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# Unit 1 Home Finance

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### Unit 1 Home Finance

1. 1. Essential Mathematics 40S Home Finance
2. 2. Home Finance• The purchase of a home will likely be the largest purchase that you ever make. Learning how to make decisions regarding the purchase of a home and the many costs associated with home ownership will help you to make educated decisions about your future.
3. 3. Home Finance• In this module you will learn how to solve problems and make informed decisions regarding the purchase and maintenance of a home. This will involve home insurance, mortgages, home maintenance, property taxes and the benefits of home ownership. You will also learn how the Gross Debt Service Ratio is used to determine how much people can afford to spend on a home.
4. 4. Mortgages• Buying a home is the largest purchase that most consumers will make in their lifetime. In most cases, because it is such a large purchase, people do not buy the home with cash. They often will need to borrow money from a financial institution (bank, credit union, mortgage broker, etc) in order to complete the purchase. This type of loan is called a mortgage.
5. 5. Mortgages• Do a web search, or use other resources available to you, to complete your worksheet.
6. 6. Mortgages – Fixed vs Variable Rate
7. 7. • Types of Mortgages – Variable Rate Mortgage - A mortgage with an interest rate that changes with the market. The rate changes each month, meaning that the portion of your monthly payment that goes towards interest may go up or down each month. However, your total monthly payment will probably stay the same. – Fixed Rate Mortgage - With a fixed-rate mortgage, the interest rate is set for the term of the mortgage so that the monthly payment of principal and interest remains the same throughout the term. Regardless of whether rates move up or down, you know exactly how much your payments will be and this simplifies your personal budgeting. – Closed Mortgage - A mortgage that has a fixed interest rate (usually lower than an open mortgage rate) and a set, unchangeable term. You cannot pay off a closed mortgage before the agreed end date without paying a penalty. – Convertible Mortgage - A mortgage that you can change from short-term to long-term, depending on your financial needs. – Open Mortgage - A mortgage that you can pay off, renew or refinance at any time. The interest rate for an open mortgage is usually higher than a closed mortgage rate.
8. 8. Mortgages – Calculating Mortgage Payments• In order to calculate the monthly mortgage payment, you must make use of a amortization table or a mortgage calculator.
9. 9. Mortgages – Calculating Mortgage PaymentsExample 1• Conrad Wiebe purchases a home for \$120,000. He makes a down payment of \$40,000 and takes out a fixed-rate mortgage at 7.5% for the balance of the purchase price. The mortgage is to be amortized over 20 years. Determine Conrad’s monthly mortgage payment. Calculate the amount of interest Conrad pays during the 20-year amortization period.
10. 10. Mortgages – Calculating Mortgage PaymentsExample 1• Conrad Wiebe purchases a home for \$120,000. He makes a down payment of \$40,000 and takes out a fixed-rate mortgage at 7.5% for the balance of the purchase price. The mortgage is to be amortized over 20 years. Determine Conrad’s monthly mortgage payment. Calculate the amount of interest Conrad pays during the 20-year amortization period.
11. 11. Mortgages – Calculating Mortgage PaymentsExample 2• Matilda wants to purchase a home that is valued at \$200 000 and she has a down payment of \$25 000. She has negotiated a mortgage with an interest rate of 5.28% with an amortization period of 20 years. Use the mortgage calculator to find her monthly mortgage payment. Calculate the amount of interest Matilda pays during the 20-year amortization period.
12. 12. Mortgages – Calculating Mortgage PaymentsExample 2• From the previous activity you determined that if Matilda borrowed \$175 000 to buy her home she ended up paying \$282 376.80, of which \$107 376.80 went to the bank in interest. Recall: \$1176.57 x 240 payments = \$282 376.80 - \$175 000.00 = \$107 376.80• Let’s use these figures to look at several ways you may be able to reduce the amount of interest paid on a mortgage.• Consider the factors or variables we used to calculate Matilda’s mortgage. Then take a moment to think of any ways that you could suggest to Matilda that might reduce the cost of her mortgage.
13. 13. Mortgages – Calculating Mortgage PaymentsImpact of a lower Interest Rate• Matilda wants to purchase a home that is valued at \$200 000 and she has a down payment of \$25 000. She is wanting to borrow \$175 000 with an amortization period of 20 years, and was offered an interest rate of 5.28%.• In order to reduce the amount of interest that she will pay over the life of her mortgage she has gone “shopping” around to other financial institutions for a better interest rate. She has found one that will give her an interest rate of 4.6%. Determine the amount she will pay in interest over the life of this mortgage.
