Question

Securing a Mortgage Claude and Mike are a young couple of working professionals living in Thunder Bay, Ontario. Together, they have a combined gross monthly income of $6,200. They currently pay $280 per month towards a lease on their car and Claude makes a payment of $160 per month towards her school debt. They have also developed a high credit score, by keeping their credit card balances low and paying off all bills and debts on time. Claude and Mike have been putting money aside from each of their paycheques to save up for a down payment of 20% on a $185,000 condo. Once they saved up enough money, they began researching different mortgage options online. Through their research, Claude and Mike discovered that in addition to big banks, there are mortgage brokers who can assist them with their mortgage. A mortgage broker will negotiate terms with multiple different potential lenders, and as such, can often find the lowest interest rate offered by a financial lending institution. In addition to this, a mortgage broker is paid commission by the lender, and therefore, the service would not be of cost to Claude and Mike. Intrigued by this, the couple contacted a Canadian mortgage broker company, that has access to over 30 of the top mortgage lenders in Canada.

Answer 1

a. The couple require mortgage to the tune of 85% on the $185,000 condo as 20% is the down payment. So, mortgage required = 80% * $185,000 = $148,000

b. To calculate size of the monthly payment:

No. of periods = 10 years or 120 months ; Rate = 2.72%/12

Monthly payment = $148000 / PVAF(2.72%/12, 120) = $1,410

c. GDS (Gross Debt Service) is the percentage of income needed to pay all monthly housing costs and 50 per cent of condo fees, if applicable.
TDS (Total Debt Service) is the percentage of income needed to cover all debts. This is the same as that of the GDS, except all of the monthly debts are taken into consideration. This includes car payments, credit cards, alimony, and any loans.

GDS = 1410 + 50%*200 = $1,510

TDS = 280 + 160 + 1410 + 200 = $2,050

Monthly Income = $6,200

GDS Ratio = 1510/6200 = 24.35%

TDS Ratio = 2050/6200 = 33.06%

The industry standard for a TDS ratio is 42 per cent. So, it is advisable to lend the couple.

d. Referring to the mortgage schedule in part (f), the principal remaining at the end of 60 months is $79,021.29.

No. of periods left = 5 years or 60 months ; Rate = 2.68%/12

Monthly payment = $79021.29 / PVAF(2.68%/12, 60) = $1,408.70

f.

Amount Paid Payment (Periodic Number Payment) PMT($) Principal Interest Principal Balance Portion Portion (PMT (Previous (Pervious - INT) Balance - Balance * i) PRN ($) PRN) INT($) BAL($) $ - $ - $ 148,000.00 $ 335.47 $ 1,074.53 $ 146,925.47 $ 333.03 $ 1,076.97 $ 145,848.50 0 $ 1 $ 2 $ - 1,410.00 1,410.00 58 $ 59 $ 60 $ 611 $ 621 $ 1,410.00 $ 1,410.00 $ 1,410.00 $ 1,408.70 $ 1,408.70 $ 187.45 184.68 181.90 176.48 173.73 $ $ $ $ $ 1,222.55 $ 81,475.22 1,225.32 $ 80,249.89 1,228.10 $ 79,021.79 1,232.22 $ 77,789.58 1,234.97 $ 76,554.61 119 $ 1,408.70 120 $ 1,408.70 Total $ 169,122.00 $ 6.27 $ 2.57 $ 21,122.00 $ 1,402.43 $ 1,406.13 $ 148,000.00 $ $ 1,406.13 0.00