ADMS3541 Personal Financial Planning

Question 1:  Rent vs buy 

Mila is moving to a new location for work.  Based on her revised employment contract, she will be working at the new location for the next 5 years.  She is deciding whether she should rent or buy a house.  From her research, she can rent an apartment for a cost of $1,800 per month.  The house she is considering purchasing will cost $625,000.  Mila has just signed a contract to sell her current home and would use some the proceeds from this sale for the down payment.  The amount for a down payment for her next property would be $125,000.  Mila prefers to purchase a home as she enjoys gardening.  She also has many ideas of how to decorate her new space

Her financial institution is currently offering a mortgage rate of 4.25% for 5 years.  Mila would amortize the mortgage over a period of 25 years with monthly payments.

Other costs associated with owning the home are as follows:

· $5,100 p.a. for property taxes.

· $100 monthly for insurance.

· New roof in 3 years, estimated cost in 3 years is $23,000.

· $525 per month for utilities (electricity, water, heat) and landscaping costs (Mila would hire a company to cut grass in the summer and do snow removal in the winter).

All expenses are expected to increase at a rate of 2% p.a.  Due to the demand for homes in the new location, the home value is expected to increase 3.25% p.a.  Mila can earn a return of 4.5% p.a.

Required:

a) Is it a good time for Mila to buy a home or rent in the new location?  Ignore expenses such as moving and legal and ignore taxes.

b) What are 3 other factors Mila should consider in her rent vs buy decision?

Question 2:  Mortgage Qualification

Craig and Aileen have always wanted to live close to their work. Craig is an engineer and his net income is $63,440 per annum.  Aileen is an accountant and her net income is $66,895 per annum.  Craig’s tax rate is 20.7% and Aileen’s tax rate is 21.3%.

The cost of purchasing a home in the city that they work is quite expensive.  Craig and Aileen have been committed to saving for a down payment to purchase a home and have saved $105,000.  They have been able to save this amount while also paying $475 per month to pay down their student loans. Aileen’s parents have gifted them $50,000 towards the purchase of a home.  They have a total of $155,000 for a down payment.  

Due to an ongoing health emergency in the past year, both their places of employments have implemented mandatory work from home and have not communicated that work from home will be the practice going forward.  With the change of working from home, Craig and Aileen are very excited to expand their option to purchase a home outside of the city.  They have found a town where they would like to purchase a home.  The annual property tax in this town is estimated to be $4,800.

Their financial institution has offered them a 5-year fixed closed mortgage at a rate of 3.75%.  The amortization period is 25 years.

Craig and Aileen usually use public transit to get around the city.  If they needed a vehicle to travel outside of the city, they rented a car.  Now that they are looking at purchasing a home outside of the city, they have recently purchased a car.  The car was financed with the following details:  cost $18,000, rate 5.5% APR, compounded monthly, monthly payments for 5 years

Ignore stress test in the calculation

Required:

a) Using the two popular debt-service ratios (GDS and TDS), how much mortgage can they qualify for assuming monthly payments. Use the standard benchmark for these ratios from the textbook.

b) List 3 other factors they should consider that are not reflected in the ratios.

c) Explain to Craig and Aileen the purpose of the mortgage stress test.  No calculations.

d) List 3 other costs Craig and Aileen need to consider when purchasing a home.

Question 3:  Mortgage Calculations

Ava and Brady have been enjoying their home since they purchased it almost 5 years ago.  They have provided you with a copy of their mortgage contract.  The following are key details from their mortgage contract:

· Mortgage amount:  720,000

· Mortgage term:  5 years

· Mortgage amortization:  20 years

· Fixed closed mortgage, rate:  3.25%

· Payment schedule:  monthly payment

They have been contacted by their financial institution regarding their mortgage renewal.  Their financial institution is offering Ava and Brady a 3-year fixed closed mortgage at a rate of 3.75%.

Required:

a) Compute the balance outstanding after 5 years.

b) Compute the new mortgage monthly payment upon renewal.

c) How much interest will they pay during the new 3-year mortgage period?

d) To assist with their budgeting, Ava and Brady are considering changing to
bi-weekly payments so the timing will be the same as their payroll deposits.  Compute the new mortgage bi-weekly amount upon renewal.