14. 14. Mortgages – Calculating Mortgage PaymentsImpact of a larger Down Payment• Matilda wants to purchase a home that is valued at \$200 000. She has negotiated a mortgage with an interest rate of 5.28% with an amortization period of 20 years, and originally considered a down payment of \$25 000.• However, she wants to decrease the amount of interest that she will have to pay. So, she has decided to increase her down payment to \$50 000. Determine the amount she will pay in interest over the life of the mortgage using a \$50 000 down payment.
15. 15. Mortgages – Calculating Mortgage PaymentsImpact of a shorter Amortization Period• Another way that Matilda can decrease the amount of interest she will pay is by paying the mortgage off quicker.• Matilda wants to purchase a home that is valued at \$200 000 and her down payment is \$25 000. She has negotiated a mortgage with an interest rate of 5.28% but changes the amortization period to 15 years instead of 20 years.• Determine the amount she will pay in interest over the life of the mortgage.
16. 16. Practice• Lorem ipsum dolor sit amet, consectetuer adipiscing elit. Vivamus et magna. Fusce sed sem sed magna suscipit egestas.• Lorem ipsum dolor sit amet, consectetuerEssentials of Mathematics 12 Text adipiscing elit. Vivamus et magna. Fusce Page 32 sed sem sed magna suscipit egestas. Questions 1, 2, 3, 5, 7
17. 17. Mortgages – Payment Schedule• You can gain a better understanding of mortgage payments and interest costs by examining how each monthly payment affects the mortgage. This can be done with a schedule of mortgage payments chart. The schedule of mortgage payments chart divides each mortgage payment into the amount of the payment that goes to pay interest and the amount of the payment that goes to pay down the principal.
18. 18. Mortgages – Payment ScheduleExample 1• Write an amortization schedule for 3 months, given a mortgage of \$85 000 (after a \$20 000 down payment), at 6% for 20 years. – Essential of Mathematics Text (Page 28-29)
19. 19. Mortgages – Payment ScheduleExample 2• Matilda wants to purchase a home that is valued at \$200 000 and she has a down payment of \$25 000. She has negotiated a mortgage with an interest rate of 5.28% with an amortization period of 20 years. Find her monthly mortgage payment and then create a schedule of payments for the first 7 payments.
20. 20. Mortgages – Payment ScheduleExample 3• Using the mortgage calculator found at: http://www.canequity.com/mortgage-calculator/• If you scroll further down the page, you will find this Monthly Payment and Amortization Table. It will show the amount of the monthly payment, which as you can see, stays the same for the entire mortgage. You will also see that the payment is divided up into principal and interest. Every time a person makes a payment on their mortgage the amount they owe decreases. So as a result, the amount of interest that they pay also decreases with each payment.• .
21. 21. Practice• Lorem ipsum dolor sit amet, consectetuer adipiscing elit. Vivamus et magna. Fusce sed sem sed magna suscipit egestas.• Lorem ipsum dolor sit amet, consectetuer HOME FINANCE Fusce adipiscing elit. Vivamus et magna. Mortgage Calculations sed sem sed magna suscipit egestas. Worksheet #1
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23. 23. Home Insurance• Home insurance protects you against mishaps that are generally hard to predict and prevent. There are insurance policies for homeowners, apartment dwellers, condominium owners, and mobile home owners. Homeowner’s insurance protects a homeowner against damage and/or loss to both building and contents. Tenant’s insurance protects a renter against damage and/or loss to personal possessions. As well, tenant’s insurance protects renters against damage they may inadvertently cause to the building or other renters.
24. 24. Home Insurance• In Manitoba, you purchase home insurance through an insurance company broker or agent.• Your home insurance premium is the amount that you pay in order to obtain your insurance.
25. 25. Home Insurance PREMIUMS• In addition to the company you choose, home insurance premiums depend on the following factors: »Replacement cost of home »Location of home »Type of coverage »Amount of deductible »Available discounts
26. 26. Home Insurance PREMIUMSReplacement cost of home• The replacement cost of a home is the amount it would cost to replace the home and its contents if it burned to the ground
27. 27. Home Insurance PREMIUMSLocation of home• Manitoba is divided into different areas for the purposes of calculating premiums for homeowner’s insurance. For the purposes of this course, Manitoba will be divided into the following four areas: – Area 1(Metro Winnipeg)-homes that are located within the City of Winnipeg. – Area 2 (Protected) – homes located outside Winnipeg but within 300 metres of a fire hydrant. – Area 3 (Semi-Protected) – homes located outside Winnipeg but within 12 kilometres of a fire hall. – Area 4 (Unprotected) – homes outside Winnipeg and located more than 12 kilometres from a fire hall.
