Question

André and Anna bought a condominium nearly five years ago. The lending value was $250,000 and
has since increased by 30%. Their $187,500 mortgage loan had monthly payments, an amortization
period of 25 years, and a term of 5 years. The term is almost over and they are considering renewing
their mortgage loan with the same bank.
Karen, the loan officer, has informed André and Anna that their loan can be renewed for another 5-
year term, subject to the company's new guidelines: the loan-to-value ratio is limited to 80% and the
maximum gross debt service ratio is 32%. Both André and Anna have since had a raise and their
combined gross monthly income has increased to $5,500 and their annual property taxes have
increased to $2,000.
In calculating the maximum loan permitted, only the interest rate can be changed – the rest of the
loan provisions continue to be in effect. Therefore, the amortization period on the new loan is 20
years. If the maximum loan is less than the amount owing at the end of the first 5-year term, then
André and Anna must make a cash payment of the difference. If the maximum loan is greater than
the amount owing at the end of the first 5-year term, then André and Anna could borrow additional
funds.
(a) Calculate the maximum loan that André and Anna could obtain today using the loan-to
value-ratio.
(b) Calculate the payment and outstanding balance at the end of the term on the current mortgage. In
doing so, research what five-year term mortgages rates were five years ago, select a mortgage rate
for this analysis, and briefly explain your choice. State the chosen rate and compounding frequency
in your solution. (Hint: you may visit the Bank of Canada website for historical rates).
(c) Calculate the maximum monthly payment under the new conditions using the gross debt
service ratio.
(d) Calculate the maximum loan available using the results from part (c). Research what current
mortgage rates are and select an applicable rate. Briefly explain your choice of rate.
(e) How much of the loan balance, if any, will André and Anna have to pay in cash in order to obtain
their loan renewal? If André and Anna qualify for a loan larger than the current outstanding
balance, how much additional money could they obtain? Briefly explain your answer.

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Answer 1