $3,000 in rent is a helluva lot better than owing $728,000 and forking over $3,800 monthly for mortgage, insurance and taxes. This will allow you to get out of negative net worth faster, and your young child won’t care (or know) that you rent instead of own. Now you can do what responsible parents should – stop feeding an unrepayable bank mortgage and start chunking money away in the child’s RESP plus for you own future financial security. You can also take advantage of Cowtown’s crazy current real estate boom to sell fast, for the most.

The lessons are simple. Starting a family does not mean panic-buying a house. Kids don’t care. It’s irresponsible.

Purchasing with 5% down and 95% financing is ridiculous. If that’s all the cash you’ve got, you can’t afford real estate. Shame on the lender who told you otherwise.

Not planning ahead is lethal. Surely you knew Bethany’s income wouldn’t be topped-up during mat leave, yet your expenses would swell. You went into that maelstrom without enough resources and a surfeit of hormones. This is the result.

The siren song of real estate has brought you to this point – even in the midst of the country’s frothiest housing market. Rather than yielding stability and giving your child a head start, it has weakened your family, stressed your marriage and saddled you with obligation and worry.

Throw off the shackles. Walk away towards freedom.

About the picture: “Meet Pearl, a recent addition to our family as she ponders which book to read next,” writes Greg (who has an awesome library). “We’ve been reading your blog (and books) since pretty much the beginning and can never thank you enough for all your sage advice. You and your team are a daily source of information, inspiration and humour which we will continue to reap the benefit of for the rest of our lives. Thank you so much!”

To be in touch or send a picture of your beast, email to ‘[email protected]’.