CASE

12b

Securing a Mortgage

Claudette and Arash are a young couple of working professionals living in Thunder Bay, Ontario. Together, they have a

combined gross monthly income of $5500. They currently pay $280 per month towards a lease on their car and Claudette

makes a payment of $200 per month towards her school debt. They have also developed a high credit score, by keeping

their credit card balances low and paying off all bills and debts on time.

Claudette and Arash have been putting money aside from each of their paycheques to save up for a down payment of 20%

on a $200,000 condo. Once they saved up enough money, they began researching different mortgage options online.

Through their research, Claudette and Arash discovered that in addition to big banks, there are mortgage brokers who can

assist them with their mortgage. A mortgage broker will negotiate terms with multiple different potential lenders, and as

such, can often find the lowest interest rate offered by a financial lending institution. In addition to this, a mortgage broker

is paid commission by the lender, and therefore, the service would not be of cost to Claudette and Arash.

Intrigued by this, the couple contacted a Canadian mortgage broker company, that has access to over 30 of the top mortgage

lenders in Canada.

a.

What size of mortgage do the couple require?

b.

If the mortgage broker is able to secure them with a ten-year mortgage with a fixed rate of 2.44% compounded semi-

annually for a term of five years, what would be the size of their monthly payment?

c.

Claudette and Arash are informed that the utilities and taxes on their condo will be approximately $215 per month.

Assuming the mortgage terms outlined in (b), is it advisable for the lender to qualify the couple for their mortgage?

Explain your answer.

The couple accepted the mortgage terms, and made monthly payments for five years. At the end of the term, a new term of

five years with a fixed rate of 2.74% compounded semi-annually was negotiated.

d.

What is the new monthly payment that Claudette and Arash must make?

e.

Instead of making monthly payments, the mortgage broker presented an option of accelerated bi-weekly payments,

in which the couple must make a payment of half the amount calculated in (d) every two weeks. What are the pros

and cons of Claudette and Arash accepting this accelerated bi-weekly payment schedule?

f.

Claudette and Arash opted for the accelerated bi-weekly payment schedule. By how many weeks did they shorten

their amortization period?

g.

How much do Claudette and Arash save by making the accelerated bi-weekly payments?

h.

Construct a partial mortgage schedule the mortgage broker can present to the couple, showing:

(i)

the first two payments of the first term,

(ii)

the last two payments of the first term,

(iii)

the first two payments of the second term,

(iv)

the last two payments of the second term, and,

(v)

the total payment made and interest paid.