28. 28. Home Insurance PREMIUMSType of coverage• There are two basic types of home insurance, standard (or broad) coverage and comprehensive coverage. Both types of insurance offer the same protection for the building but they differ in terms of the protection to the contents. Comprehensive coverage will offer more protection to the contents of a building than standard or broad coverage.
29. 29. Home Insurance PREMIUMSAmount of deductible• The deductible is the amount you must pay before the insurance company pays you anything when you make a claim. Most home insurance policies carry a \$500 deductible which means you are responsible for paying the first \$500 of any insurance claim that you make. Most insurance companies allow you to increase or decrease the amount of deductible you will pay by adjusting your premium.
30. 30. Home Insurance PREMIUMSAvailable discounts• Most insurance companies will allow discounts if your home has a burglar alarm, you are claim free for three years, it is a new home, or the client is over 50 years of age.
32. 32. Tenants InsuranceUsing Tables to Determine Tenant InsurancePremiums• In order to determine the amount that a tenant will pay to insure their possessions (suite contents), you will need to refer to Table 1-1, Tenants Policy Rates.• Please note that this table contains hypothetical examples that have been developed for the purposes of this course. Different insurance companies offer different rates and the tables are usually more complex.
33. 33. Tenants InsuranceUsing Tables to Determine Tenant InsurancePremiums
34. 34. Tenants InsuranceExample 1• Jane is renting an apartment and her possessions (the contents) are worth \$35 000. If she wants a tenants package policy with a \$500.00 deductible and standard coverage, find her annual premium.• How much more will Jane have to pay if she would like a \$200.00 deductible rather than a \$500 deductable?
35. 35. Home Owners InsuranceUsing Tables to Determine Home OwnersInsurance Premiums• A homeowner owns not only their possessions but the building as well. To determine the amount a homeowner will pay to insure their building and possessions, you will need to refer to Table 1-2 Manitoba Homeowners Insurance Rates.
36. 36. Home Owners InsuranceUsing Tables to Determine Home OwnersInsurance Premiums
37. 37. Home Owners InsuranceExample 1• The Chen family wants to insure their home and its contents for \$190 000 with comprehensive coverage. The home is located in Metro Winnipeg and they would like a \$200 deductible. Use the Homeowners Insurance Rates Table to identify the annual base insurance premium based on: » the type of coverage » value of the home with contents » the insurance area they live in » the deductable amount they want.
38. 38. Home Owners InsuranceExample 2• The Amir family owns a home with a replacement value of \$250 000. The home is located outside Winnipeg but within 300 metres of a fire hydrant. The family chooses standard insurance with a deductible of \$500.00. Open and refer to Table 1-2 Manitoba Homeowners Insurance Rates Table to identify the annual base insurance premium based on: » the type of coverage » value of the home with contents » the insurance area they live in » the deductable amount they want.
39. 39. Practice• Lorem ipsum dolor sit amet, consectetuer adipiscing elit. Vivamus et magna. Fusce sed sem sed magna suscipit egestas.• Essentials of Mathematics 12 Text Lorem ipsum dolor sit amet, consectetuer adipiscing elit. Vivamus et magna. Fusce Page 59 sed sem sed magna1- 6 Q. suscipit egestas.
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41. 41. Property Taxes• Property taxes are a way for the local (Municipal) government (e.g., a township, regional municipality, or city) to raise money to provide services to the public.• These services can include snow removal, road maintenance, garbage disposal, and others. In this learning experience you will learn about how property taxes are actually calculated.
42. 42. Property Taxes Internet Activity• Open the Sample Statement of Demand for Taxes that is used in Winnipeg. This is the type of statement that each homeowner in Winnipeg can expect to receive to inform them of their annual School and Municipal taxes.• In your notebook or in a word processing document create a "T" chart. On the left hand side list the numbered items on the chart that you already know about. On the right hand side list the items you know nothing about.• When your list is done check out what some of the numbered locations on the statement represent. Move your mouse pointer over the numbers in red you will be given definitions or descriptions for each of the items.
