Laurence and Amanda Booth are considering buying a house in Scarborough. Their combined gross income is $200,000. They have no savings. They just bought a car. To finance the car purchase they took a 5 year $40,000 loan at an interest rate of 6% compounded monthly. They have a furniture loan which requires a monthly payment of $900 for the next three years. Their goal is to buy a house in 3 years financed with a conventional mortgage (20% down payment). Currently property taxes are $800 per month on the type of house they are interested in. The legal, moving, and other costs are expected to be $7,000 in todays dollars. The inflation rate is 2% per annum, and they expect their salaries to rise at a real rate of 3% per annum. House prices, property taxes, legal, moving, and other costs will increase at the inflation rate. Use the GDS ratio of 28% and TDS ratio of 38% to solve the problem in nominal terms.

a. What is the maximum they can afford to pay for a house and still qualify for the conventional mortgage? Assume 25 year amortization, monthly payments, and mortgage loan interest rate of 3% compounded semiannually.

b. Suppose currently they have $100,000 in savings. How much do they need to save during each of the next 3 years to make the down payment? Assume they can earn a nominal before tax rate of return of 6% on their savings and their marginal tax rate is 40%.

Please show calculations and provide and excel spreadsheet