Ozmar earns a gross annual salary of $70,000, Marzo earns a gross annual salary of $90,000 and the taxable earnings on their savings combined is $2,000 per year. Their marginal tax rate is 35%. Marzo has a student loan which is paid monthly, the current balance is $24,000 with an interest rate of0.99%, compounded monthly. This loan will be paid in full in 3 years. While Ozmar was able to purchase a car outright, Marzo purchased a new car 2 years ago at a cost of $22,500, and financed it through the dealerships plan for 60 months at 1.9% compounded monthly. Payments are monthly. Ozmar and Marzo took your earlier advice about credit card balances and now pay off their balance each month. They use their credit cards only for car expenses and restaurant meals which combined tend to be about $450 per month.

Ozmar and Marzos apartment rent includes all utilities plus 2 underground parking spaces for $2,600 per month. Their car insurance combined is $300 per month and tenants insurance is $60 per month, food, entertainment and other run at about $650 per month and their joint cell phone bill is $200 per month. Marzo pays $550 per year for parking at work.

Given the prices in the GTA, Ozmar and Marzo understand that they will need to move farther east and/or north to be able to afford to purchase a home. Thus they anticipate Ozmar will need to drive to work and Marzo will have a further drive so they anticipate their car expenses are likely to increase to about $750 per month, plus Ozmar would need to pay for parking at work which is $350 per year.

In addition to a mortgage payment, Marzo and Ozmar would also need to pay property taxes, which they estimate at $3,100 per year, utilities (electricity, water, internet) which they estimate at $375 per month and maintenance which they estimate at $1,500 per year. Marzo and Ozmar have $120,000 in savings available for use in a house purchase. They have been examining the market for a while and realize that they will need about $3,500 for closing costs, and would like to keep $15,000 as an emergency fund, which leaves them with a down payment of $101,500 They have seen a property North of Whitby which they are very interested in. It is about 20 years old but has been well maintained, although not upgraded. They believe that they could acquire this property for $750,000. They realize that they do not meet the 20% minimum down payment amount so will have to pay Mortgage Loan Insurance. Thus, they estimate the monthly payments for a 5 year fixed mortgage, with a 25 year amortization period at a rate of 3.59% will be $3,268.66. For a 5 year variable rate, closed mortgage, with a 25 year amortization period at a rate of 2.05%, they estimate their monthly payment would be $2,764.51.

1. Ozmar and Marzo have approached their bank for pre-approval of a mortgage. Use the above information to calculate the 2 stress tests that the bank will likely require based on the 5 year fixed rate of 3.59%.
2. Do Marzo and Ozmar meet the standard requirements for the stress tests? Briefly explain why or why not.
3. If Ozmar and Marzo purchase this property for the $750,000, how much will the Mortgage Loan Insurance be?
4. In the current economic climate which would you recommend a fixed or a variable rate mortgage? Why?

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