Ignore the stress test rules for this question.

Ali & Mutu have saved up $150,000 for a down pmt on a house. They also each have $15,000 in their registered retirement savings plans (RRSP). The home's property tax is estimated to be $7,200 a year.

Ali earns $65,000 gross per annum. His employer has provided life insurance and extended health care.

Mutu earns $80,000 per annum. His employer provides no benefits. His work is seasonal and therefore can never be guaranteed.

They only have one debt which is a car loan with a balance of $15,000 and monthly payments of $450.

Their financial institution offers them the following options with a 25 year amortization period:

Term Rate (APR)

5-year variable closed 3.45%

5 year fixed closed 3.25%

3 year fixed closed 2.95%

1-year variable open 2.65%

a) Using the ratios based on normal textbook thresholds, how much mortgage can Ali and Mutu qualify for assuming monthly payments if they select a 3 year fixed closed mortgage?

b) Identify 2 other aspects that Ali and Mutu should take into account that are not reflected in the ratios.

c) What type of mortgage should be recommended to Ali and Mutu based on the options provided and why?