Mortgage Qualification (20 marks)

Craig and Aileen have always wanted to live close to their work. Craig is an engineer and his net income is $63,440 per annum. Aileen is an accountant and her net income is $66,895 per annum. Craigs tax rate is 20.7% and Aileens tax rate is 21.3%.

The cost of purchasing a home in the city that they work is quite expensive. Craig and Aileen have been committed to saving for a down payment to purchase a home and have saved $105,000. They have been able to save this amount while also paying $475 per month to pay down their student loans. Aileens parents have gifted them $50,000 towards the purchase of a home. They have a total of $155,000 for a down payment.

Due to an ongoing health emergency in the past year, both their places of employments have implemented mandatory work from home and have not communicated that work from home will be the practice going forward. With the change of working from home, Craig and Aileen are very excited to expand their option to purchase a home outside of the city. They have found a town where they would like to purchase a home. The annual property tax in this town is estimated to be $4,800.

Their financial institution has offered them a 5-year fixed closed mortgage at a rate of 3.75%. The amortization period is 25 years.

Craig and Aileen usually use public transit to get around the city. If they needed a vehicle to travel outside of the city, they rented a car. Now that they are looking at purchasing a home outside of the city, they have recently purchased a car. The car was financed with the following details: cost $18,000, rate 5.5% APR, compounded monthly, monthly payments for 5 years.

Ignore stress test in the calculations.

Required:

a) Using the two popular debt-service ratios (GDS and TDS), how much mortgage can they qualify for assuming monthly payments. Use the standard benchmarkfor these ratios from the textbook. (12 marks)

b) List 3 other factors they should consider that are not reflected in the ratios. (3 marks)

c) Explain to Craig and Aileen the purpose of the mortgage stress test. No calculations. (2 marks)

d) List 3 other costs Craig and Aileen need to consider when purchasing a home. (3 marks)