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Personal Finance Canadian 7th Edition
Kapoor Solutions Manual

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CHAPTER 7
THE FINANCES OF HOUSING
CHAPTER OVERVIEW
This chapter provides a complete discussion of selecting housing based on life situation, needs, and
personal values along with the related financial aspects of this major expenditure. First presented is
material regarding factors related to renting a residence. This is followed by discussion of buying
alternatives and the home buying process including determining housing needs, evaluating potential
homes, and pricing the property. The financing section covers types of mortgages and closing costs of a
real estate purchase. Finally, suggestions for selling a home are offered.
LEARNING OBJECTIVES CHAPTER SUMMARY
After studying this chapter, students will be able to:
Obj. 1 Evaluate available Your needs, life situation, and financial resources are the major
housing alternatives. factors that influence your selection of housing. Assess renting
and buying alternatives in terms of their financial and
opportunity costs.
Obj. 2 Analyze the costs and The main advantages of renting are mobility, fewer
benefits associated with responsibilities, and lower initial costs. The main disadvantages
renting. of renting are few financial benefits, a restricted lifestyle, and
legal concerns.
Obj. 3 Implement the home- Home buying involves five major stages: (1) determining home
buying process. ownership needs, (2) finding and evaluating a property to
purchase, (3) pricing the property, (4) financing the purchase,
and (5) closing the purchase transaction.
Obj. 4 Obtain mortgage Once you decide to purchase a specific home, you will probably
financing. apply for a loan. Financing a home purchase requires obtaining
a mortgage, an awareness of types of mortgages, and settling the
real estate transaction.
Obj. 5 Develop a strategy for When selling a home, you must decide whether to make certain
selling a home. repairs and improvements, determine a selling price, and choose
between selling it yourself and using the services of a real estate
agent.
7-1
Copyright © 2018 McGraw-Hill Education Ltd. All Rights Reserved.
Instructor’s Manual for Kapoor et al. Personal Finance 7CE.
INTRODUCTORY ACTIVITIES
• Ask students to comment on the opening case for the chapter.

• Point out the learning objectives in an effort to highlight the key points in the chapter.
• Ask students to discuss the relationship between housing selection and other financial goals.
• Point out the opportunity costs associated with various housing decisions.
CHAPTER 7 OUTLINE
I. Evaluating Housing Alternatives

A. Your Lifestyle and Your Choice of Housing
B. Opportunity Costs of Housing Choices
C. Renting versus Buying Housing
D. Housing Information Sources
II. Renting
A. Selecting a Rental Unit
B. Advantages of Renting
C. Disadvantages of Renting
D. Costs of Renting
E. Renting Rights
III. The Home Buying Process
A. Step 1: Determine Homeownership Needs
B. Step 2: Find and Evaluate a Property to Purchase
C. Step 3: Price the Property
IV. The Finances of Home Buying
A. Step 4: Obtain Financing
B. Step 5: Close the Purchase Transaction
Home buying: A Final Word
V. Selling Your Home
A. Preparing Your Home for Selling
B. Determining the Selling Price
C. Sale by Owner
D. Listing with a Real Estate Agent
7-2
CHAPTER 7 LECTURE OUTLINE Instructional Suggestions
EVALUATING HOUSING ALTERNATIVES • Text Highlight: Exhibit 7-

1 presents suggested housing
• Your needs, lifestyle, and financial resources will alternatives for different life
determine whether you decide to rent, buy, or have a situations.
home built.
Your Lifestyle and Your Choice of Housing
• Your lifestyle (how you spend your time and
money) is reflected in almost all consumer purchases
including housing.
• While personal preferences and tastes are the
foundation of your housing decisions, financial factors
may modify your final choice.
Opportunity Costs of Housing Choices
• Consider what you are giving up when you live in
a certain area or in a certain type of residence.
• Common housing trade-offs include:
 interest earnings lost on the down payment for a
house or apartment
 time and cost of getting to work living in a distant
area
 loss of equity growth
 time and money to repair and improve a lower-
priced home
 time and effort to have a home built to your
specifications
Renting versus Buying Housing • Text Highlight: Exhibit 7-
2 evaluating housing alternatives
• Choosing between renting and buying your
residence is an essential decision related to housing.
• Economic conditions can influence this decision
as well as a personal desire for ease of mobility or •
pride of ownership.
Housing Information Sources
• As with other consumer purchases, much
information is available on housing including books,
newspaper articles, people with knowledge and • Concept Check 7-1
experience in this area, the World Wide Web, and
government agencies.
RENTING
• At some point in your life, you are likely to rent
your place of residence. You may rent when you are
first on your own and cannot afford to buy a home or
later in life when you want to avoid the activities
required to maintain your own home.
7-3
Selecting a Rental Unit

