Andr and Anna bought a condominium nearly five years ago. The lending value was $250,000 and has
Question:
André and Anna bought a condominium nearly five years ago. The lending value was $250,000 and has since increased by 30%. Their $187,500 mortgage loan had monthly payments, an amortization period of 25 years, and a term of 5 years. The term is almost over and they are considering renewing their mortgage loan with the same bank.
Karen, the loan officer, has informed André and Anna that their loan can be renewed for another 5-year term, subject to the company's new guidelines: the loan-to-value ratio is limited to 80% and the maximum gross debt service ratio is 32%. Both André and Anna have since had a raise and their combined gross monthly income has increased to $5,500 and their annual property taxes have increased to $2,000.
In calculating the maximum loan permitted, only the interest rate can be changed – the rest of the loan provisions continue to be in effect. Therefore, the amortization period on the new loan is 20 years. If the maximum loan is less than the amount owing at the end of the first 5-year term, then André and Anna must make a cash payment of the difference. If the maximum loan is greater than the amount owing at the end of the first 5-year term, then André and Anna could borrow additional funds.
(a) Calculate the maximum loan that André and Anna could obtain today using the loan-to value-ratio.
(b) Calculate the payment and outstanding balance at the end of the term on the current mortgage. In doing so, research what five-year term mortgages rates were five years ago, select a mortgage rate for this analysis, and briefly explain your choice. State the chosen rate and compounding frequency in your solution. (Hint: you may visit the Bank of Canada website for historical rates).
(c) Calculate the maximum monthly payment under the new conditions using the gross debt service ratio.
(d) Calculate the maximum loan available using the results from part (c). Research what current mortgage rates are and select an applicable rate. Briefly explain your choice of rate.
(e) How much of the loan balance, if any, will André and Anna have to pay in cash in order to obtain their loan renewal? If André and Anna qualify for a loan larger than the current outstanding balance, how much additional money could they obtain? Briefly explain your answer.
Real Estate Finance and Investments
ISBN: 978-0073377339
14th edition
Authors: William Brueggeman, Jeffrey Fisher