43. 43. Municipal Revenues & Expenditures• The three main levels of government are federal, provincial and municipal. The City of Winkler would be an example of a municipal level of government.• Municipal revenue is the money that the municipal government collects. The largest portion of municipal revenue is collected through property taxes.• Municipal expenditures refers to the money that is spent by the government to maintain the municipality. Some examples of municipal expenditures are police, education, transit, and road repair.
44. 44. Municipal Revenues & Expenditures• In order for a municipality to determine the amount of property tax the taxpayers must pay, it must first determine the value of its taxable portioned assessment base and the revenue it requires.
45. 45. Unit 3 – Government FinancesMunicipal Property Taxes – Property Classification• From the previous pages, you can see that the major source of revenue for the City of Winnipeg is property taxes. Most municipalities have property taxes as their major source of revenue.• Owners of property must pay property tax to the municipality in which the property is located. Provincial legislation requires all property in Manitoba to be classified for tax purposes.
46. 46. Unit 3 – Government FinancesMunicipal Property Taxes – Property Classification• There are nine classes of property ranging from residential property to commercial and industrial property.• The following chart lists the property classification for properties in Manitoba.
47. 47. Unit 3 – Government FinancesMunicipal Property Taxes- Portioned Assessment Value• The Province of Manitoba assigns a portion percentage to each of the nine classes of property. The following chart lists the portion percentages of the nine classes of property in Manitoba.• The portioned assessment value of a property is the value of the property on which the property tax is calculated. The portioned assessment value is determined by multiplying the market value of the property by the portion percentage. Note: The market value is the value that the property could be sold for.
48. 48. Unit 3 – Government FinancesMunicipal Property Taxes- Portioned Assessment ValueExample Problem #1• Sarah Mahler owns a home in Flin Flon. The market value of her home and land is \$83,850. – Find the portion percentage for the property. – Find the portioned assessment of the property.
49. 49. Unit 3 – Government FinancesMunicipal Property Taxes – Determining the Rate of Property Tax (%)• In order to establish the rate at which property will be taxed, a municipality must first establish a budget. From that budget, the total revenues required is determined. From this revenue, all other sources of revenue, such as provincial grants, business taxes, licence fees, and user fees, are subtracted. The balance is the amount the municipality must raise with property taxes.
50. 50. Unit 3 – Government FinancesMunicipal Property Taxes – Determining the Rate of Property Tax (%)• The total revenue required from property taxes is compared to the total portioned assessment of all properties in the municipality. This ratio is then expressed as a % rate of tax. The following formula can be used to determine this rate of tax:
51. 51. Unit 3 – Government FinancesMunicipal Property Taxes – Determining the Rate of Property Tax (%)Example Problem #2• A municipality requires revenue of \$4,500,000 to be raised from property taxes. The total portioned assessment of all taxable properties is \$200,000,000. Find the tax rate expressed as a percentage rate.
52. 52. Unit 3 – Government FinancesMunicipal Property Taxes – Expressing the Rate of Property Tax in Other Ways• The rate of tax in the previous example was expressed as a percentage (2.25%). The rate of property tax can be expressed in other ways. Two of these are: – cents per dollar – in mills
53. 53. Unit 3 – Government FinancesMunicipal Property Taxes – Expressing the Rate of Property Tax in Other Ways• Cents Per Dollar The previous tax rate of 2.25% means 2.25 out of 100. This can all be expressed as 2.25¢ out of 100¢ or 2.25¢ out of \$1.00. In terms of property taxes, it means that a property owner would pay 2.25¢ of tax for every \$1.00 of the portioned assessed value of the property.
54. 54. Unit 3 – Government FinancesMunicipal Property Taxes – Expressing the Rate of Property Tax in Other Ways• Mills The most common way to express the property tax rate is as a mill rate. A “mill” is really a metric term, much like a millimeter, where a “mill” refers to a unit of one thousandth. In terms of a property tax rate, one mill represents a tax of \$1 for every \$1000 of portioned assessed value. The formula for calculating the property tax as a mill rate is the following:
55. 55. Unit 3 – Government FinancesMunicipal Property Taxes – Expressing the Rate of Property Tax in Other Ways• Mills The most common way to express the property tax rate is as a mill rate. A “mill” is really a metric term, much like a millimeter, where a “mill” refers to a unit of one thousandth. In terms of a property tax rate, one mill represents a tax of \$1 for every \$1000 of portioned assessed value. The formula for calculating the property tax as a mill rate is the following:
56. 56. Unit 3 – Government FinancesMunicipal Property Taxes – Expressing the Rate of Property Tax in Other WaysExample Problem #3• A municipality requires revenue of \$4,500,000 to be raised from property taxes. The total portioned assessment of all taxable properties is \$200,000,000. Find the tax rate expressed as a percentage rate.
