Recognizing the importance of planning for their future, Sean and Karen sat down to determine their net worth. They compiled a list of the assets and liabilities each one of them is bringing into the marriage.

Then they identified their monthly income and debts as follows:

a. Net worth is calculated as the difference between a person€™s assets and liabilities. Calculate Sean and Karen€™s total assets, total liabilities, and individual net worth.
b. Calculate Sean and Karen's total monthly expenses, and determine how much money each one has left over at the end of each month.
c. Sean and Karen are anxious to pay off their student loans so that they can realize their dream of buying a home and starting a family by the time they both turn 30. Currently, Sean is repaying $150 per month on his student loan, and Karen is contributing $350. At these rates, it will take Sean five more years to pay off his student debt and it will take Karen three years.
Using the following formula, calculate the monthly loan payment that will enable Sean to pay off his student debt in only two years. (Assume a fixed interest rate of 3.5%.)

d. Although the purchase is still a few years off, Sean and Karen want to estimate now what they€™ll be able to afford when they go house hunting. One rule of thumb is that couples can afford to spend between 2.5 and 3 times their gross household income. Lenders also ask two key questions to determine whether or not you have the financial ability to carry the costs of a mortgage and of running the home. The two most widely accepted guidelines used are the gross debt service ratio (GDS) and the total debt service ratio (TDS). The GDS should not exceed 32%.
i. According to the rule of thumb, how much can Sean and Karen afford for their first home?
ii. Assuming a mortgage payment of $2300 per month, property taxes of $3000 per year, and heating of about $180 per month on equal billing, calculate Sean and Karen€™s GDS using this formula:

iii. The TDS also needs to be under 40% for lenders to approve a mortgage. Calculate Sean and Karen€™s TDS if they expect to have paid off their student loans and the loan to Karen€™s parents, taken on a new car loan of $425 per month, and find themselves paying an average of $9000 per year on their credit cards.

iv. If you were a bank manager, would you approve the mortgage for Sean and Karen€™s home purchase?

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Sean Karen Assets Chequing/savings account(s) Investments Automobile(s) Cash value of life insurance RRSP(S) Other Liabilities Student loans Car loans Other debts Line of credit Credit cards $800 n/a 3000 S3200 17 000 n/a 3100 4000 600 n/a $7500 $11 000 1350 n/a 290 5000 n/a 475 Sean Karen Total Monthly Income Gross monthly income Met Income Monthly Expenses Housing (rent, utilities, cable, phone) Transportation (lease. gas, repairs, insurance, parking) Medical and dental Living expenses (groceries, clothes, entertainment, miscellaneous) Credit payments $5250$5100 $10 350 $4080 S3937 8017 $1700 1140 100 425 $780 435 200 460 $2480 1575 300 885 200 780 980 1-(1 + (fixed rate + 5%/12))-24] (fixed rate + 5%/12) Loan Amount Monthly Payment (Monthly mortgage paymen Monthly property taxes Monthly heating) GDS x 100% (Gross monthly income) (Monthly mortgage payment Monthly property taxes + All other m nthly debts) TDS 100% (Gross monthly income)