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Applied 40S May 14, 2009

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More about Gross Debt Service Ratio and additional costs when buying a home.

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Applied 40S May 14, 2009

  1. 1. Mortgages: Should I Buy or Rent? 3D Realty Handshake by flickr user lumaxart
  2. 2. quot;How Much Can I Afford to Pay for a Home?quot; Banks and other lending institutions have developed a formula that allows you to calculate the maximum price of a home you can afford. This formula is known as the Gross Debt Service Ratio, or GDSR. According to this formula, anyone buying a home should spend no more than 32% of gross income on household or accommodation expenses, including mortgage payments, property taxes, heating and condo/strata fees. The formula may be written as: Find your maximum mortgage Looking for a house? amount and monthly payment http://is.gd/zxd5 http://is.gd/zxay
  3. 3. Lucy Brown wants to buy a condo, but does not know how much money she should spend based on her income. She earns $44 000 per year, and has saved $9000 for a down payment. The property taxes for the condo she likes are $1500 per year, and the heating costs average $90 per month. The condo/strata fees are $180 per month. The bank will give her a 25-year mortgage at an interest rate of 7.5%. What is the maximum price she can afford for a condo, based on spending no more than 32% of her gross income on household and accommodation HOMEWORK expenses?
  4. 4. Gross Monthly Income: $44 000 ÷ 12 = $3 666.67 Monthly Property Tax: $1 500 ÷ 12 = $125.00 Monthly Heating Bill: $90.00 50% of Condo Fees: 0.5 * 180 = $90.00 25 Year Mortgage at 7.5% Max GDSR = 0.32 N= I%= 0.32 = Monthly Mortgage PMT + 305 PV= 3666.67 PMT= 0.32(3666.67) = Monthly Mortgage PMT + 305 FV= P/Y= 0.32(3666.67) - 305 = Monthly Mortgage PMT C/Y= $868.33 = Monthly Mortgage PMT PMT: END BEGIN Down PMT: $9 000 Maximum Possible Mortgage $9 000.00 + $118696.49 = $127 696.49
  5. 5. Your turn ... A group of rural students is planning to go to university. One of the members of the group suggests that they purchase an older home rather than rent an apartment. After a careful analysis of their finances, the group decides that their gross monthly income would be around $3000.00. Monthly property taxes are estimated to be $125.00. Heating bills are estimated to be $150.00. The group can arrange a mortgage at a rate of 9%. The three members of the group are able to come up with a down payment of $8000.00. Determine the maximum affordable purchase price that can be considered if they take out a 25-year mortgage.
  6. 6. A group of rural students is planning to go to university. One of the members of the group suggests that they purchase an older home rather than rent an apartment. After a careful analysis of their finances, the group decides that their gross monthly income would be around $3000.00. Monthly property taxes are estimated to be $125.00. Heating bills are estimated to be $150.00. The group can arrange a mortgage at a rate of 9%. The three members of the group are able to come up with a down payment of $8000.00. Determine the maximum affordable purchase price that can be considered if they take out a 25-year mortgage. Total allowable monthly expenses on house 0.32($3000) = $960 Heating & Taxes $125 + $150 = $275 Maximum Affordable Maximum Possible Purchase Price is Monthly Mortgage PMT $90 731.73 $960 - $275 = $685
  7. 7. Are there other costs involved in buying a home?
  8. 8. Additional Costs When Purchasing a Home 1. Appraisal fees
  9. 9. Additional Costs When Purchasing a Home 1. Appraisal fees 2. Inspection costs
  10. 10. Additional Costs When Purchasing a Home 1. Appraisal fees 2. Inspection costs 3. Property survey
  11. 11. Additional Costs When Purchasing a Home 1. Appraisal fees 2. Inspection costs 3. Property survey 4. Insurance costs for high ratio mortgages
  12. 12. Additional Costs When Purchasing a Home 1. Appraisal fees 2. Inspection costs 3. Property survey 4. Insurance costs for high ratio mortgages 5. Home insurance
  13. 13. Additional Costs When Purchasing a Home 1. Appraisal fees 2. Inspection costs 3. Property survey 4. Insurance costs for high ratio mortgages 5. Home insurance 6. Land transfer tax
  14. 14. Additional Costs When Purchasing a Home 1. Appraisal fees 2. Inspection costs 3. Property survey 4. Insurance costs for high ratio mortgages 5. Home insurance 6. Land transfer tax 7. Interest adjustments
  15. 15. Additional Costs When Purchasing a Home 8. Prepaid property 1. Appraisal fees taxes and utilities 2. Inspection costs 3. Property survey 4. Insurance costs for high ratio mortgages 5. Home insurance 6. Land transfer tax 7. Interest adjustments
  16. 16. Additional Costs When Purchasing a Home 8. Prepaid property 1. Appraisal fees taxes and utilities 2. Inspection costs 9. Legal fees 3. Property survey 4. Insurance costs for high ratio mortgages 5. Home insurance 6. Land transfer tax 7. Interest adjustments
  17. 17. Additional Costs When Purchasing a Home 8. Prepaid property 1. Appraisal fees taxes and utilities 2. Inspection costs 9. Legal fees 3. Property survey 10. Sales tax (GST on new homes) 4. Insurance costs for high ratio mortgages 5. Home insurance 6. Land transfer tax 7. Interest adjustments
