FINC 1100 - Introduction to Financial Planning Assignment 2

Assignment Task

Question 1

How Much Mortgage Will the Bank Approve?

Background

• Assume that you are a bank manager for a large bank in Oshawa.
• Sam Smith, a new client of yours, is interested in obtaining a mortgage from you. This will be Sam’s first home purchase.
• Sam has been working full-time for 4 years as an insurance agent. Sam does not have a spouse, partner or children.
• Sam’s real estate agent recently showed him the perfect home. This house is large, beautiful and is located in Sam’s favourite part of town. Sam’s real estate agent believes that the current homeowners will agree to sell their home for $450,000. Sam has $50,000 in cash to pay as a down payment on the home. Sam will need to obtain a mortgage to pay for the remainder of the home.

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

• You recommend to Sam 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 Sam’s mortgage application includes the following:

• Sam’s credit score is 700.
• Sam’s monthly gross income is $8,000.
• 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 = $250; and,
• Sam 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 Sam a mortgage of $400,000:

• Sam’s current credit score, and
• Results of the debt ratio analysis.

Required

Part (a)

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

2. List and describe five (5) factors that were used to determine Sam’s credit score.

Part (b)

1. Use the above case information to calculate Sam’s Gross Debt Service Ratio (GDSR).

2. Using the Sam’s credit score and Gross Debt Service Ratio, is the bank likely to approve the mortgage? Explain your answer. 

Question 2

Required

a. In your own words, explain the difference between a home equity loan and a personal loan. 

b. Using the following information to determine the maximum amount of home equity loan the bank will give to your client:

c. Your client owns a home worth $550,000 that he purchased five years ago.

The client’s current mortgage balance is $200,000 . Your client has no other debt.

• Provide your client with four specific recommendations for lowering his debt.

This  FINC 1100 - Accounting and Finance has been solved by our PhD Experts at My Uni Paper.