Assume that you are a bank manager for a large bank in Oshawa.

Jim Smith, a new client of yours, is interested in obtaining a mortgage from you. This will be Jims first home purchase.

Jim has been working full-time for 4 years as an insurance agent. Jim does not have a spouse, partner or children.

Jims real estate agent recently showed him the perfect home. This house is large, beautiful and is located in Jims favourite part of town. Jims real estate agent believes that the current home owners will agree to sell their home for $450,000. Jim has $50,000 in cash to pay as a down payment on the home. Jim will need to obtain a mortgage to pay for the remainder of the home. After discussing these facts with Jim, you provide him with the following suggestions

You recommend to Jim that the mortgage be amortized over 25 years.

You also recommend a five-year, fixed mortgage, in order to lock in the current interest rate for 5 years, in case interest rates increase further in future years. The current five-year fixed mortgage interest rate is 4 percent, compounded semi-annually. Additional information pertaining to Jims mortgage application includes the following:

Jims credit score is 650.

Jims monthly gross income is $4,500.

The expected monthly mortgage payments will be $2,104 per month on a mortgage of $400,000, at 4% per year for 5 years.

Other monthly expenses related to the house are expected to be as follows:

i. heating costs = $120;

ii. property taxes = $350; and

, iii. Jim also pays $500 per month towards his Visa debt.

Assume that you will use the following two key criteria to determine whether you can offer Jim a mortgage of $400,000:

i. Jims current credit score, and

ii. Results of the debt ratio analysis.