Module 2: Mortgages Self Study - Answers 1. Saving for a down payment Julie and Craig wish to purchase a home in 3 years. Their goal is to have the 20% down payment to purchase a home in the price range of $800,000 Their current non-registered savings are $100,000 Assume an after-tax rate of return of 3% on their savings a) How much do Julie and Craig need to save each year to achieve their goal? $800,000 X 20% = $160,000 (savings goal) FV = -$160,000 PV = $100,000 n=3 I/Y = 3% Savings = $16,411/year or $1,367/mo for 3 years. b) How would you determine if this savings goal is realistic for a client? Calculate their cashflow to determine if they have the cashflow surplus available. 2. To better understand the numerous mortgage interest rates, options and features available search online at: • One Chartered Bank (BMO, BNS, CIBC, TD, RBC) • One Credit Union or Insurance Company Compare mortgages from each company relative to: • Interest rates (fixed, variable, open & closed mortgages) What was the cheapest interest rate you found? • Features & benefits of different types of mortgages (repayment terms, pre- payment/ lump sum payment options etc.) RATESDOTCA, October 4th, Posted Five Year fixed mortgage rates Best rate: 3. Mortgage Affordability Julie and Craig wish to purchase a home: Purchase Price $800,000, down payment $160,000 Mortgage amount $640,000, fixed 5-year mortgage payment would be $3,500 (rate 4%) Estimate of taxes $350/mo & heat $150/mo Combined annual gross income $130,000 a) Can Julie and Craig afford this mortgage? (hint: GDSR) $3,500 + $350 + $150 = 37% No $10833 b) If not, what mortgage payment could Julie and Craig afford? X + $350 + $150 = 32% $10,833 ~$3,000/mo c) Based on this latest information Julie & Craig should be looking to purchase a home in what price range? Estimate based on: N =300 PMT= $3,000 I/Y = 4% (compounded semi annually) FV = 0 CPT PV = ~$650,000 - $700,000 *only an estimate because the interest rate will vary over 25 yrs 4.Secondary Mortgage Market a bundle of existing mortgages sold in the secondary market by financial institutions seeking profits and liquidity to other institutions (ie. pension funds or private investors) who are looking to secure cash flow and long-term value. Watch this 3 minute clip from the movie “Too Big to Fail” (an adaptation of the book) for a good explanation of the secondary mortgage market. https://www.youtube.com/watch?v=OqYTQB6lrQQ The secondary mortgage market is typically managed by the Capital Markets area of a bank as it is a business to business transaction, therefore, no direct impact on Financial Advisors. For your interest, Too Big to Fail book & movie and/or the movie “The Big Short” provide good insight to the 2008 financial crisis.
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