QUESTION #3 MORTGAGE & HOME OWNERSHIP (20 MARKS)

Stephanie and Sadie have diligently saved $140,000 towards a down payment on a home in Ottawa. They have been looking at 3-bedroom homes in the Westboro neighborhood, in the range of $700,000 - $850,000. Estimated property taxes are $4,300/year.

They are both public servants, with Stephanie working at Statistics Canada earning $85,000 per year and Sadie working as an Archivist at the National Gallery of Canada earning $67,000 per year. They have one car loan, with a remaining balance of $12,564 and a monthly payment of $456. They do not have any other debts.

Over the past few years, as they continued to save, they also watched as the mortgage rules have changed. They are worried that the mortgage stress tests introduced in 2017 are going to make it impossible for them to buy they size of property they want.

Term	Rate (APR)
5-year variable closed	3.35%
5-year fixed closed	3.29%
3-year fixed closed	2.96%
Bank of Canada 5-year conventional mortgage benchmark rate	5.34%

Mortgage stress test:

To qualify for a mortgage loan at a bank, you will need to pass a stress test. You will need to prove you can afford payments at a qualifying interest rate which is typically higher than the actual rate in your mortgage contract. The qualifying interest rate your lender will use for the stress test depends on whether you need to get mortgage loan insurance.

If you need mortgage loan insurance, the bank must use the higher interest rate of either:

the Bank of Canadas conventional five-year mortgage rate

the interest rate you negotiate with your lender

If you dont need mortgage loan insurance, the bank must use the higher interest rate of either:

the Bank of Canadas conventional five-year mortgage rate

the interest rate you negotiate with your lender plus 2%

A) Taking in to consideration mortgage rates provided, stress test rules, and the debt ratios from the textbook, what is the maximum purchase price that Stephanie and Sadie can reasonably afford? Assume monthly mortgage payments.

B) Sadie and Stephanie put in an offer of $700,000 on a property, and it is accepted. If they choose the 5-year fixed closed mortgage, with a 25-year amortization and bi-weekly payments, what will be their mortgage payment?

C) Assuming no extra payments are made, what will be the total interest, and total principal paid over the 5-year term?

D) What other costs should Sadie and Stephanie consider when deciding to buy the house?