QUESTION #1

PART (a)

Discuss four (4) factors to consider when making a decision between leasing and buying a car with a personal loan.

PART (b)

List and discuss the advantages (2) and disadvantages (2) of leasing a car.

Solution

PART (c)

Assume that you decide to purchase the new car by obtaining a bank loan. Aside from the interest rate, what 2 factors will have the largest impact on the size of your monthly loan payments?

QUESTION #2

How Much Mortgage Can Your Client Afford?

Assume that you are a bank manager for a large bank in Oshawa.

Jim Smith, a new client of yours, is interested in obtaining a mortgage from you. This will be Jims first home purchase.

Jim has been working full-time for 4 years as an insurance agent. Jim does not have a spouse, partner or children.

Jims real estate agent recently showed him the perfect home. This house is large, beautiful and is located in Jims favourite part of town. Jims real estate agent believes that the current home owners will agree to sell their home for $450,000. Jim has $50,000 in cash to pay as a down payment on the home. Jim will need to obtain a mortgage to pay for the remainder of the home.

After discussing these facts with Jim, you provide him with the following suggestions:

You recommend to Jim that the mortgage be amortized over 25 years.

You also recommend a five-year, fixed mortgage, in order to lock in the current interest rate for 5 years, in case interest rates increase further in future years. The current five-year fixed mortgage interest rate is 4 percent, compounded semi-annually.

Additional information pertaining to Jims mortgage application includes the following:

Jims credit score is 650.

Jims monthly gross income is $4,500.

The expected monthly mortgage payments will be $2,104 per month on a mortgage of $400,000, at 4% per year for 5 years.

Other monthly expenses related to the house are expected to be as follows:

heating costs = $120;

property taxes = $350; and,

Jim also pays $500 per month towards his Visa debt.

Assume that you will use the following two key criteria to determine whether you can offer Jim a mortgage of $400,000:

Jims current credit score, and

Results of the debt ratio analysis.

REQUIRED:

Part (a)

In your own words, explain what a credit score is.

List and describe five (5) factors that were used to determine Jims credit score.

Conclude on the acceptability of Jims credit score to the bank.

Part (b)

In your own words, describe the formula used to calculate the clients Gross Debt Service Ratio (GDSR).

Part (c)

Calculate Jims GDSR,

Conclude on the results of your ratio calculation.