Real estate sticker shock. Can AJ really afford to buy a bigger home for his growing family?

The couple is aiming to pay off their mortgage next year, which would give them some room to sell and find a bigger place to live.

But AJ is shocked at the cost of properties these days.

“We want a detached four-bedroom two-car garage home with an office,” he says. “But anything we like is going for upwards of $1.2 million.”

AJ calculates that if they sell their current home for $800,000, after paying their mortgage and realtor fees, they’d be left with about $600,000 for a down payment.

“This would mean if we get the home we really want, we would have to get a mortgage of $600,000 which seems absolutely ridiculous, especially with today’s interest rates,” he says.

Will AJ be able to buy his dream home in the next couple of years? We asked him to share his expenses with a financial adviser to see what he can do.

The expert: Jason Heath, managing director at Objective Financial Partners.

AJ and his wife have a modest mortgage and are hoping to move to a bigger home with a little more room for their family. They figure it could come with is a $600,000 mortgage which makes them a bit uncomfortable.

There are 5-year fixed rates in the 5 to 5.25 per cent range right now. If they could get a 5 per cent mortgage amortized over 25 years, the payments would be nearly $3,500 a month.

By comparison, their current mortgage payments are just over $1,100 a month. That would imply a $2,400 a month increase in their debt payments — let alone higher property taxes, utility costs, insurance, and other expenses.

If they are hoping that a variable rate mortgage can catch a downturn in interest rates, they may be right. But their starting point currently may be 6.25 per cent to 6.5 per cent, so they will pay more initially if they hope to pay less later. FP Canada provides guidelines each year to Certified Financial Planners for long-term financial planning purposes. Currently, the long-term mortgage rate assumption suggested is 4.3 per cent.

So, anyone hoping for two per cent interest rates to decrease borrowing costs may be overly optimistic. Today’s rates may be high on a relative basis compared to the past 15 years, but on an absolute basis, we may not be much above the so-called “normal” cost of capital.

If AJ and his wife are going to increase their housing costs by $2,500 to $3,000 a month, they may need to cut back in other places. They spend modestly as it is. They donate $1,500 a month to charity so that may be one area to reconsider. Another consideration is their car budget. They have no car payments now and sometimes this is a short-lived scenario. In a case like theirs, they may benefit from developing a long-term retirement plan on their own or with a professional.

If they do make the move to a bigger home, how might it impact their potential retirement savings capacity? They may expect positive things in the future like incremental increases in their incomes, but they should also think about ongoing home renovations, car replacement, education funding for their kids, and other sporadic costs.

If AJ and his wife can take on the bigger mortgage and balance their other short- and long-term goals, they can make a move with more confidence. They may be somewhat limited, however, by their incomes and down payment. If they have a $600,000 down payment, based on their combined $140,000 of family income, they may only be able to qualify for a mortgage in the $450,000 range.

They should get a pre-approval before they begin house hunting in addition to doing their own number crunching to make sure they are setting their own targets for their home and mortgage budget.

Spending in week one: $462. Spending in week two: $705.

Takeaways: AJ says he will prioritize getting a mortgage preapproval before beginning the house hunt. “I pay very close attention to the interest rates so I am familiar with them,” he says.

Are you a millennial living in Toronto or the GTA who needs help with saving your money? Be a part of #MillennialMoney and email galsharif@thestar.ca