Your clients Matthew & Ruth have come to see you for some advice on purchasing a condominium in Toronto. Matthew & Ruth are at present renting a house for $1800 per month in Kitchener and need to drive to work everyday. They have lived in Kitchener for over five years and find their commute to Toronto a little too much particularly during winter months. They believe if they move to Toronto, it will save them more time and money, and they also can dispose one car and the savings of the car payment can be used towards some of their mortgage payments. They do not want to spend more than $650,000 on the condo. The condo they plan to buy has a condo fee of $300 per month.

They will have to pay property taxes of $240 per month and heating costs will be $200 a month. They believe they will have $180,000 for down payment. This amount will be more than the required 20 percent down payment, and so, they will be able to avoid the CMHC insurance. They will also use the Home Buyers plan to withdraw $35000 each from their respective RRSPs. Ruth works for TD bank and has been with the bank for over nine years. She earns $80,000 a year. She had saved $45000 in her TFSA and $40000 in her RRSP. Matthew is a freelance tutor and earns $55,000 a year. Matthew has $33000 in his TFSA and $35000 in his RRSP. Matthew & Ruth have two cars valued at $34000 & $26000 respectively. Both the cars are financed and have loan outstanding balances of $27000 & $ 19000 respectively. Matthew makes a monthly car loan payment of $500, and Ruth makes a monthly payment of $400. They also jointly have a personal line of credit with an outstanding balance of $7000.

The limit on their line of credit is $15000. Both hold credit cards with a $10000 limit. The current balances on the credit card for Matthew and Ruth are $900 & $1600 respectively. The minimum monthly payment for the credit card and the line of credit is 3% of the credit limit. You explain to them that the prequalification process for the mortgage is based on their income and assets. The mortgage will have an amortization period of 25 years with a five-year term and an interest of four percent. The five-year Bank of Canada rate is set at 4.79 percent. Use the following steps to help your clients Matthew & Ruth understand how much they will be able to borrow based on their assets, income, and the required payments and provide recommendations. a. Assess the present financial situation (List the assets & Liabilities & net worth.

b. Show the sources of their down payment from the details provided. Do they have enough sources towards the down payment and other costs related to the purchase of the condo?

 c. Calculate the likely monthly payment on the mortgage.

d. Calculate the GDS & TDS ratios & comment on whether they will be approved based on these ratios .

e. Give your conclusion & recommendation on how the goal of purchasing the condo may or may not be achieved. Make your assumptions on what strategies Matthew & Ruth can use and present your calculations.  (Note: Think about answering questions such as: Will they have enough cash to cover other costs related to the purchase of the condo? 

What other factors need to be considered for the approval? What other strategies, given their circumstances can they use to lower their capacity ratio?)