57. 57. Unit 3 – Government FinancesMunicipal & Education Taxes• In the last lesson, municipal revenues and expenditures were examined. The main source of municipal revenues is collected from property taxes. In this lesson, the property taxes of homeowners will be considered in more detail.• Homeowners in Manitoba pay property taxes each year. Property taxes consist of both municipal taxes and local and provincial education taxes. In order to calculate property taxes, the portioned assessments and property tax mill rates introduced in the previous lesson, will be used.
58. 58. Unit 3 – Government FinancesMunicipal Taxes• Municipal taxes support municipalities. Municipal taxes consist of a General Municipal Tax and Local Improvement Taxes. The General Municipal Tax (GMT) is calculated as follows:
59. 59. Unit 3 – Government FinancesMunicipal Taxes• Municipalities will often make improvements to roads, sidewalks, sewers, street lighting, etc. The property owners themselves pay some of the cost of these improvements.• The following table lists the local improvement charges for the City of Winnipeg. There charges are paid annually by the homeowner for the number of years indicated.
60. 60. Unit 3 – Government FinancesMunicipal Taxes• Most Local Improvement taxes are based on the cost of the improvements and on the frontage of the property. For purposes of this course, the frontage is taken to be the width of the front of your property. Each Local Improvement Tax (LIT) is calculated as follows: The total municipal tax is the sum of the General Municipal tax and the Local Improvement taxes. The total municipal tax can be calculated as follows:
61. 61. Unit 3 – Government FinancesMunicipal Taxes – Sample Problem 1• Andre Hebert owns a home with a total portioned assessment of \$48,500. His annual municipal tax rate is 23.435 mills. The frontage of his property is 50 feet. His property taxes include Local Improvement Taxes for both boulevard construction and lane paving. Calculate Andre’s total annual municipal taxes.
62. 62. Unit 3 – Government FinancesEducation Taxes• Education taxes support the various school divisions in the province of Manitoba. Education taxes are also calculated using portioned assessed property value and mill rate. The mill rate for education taxes is usually not the same as that for municipal taxes. Education taxes are calculated as follows: The education tax rate in this lesson is expressed as a single mill rate. In reality, there are two education taxes, each with their own mill rate.
63. 63. Unit 3 – Government FinancesEducation Taxes – Sample Problem 2• In the previous problem Andre Hebert’s property had a portioned assessment of \$48,500 and total annual municipal taxes of \$1787.60. As well as these annual municipal taxes, he must also pay Education taxes. These taxes are levied at a rate of 30.926 mills. – Calculate Andre’s annual total Education tax. – Calculate the total of Andre’s annual Municipal and Education taxes.
64. 64. Unit 3 – Government FinancesEducation Taxes – Sample Problem 3• The Wallace family owns a home with a market value assessment of \$71,500 and a land assessment of \$13,500. The municipal mill rate is 21.415 mills and the education mill rate is 28.562 mills. The property has a frontage of 50 feet. The family is charged Local Improvement taxes for road oiling and lane lighting. – Calculate the total portioned assessed value of the property. – Calculate the total annual Municipal taxes for the property. – Calculate the total annual Education taxes for the property. – Calculate the total annual Municipal and Education taxes.
65. 65. Unit 3 – Government FinancesDemand for Taxes
66. 66. How is property in Manitobaassessed?• All property in Manitoba must be assessed using the market value system. The assessed value of a property should be equal to the most probable selling price at a specific point in time. Market values will vary depending on the size of the property, building style and the location.• Properties in Manitoba are assigned a portion percentage based on the type of property. For example, the portion percentage for a residential property is 45%, farm property is 30% and golf course is 10%.
67. 67. How is property in Manitobaassessed?• This portion percentage is important because it is used to determine the assessed value of a property. Then the assessed value is used to calculate the amount to be paid in property tax.• To calculate the portioned assessment, you multiply the portion percentage and the market value assessment.Portioned Assessment = Portion Percentage x Market Value Assessment
68. 68. How is property in Manitobaassessed?Example 1• Cindy Wells owns a home in Portage la Prairie. The market value of the land is \$60 000 and the building is \$175 000. The portion percentage for her property is 45%. Find the portioned assessment of the property.
