QUESTION 4:

Vivian & Eric Tsang are planning to buy a bigger house in Ajax for $650,000. Property taxes are currently $6,000 p.a. on this house. Their current house is fully paid and they can sell it for $300,000. The legal, realtor and moving expenses would be $20,000. Currently mortgage rate for a five year term is 5% per year compounded semiannually. Their combined gross income is $150,000 p.a. They will be paying off a furniture loan for the next 4 years, at a rate of $600 per month.

a. How much will their bi-weekly mortgage payment be if they take a 5-year term loan, amortized over 20 years? Assume 26 bi-weekly payments per year.

b. Will they qualify for a conventional mortgage loan?

c. What will be the balance outstanding after 3 years?

d. At the end of 5 years, they can change the terms of the mortgage loan. Suppose that the interest rate is 5.5% after five years, and they change to monthly payments of $4,000. How long would it take them to pay off the loan?

e. Suppose 3 years after the initial mortgage loan, interest rates declined to 3% for a 2-year term. For a penalty payment equal to the next 16 weeks of interest added to the principal, Vivian & Eric can switch to this rate for the two years remaining in the term of the mortgage loan, while continuing to make the same bi-weekly payment as in a. Thus, they would pay off the principal faster for 2 years, until the renewal date. At that time, the terms would again be open, and the bank would adjust the interest rate to market rate, should they make the switch?