Andr 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 Andr 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 Andr 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

Andr 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 Andr and Anna could borrow additional

funds.

(a) Calculate the maximum loan that Andr and Anna could obtain today using the loan-to

value-ratio. (2 marks)

(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). (5 marks)

(c) Calculate the maximum monthly payment under the new conditions using the gross debt

service ratio. (2 marks)

(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. (4 marks)

(e) How much of the loan balance, if any, will Andr and Anna have to pay in cash in order to obtain

their loan renewal? If Andr and Anna qualify for a loan larger than the current outstanding

balance, how much additional money could they obtain? Briefly explain your answer. (2 marks)

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