69. 69. How is property in Manitoba assessed?Sample Solution:• The total market assessment of the property is: \$60 000 + \$175 000 = \$235 000. Portioned Assessment = Portion Percentage x Market Value Assessment• 0.45 X \$235 000=\$105 750 45% of \$235 000 is \$105 750.00 • This is the amount that will be used to calculate the amount of property tax to be paid.
70. 70. Finding the Tax Rate as a Percentageand as a Mill Rate• In order to determine property taxes, each municipality must establish a tax rate. The tax rate can be expressed as a percent, as cents per dollar or as a mill rate.• This rate can be calculated once the municipality has determined the amount of revenue it requires.
71. 71. Finding the Tax Rate as a Percentageand as a Mill Rate• The Property tax percentage rate reflects a tax per \$100 of portioned assessed property value. The formula that each municipality uses to determine its tax rate as a percentage is:
72. 72. Finding the Tax Rate as a Percentage and as a Mill Rate• Most municipalities express their property tax rates in terms of mill rates. The mill rate reflects a tax per thousand dollars. In terms of property tax rate, one mill represents a tax of \$1 for every \$1000 of portioned assessed value.
73. 73. Finding the Tax Rate as a Percentage and as a Mill RateExample 1• A Manitoba municipality has a total taxable portioned assessment base of \$525 000 000. The municipality requires revenue of \$13 000 000 to meet its budget requirements. Calculate the property tax rate in mills and express this mill rate as a percentage.
74. 74. Finding the Tax Rate as a Percentageand as a Mill RateSolution:
75. 75. Calculating Municipal and EducationTaxes• Homeowners in Manitoba pay property taxes every year. These property taxes consist of both municipal and education taxes. In order to calculate property taxes, you will need to use the portioned assessments and mill rates you were introduced to in the previous section.
76. 76. Calculating Municipal and EducationTaxes• Municipal taxes are collected in order to support municipalities. These taxes consist of a general municipal tax and local improvement taxes.• General Municipal Tax is calculated as follows:
77. 77. Calculating Municipal and Education Taxes• Local Improvements are based on the cost of the improvements as well as the size of your property. For the purposes of this course, the size of the property will be taken as the width of the front of the property. This is also known as the frontage.• Local Improvement Tax is calculated as follows: Local Improvement Tax = Frontage X Cost of Improvement per foot of frontage• The costs of local improvements vary from municipality to municipality and are based on the type of improvement.
78. 78. Calculating Municipal and EducationTaxes• Education taxes are collected by the municipal governments on behalf of the various school divisions in Manitoba.• Education Tax is calculated as follows:
79. 79. Calculating Municipal and EducationTaxes• The total Municipal Tax is the sum of the General Municipal Tax, the Local Improvement Tax and the Education Tax.
80. 80. Calculating the Total Municipal TaxExample 1• Doreens property has a portioned assessed value of \$180 000 and the property has a frontage of 50 feet. The municipal mill rate is 16.120 and the education mill rate is 12.450. Doreens property will be assessed a local improvement tax of \$5.50 per foot for street lighting.• Calculate Doreens total annual tax bill.
81. 81. Calculating the Total Municipal TaxSample Solution:• Municipal taxes = \$180 000/1000 x 16.120 = \$2901.60• Education Taxes = \$180 000/1000 x 12.450 = \$2241.00• Local Improvement Taxes = 50 feet x \$5.50/foot = \$275.00• Total Annual Tax Bill = \$2901.60 + \$2241.00 + \$275.00 = \$5417.60
82. 82. Calculating the Total Municipal TaxSample Solution:• In some regions, people pay property taxes once a year, while in others taxes may be due on a quarterly, semi-annual or monthly basis.• If Doreen decides to pay monthly, what would her monthly tax bill be?• \$5417.60/12 = \$451.47
83. 83. Practice• Lorem ipsum dolor sit amet, consectetuer adipiscing elit. Vivamus et magna. Fusce sed sem sed magna suscipit egestas.• Lorem ipsum dolor sit amet, consectetuer adipiscing HOME FINANCE elit. Vivamus et magna. Fusce Property Taxes sed sem sed magna suscipit egestas. Worksheet #3
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85. 85. Gross Debt Service Ratio (GDSR)• Before you even start looking for a home, you need to know exactly how much home you can afford-otherwise, you could spend time looking at homes that are out of your budget range. If that happens, its hard not to be disappointed later when you view less expensive homes.• It all starts with a general rule that household expenses cannot exceed 32% of your gross income.
