Jose and Maria Dias bought their first home in Milton, Ontario, two years ago. The purchase price was $500,000. They were determined to get a conventional mortgage and were able to come up with a down payment of $100,000 by combining $20,000 in gifts received from their parents, saving another $30,000, and borrowing $25,000 from their RRSPs each. They were approved for a 3.5 percent 25-year mortgage for $400,000 with monthly payments of $1,997.07. In addition, they chose to pay the lender another $400 per month for property taxes.

So far everything has been going well. They both have good jobs. Jose makes $69,000 a year and has a monthly take-home pay of $4,025. Maria earns $35,000 and has a take-home pay of monthly $2,175. They have no credit card debts but pay $700 per month for an auto loan and RRSP loan repayment. Other monthly expenses are as follows: home insurance $60, auto insurance $200, utilities $450 ($250 is for heating/hydro), food $700, and transportation $350. What is left is either used for entertainment or put into a savings account.

Maria is now six months pregnant with the couples first child and she is worried about whether they will be able to meet their living and financial expenses while she is on maternity leave. She is also wondering whether, in the event her mother is unable to look after the child, they can afford monthly child care expenses of $600 or more for the baby when Maria returns to work.

Questions

1. While on maternity leave, Maria will receive only 55 percent of her salary. Taking this and some of the additional baby costs (such as diapers and formula) into account, will the Diases be able to make ends meet? Will they be eligible for any tax credits and benefits that would increase their cash inflow? Are there any expenses they can reduce to help meet their obligations?

2. Calculate the maximum monthly mortgage payment, the maximum mortgage amount, and the maximum home purchase price Maria and Jose could have afforded based on the GDS ratio and TDS ratio guidelines. Would this have been wise?

3. When her maternity leave ends, can Maria afford to go back to work? What are the tax benefits of child care costs?