  18. 18. Additional Costs When Purchasing a Home 8. Prepaid property 1. Appraisal fees taxes and utilities 2. Inspection costs 9. Legal fees 3. Property survey 10. Sales tax (GST on new homes) 4. Insurance costs for high ratio mortgages 11. Moving expenses 5. Home insurance 6. Land transfer tax 7. Interest adjustments
  19. 19. Additional Costs When Purchasing a Home 8. Prepaid property 1. Appraisal fees taxes and utilities 2. Inspection costs 9. Legal fees 3. Property survey 10. Sales tax (GST on new homes) 4. Insurance costs for high ratio mortgages 11. Moving expenses 12. Service charges 5. Home insurance 6. Land transfer tax 7. Interest adjustments
  20. 20. Additional Costs When Purchasing a Home 8. Prepaid property 1. Appraisal fees taxes and utilities 2. Inspection costs 9. Legal fees 3. Property survey 10. Sales tax (GST on new homes) 4. Insurance costs for high ratio mortgages 11. Moving expenses 12. Service charges 5. Home insurance 13. Immediate repairs 6. Land transfer tax 7. Interest adjustments
  21. 21. Additional Costs When Purchasing a Home 8. Prepaid property 1. Appraisal fees taxes and utilities 2. Inspection costs 9. Legal fees 3. Property survey 10. Sales tax (GST on new homes) 4. Insurance costs for high ratio mortgages 11. Moving expenses 12. Service charges 5. Home insurance 13. Immediate repairs 6. Land transfer tax 14. Appliances 7. Interest adjustments
  22. 22. Additional Costs When Purchasing a Home 8. Prepaid property 1. Appraisal fees taxes and utilities 2. Inspection costs 9. Legal fees 3. Property survey 10. Sales tax (GST on new homes) 4. Insurance costs for high ratio mortgages 11. Moving expenses 12. Service charges 5. Home insurance 13. Immediate repairs 6. Land transfer tax 14. Appliances 7. Interest adjustments 15. Decorating cost
  23. 23. Additional Costs When Purchasing a Home 8. Prepaid property 1. Appraisal fees taxes and utilities 2. Inspection costs 9. Legal fees 3. Property survey 10. Sales tax (GST on new homes) 4. Insurance costs for high ratio mortgages 11. Moving expenses 12. Service charges 5. Home insurance 13. Immediate repairs 6. Land transfer tax 14. Appliances 7. Interest adjustments 15. Decorating cost
  24. 24. Canadian Mortgages Most home buyers make monthly payments, but it is also possible to make payments twice a month, every two weeks, or every week. The amount of the payment is determined by the following: • the principal of the mortgage (the size of the loan) • the amortization term (the number of years you have to repay the mortgage) • the interest rate It is important to use a loan calculator that calculates Canadian mortgage payments, because for Canadian mortgages the interest is compounded every six months, and this may not be the case for mortgages in other countries. The Mortgage Centre http://www.mortgagecentre.com/index.cfm
  25. 25. The Dirksons Additional Costs to Purchase Their Home HOMEWORK The Dirksons live in Brandon and bought a house in Portage. They had the home appraised and paid $125.00 to have it done. The bank required a survey, and the cost of the survay was $300.00. the price of the home was $135 000.00, and since their down payment of $20 000.00 was less than 25% of the total price, they had to buy “High Ratio Mortgage Insurance” at a cost of 1.25% of the mortgage. The home insurance premium was $475.00 but they recieved a $150.00 rebate from the policy they had on their home in Brandon. The property taxes for the year had been paid by the previous owner, and so they owed 7 months of the total tax bill of $2 125.00. A dry-walling bill of $650.00 was split equally between themselves and the former owner. The Dirksons bought a used washer and dryer for $920.00. Moving expenses were $320.00 and legal fees that included the land transfer costs were $965.00.
  26. 26. The Dirksons live in Brandon and bought a house in Portage. They had the home appraised and paid $125.00 to have it done. The bank required a survey, and the cost of the survay was $300.00. the price of the home was $135 000.00, and since their down payment of $20 000.00 was less than 25% of the total price, they had to buy “High Ratio Mortgage Insurance” at a cost of 1.25% of the mortgage. The home insurance premium was $475.00 but they recieved a $150.00 rebate from the policy they had on their home in Brandon. The property taxes for the year had been paid by the previous owner, and so they owed 7 months of the total tax bill of $2 125.00. A dry-walling bill of $650.00 was split equally between themselves and the former owner.
  27. 27. The Jamison's Mortgage HOMEWORK The Jamison family has decided to buy a house. they will require a $121 000.00 mortgage to help pay for the house. • Bank A offers them a 25 year mortgage at 7.25%. Determine the size of the monthly payment, the total amount paid for the mortgage, and the total amount of interest paid when the mortgage is repaid. • Bank B offers them a 20 year mortgage at 7.25%. Determine the size of the monthly payment, the total amount paid for the mortgage, and the total amount of interest paid when the mortgage is repaid if they repay the mortgage with monthly payments over 20 years. • How much interest do they save by repaying the mortgage in 20 years instead of 25 years? • Bank C offers them a 25 year mortgage at 7.00%. Determine the size of the monthly payment, the total amount paid for the mortgage, and the total amount of interest paid when the mortgage is repaid. • How much interest do they save by paying the mortgage in 25 years at 7.00% instead of in 25 years at 7.25%. (i.e. how much cheaper is Bank C than bank A?)

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