86. 86. Gross Debt Service Ratio (GDSR)• The Gross Debt Service Ratio or GDSR is used to determine if a property is affordable.• The GDSR is the ratio between gross income and shelter costs. The lender will set an upper limit on this ratio. As a general rule mortgage lenders will not allow you to spend more than 32% of your gross income on shelter costs.• If the sum of the mortgage payment, property taxes, condo fees and heating costs exceeds the lenders stipulated Gross Debt Service Ratio, the mortgage will likely be declined, or a revised loan amount offered.
87. 87. Gross Debt Service Ratio (GDSR)• The formula used to calculate the Gross Debt Service Ratio is:• Remember, that the Gross Debt Service Ratio is based on gross pay and not net pay. The closer the Gross Debt Service Ratio is to 32% the more difficult it would be to budget for other expenses.
88. 88. Gross Debt Service Ratio (GDSR)Example:• You would like to purchase a condominium for \$195 000. You are able to make a down payment of \$42 000. The bank will finance this property at 6% over 25 years. Your gross monthly income is \$4000. The annual property taxes are \$3100 and the monthly utility costs are \$250. Calculate the monthly mortgage payment and the gross debt service ratio. Will the bank approve your request for this mortgage? Explain.
89. 89. Gross Debt Service Ratio (GDSR)Sample Solution 1: (Using GDSR formula)• Monthly Mortgage Payment = \$978.90 (Using a mortgage calculator) GDSR = 37.2%• Since the GDSR calculated for your situation is greater than 32% the bank will likely deny your request for the mortgage.
90. 90. Gross Debt Service Ratio (GDSR)Sample Solution 2: (Using online calculator)
91. 91. Practice• Lorem ipsum dolor sit amet, consectetuer adipiscing elit. Vivamus et magna. Fusce sed sem sed magna suscipit egestas.• Lorem ipsum dolor sit amet, consectetuer adipiscing HOME FINANCE elit. Vivamus et magna. Fusce GDSR sed sem sed magna suscipit egestas. Worksheet #4
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93. 93. Additional Costs To Purchase AndMaintain A HomeAnother factor to consider when buying a home is theadditional costs you may incur at the time of purchase. Ifyou do not have money available to pay for these costs, youmay need to add the additional costs to the mortgage. Or,you may need to subtract these additional costs from yourdown payment. In either case, you will need to adjust thevalue of the maximum affordable home by subtracting theadditional costs.
94. 94. The Cost of Home Ownership: InitialFeesThere are different types or groups of fees that you mayencounter as additional costs when buying a home.• Appraisal fees - When borrowing money the lender (e.g. bank) must determine the value of the property. A certified appraiser will determine the value of the property.• Inspection costs - An inspection of the property is not absolutely necessary, but it will let you know if any repairs are required or if the house has any structural problems.
95. 95. The Cost of Home Ownership: InitialFees• Mortgage Application Fee - The bank may charge a fee for processing a mortgage application.• Insurance costs for high ratio mortgages - You must pay additional insurance costs if you have a high ratio mortgage. A high ratio mortgage is a house loan where less than 25% of the original cost of the home is paid with the down payment. The cost for this insurance is usually about 1.25% -3% of the total mortgage, depending upon the amount of your down payment.
96. 96. The Initial Cost of Home Ownership:Legal FeesLawyers Disbursements And Fees• Legal fees - When you purchase a home, it is advisable to retain a lawyer or notary to act on your behalf. They will look after all legal transactions, but they must be paid for their services.• Land transfer tax - Some provinces levy a tax on any property that changes hands. As the buyer, you are responsible for this cost. It is usually a small percentage of the purchase price, but it can add up to a large amount depending on the value of the property.
97. 97. The Initial Cost of Home Ownership:Legal Fees• Property survey - This will supply information on how buildings and fences are situated on the property. If there are any easements on your property, it is a good idea to know about this before making the purchase.• Easements are rights of way by the town, city, or utility company to access your land for specific purposes such as digging up telephone wires. An encroachment is an intrusion onto your land by a neighbours structure, or possibly an encroachment on your neighbours land by something on your property. In either case, you would certainly want to know about this before purchasing this property. You may be able to obtain a survey certificate from the seller. If you require a new survey certificate you will have to purchase one from the municipality.
98. 98. The Initial Cost of Home Ownership:AdjustmentsAdjustments• Interest adjustments - The buyer is responsible for any interest payable between the closing date (the date of possession) and the first mortgage payment.• Prepaid property taxes and utilities - You will have to reimburse the seller for any utilities or taxes paid for the period of time you own the home.• Home insurance - As soon as you purchase a home, it is wise to purchase home insurance. If you plan to carry a mortgage then the bank that you borrow the money from will require you to have home insurance. In the case of a home with a mortgage, insurance is not optional.
99. 99. The Initial Cost of Home Ownership:Moving And Set Up FeesMoving And Set Up Fees• Moving expenses - You may need to pay professional movers, rent a truck, or hire helpers when you move. Driving expenses, meals, and motel bills may also be part of the cost of moving.• Service charges - Hookup fees for telephone, TV, and utilities will likely be added to your first bills.• Immediate repairs - Some of these may be necessary prior to your moving in. You may want to negotiate the cost of these repairs with the seller.
100. 100. The Initial Cost of Home Ownership:Moving And Set Up FeesMoving And Set Up Fees• Appliances - You may need to buy appliances such as a fridge, stove, washer, dryer, and/or dishwasher when you move in.• Decorating cost - You may want to do some painting, wallpapering, carpeting, etc, before you move in.• Sales tax - GST may be charged when buying a new home in Manitoba.
101. 101. Considering the Additional Costs ofOwnershipExample:• Mr. Johnsons family has decided to buy a larger home for work purposes, and the date of possession is April 1. The price of the home is \$285 000 and he has \$50 000 as a down payment. The following additional costs are related to the purchase of the home: The Johnsons decide to have an inspection done on the home to ensure that there are not any issues with the structure of the building. The inspection fee is \$400.00. The bank charges \$150.00 for the mortgage application fee. The new home is appraised, and the fee is \$250. Since this is considered a high ratio mortgage (a house loan where less than 25% of the original cost of the home is paid with the down payment), the Johnsons will have to pay an additional 0.5% of the total mortgage. The bank requires a land survey which costs \$550. The legal fees are \$575. The land transfer tax is 1/4% of the amount of the mortgage. The interest adjustment that the Johnsons must pay is \$498.03. The Johnsons will buy homeowners insurance on the new home for \$859, but will receive a refund of \$500 from the previous home insurance policy. The previous owner had paid the property taxes of \$4,350 for the period January 1 to December 31, and the Johnsons will have to pay for their share of the taxes. The movers charged \$1,200 for moving his furniture and other belongings, and the company he works for paid half of this. The family decided to install new carpets into part of the house at a cost of \$2,400 plus PST and GST. The cost of hooking up telephone, TV and Internet are \$95.• Examine the Johnson familys situation and determine the additional costs of moving for Mr. Johnson and his family.
102. 102. Practice• Lorem ipsum dolor sit amet, consectetuer adipiscing elit. Vivamus et magna. Fusce sed sem sed magna suscipit egestas.• Lorem ipsum dolor sit amet, consectetuer adipiscing HOME FINANCE elit. Vivamus et magna. Fusce ADDITIONAL EXPENSES sed sem sed magna suscipit egestas. Worksheet #5
103. 103. Practice• Lorem ipsum dolor sit amet, consectetuer adipiscing elit. Vivamus et magna. Fusce sed sem sed magna suscipit egestas.• Lorem ipsum dolor sit amet, consectetuer adipiscing elit. Vivamus et magna. Fusce sed sem sed magna suscipit egestas.
104. 104. Renting vs Buying a Home• In this lesson you will explore the relative advantages and disadvantages and compare the costs of renting or buying a home. Some financial advisors will say that it is better to buy than rent. While this is usually true in the long term, there may be reasons that people will choose to rent rather than buy a home.
105. 105. Practice• Lorem ipsum dolor sit amet, consectetuer adipiscing elit. Vivamus et magna. Fusce sed sem sed magna suscipit egestas.• Lorem ipsum dolor sit amet, consectetuer adipiscing HOME FINANCE elit. Vivamus et magna. Fusce BUYING VS RENTING sed sem sed magna suscipit egestas. Worksheet #6