• An apartment is the most common type of rented • Text Highlight: Exhibit 7-3:
presents the activities involved
housing. in finding and living in a rental
• People who need more room should consider unit.
renting a house. • Assignment: Have
Advantages of Renting student’s survey people who
rent to determine factors that
• The main advantages of renting are: influenced this housing decision
over buying.
 mobility
 fewer responsibilities • Supplementary Resource:
 lower initial costs Talk to a lawyer about common
problems associated with renting
Disadvantages of Renting and leases.
• The main drawbacks of renting are:

 few financial benefits
 restricted lifestyle, restrictions on decorating,
having pets, and other activities
 legal details
• A lease is the legal document that defines the
conditions of a rental agreement. It is designed to
protect the rights of both the landlord and tenant.
Costs of Renting
• A security deposit is usually required when you
sign a lease. This money is held by the landlord to
cover the cost of any damages that may be done to the
rental unit during the lease period.
Renting Rights
• The Canadian Charter of Human Rights recognizes

and protects your rights to rent any apartment without • Concept Check 7-2
discrimination.
THE HOME BUYING PROCESS

• Exercise: Create a list of
• Owning a home is a goal of many people and factors that could encourage or
involves various activities as well as personal and discourage the purchase of a
housing unit.
economic trade-offs.
• Supplementary Resource:
Step 1: Determine Home Ownership Needs Obtain information from a
condominium sales office about
What Are the Benefits of Home Ownership? the purchasing and management
of this type of housing.
• The main advantages of home ownership are pride
of ownership, financial benefits, and flexibility in
using the property.
7-4
What Are the Drawbacks of Homeownership? • Assignment: Have

students talk to people who have
• Financial risks related to having down payment had their own house built, or to
funds, obtaining a mortgage, and changing property contractors who work with
values. people having a house built.
Obtain information on the
• Limited mobility may result if a home is difficult process and potential
to sell. difficulties.
• Higher living costs due to repairs and
• Text Highlight: Exhibit
maintenance. 7-5: goes through the home
• Higher property taxes affect homeowners more buying process.
directly than renters, who pay them in the form of
higher rent.
Assess Types of Housing Available
• Single-family dwellings are the most popular type
of housing.
• Multiunit dwellings include duplexes and
townhouses.
• Manufactured homes are housing that is fully or
partially assembled in a factory before being moved to
the living site. These include prefabricated homes and
mobile homes.
• Mobile homes are a second type of manufactures
homes. These housing units are typically less than 100
square meters in size.
• Some people want a home built according to their
specifications. Before you begin such a project, be
sure you possess the knowledge, the money, and the
perseverance that are needed to complete it.
Forms of Ownership
• The most common form of home ownership is one

in which an individual or a couple is the sole owner of
an entire property. Two other legal forms of
ownership are condominiums and co-operative
housing.
• A condominium (condo) consist of two parts: a

collection of private housing called units, and the
shared areas of the building such as lobbies, hallways,
elevators, recreational facilities, garden, etc. Each
unit is owned by the purchaser of that unit and the
common areas are jointly owned by these individual
unit owners.
• Co-operatives (co-ops) are member-owned

communities where residents make decisions on how
the co-op operates. A co-op is governed by directors
7-5
and member of the co-op. Each member has a vote
and say in its overall direction. There are two main
types of housing co-operatives: non-profit and for-
profit. Many provinces require that housing co-ops
operate on a non-profit basis because the main
purpose is to provide affordable housing. In a non-
profit co-op, members cannot sell their shares. In a
for-profit co-op, members own a share of the co-op
but not the individual unit they live in.
Determine Amount of Down Payment

• Before shopping for a home, you should assess
your financial situation to determine how much you
can afford to put as a down payment. The higher the • Text Highlight: Exhibit
down payment the lower the loan amount you will 7-6: looks at housing
need to borrow. affordability and mortgage
• Understand the benefits of CMHC as well as the qualification amounts.
costs associated with not having a 20% down
payment. CMHC allows buyers to buy a home and
insures the lenders of default but it comes at a cost
that a lot of people don’t take into consideration right
away. Exhibit 7-6 shows the cost of CHHC fees.
Calculate Your Affordable Home Purchase Price
• Will you have enough money to make your

mortgage payments?
• A mortgage is a long-term loan on a specific
piece of property, such as a home or other real
estate.
Step 2: Find and Evaluate a Property to Purchase • Discussion Question: Why
is home location considered
more important than any other
• In selecting a neighborhood, consider the factor when making a housing
purchase?
character of the community.
• Zoning laws are restrictions on how the property • Current Example: In
in an area can be used. addition to the location, be sure
to:
• If you have or plan to have a family, you should  consider the entire
assess the school system. Homeowners without community
children also benefit from strong schools since the  be aware of possible malls
educational advantages of a community affect or highways
property values.  consider cost and time of
commuting
• A real estate agent can help you assess your  remember that yards, home
housing needs and determine the amount you can conditions, and other items
afford to spend on a home. in view are an indication of
• A real estate agent can be helpful in presenting the lifestyles and values of
people in the community.
your offer to the seller, negotiating a settlement price,
assisting you in obtaining financing, and representing
7-6
you at the closing
• Before reaching your decision about a specific • Text Highlight: Exhibit 7-9:
presents a detailed format for
home, conduct a complete evaluation of the property. inspecting a home.
This evaluation can help minimize future problems.
Step 3: Price the Property • Supplementary Resource:
Use local newspapers to obtain
• The main factors you should consider in information on the price range
determining the home prices are recent sales prices in of houses and other housing in
the area, the current demand for housing, the length of your community.
time the home has been on the market, the owner’s • Text Highlight: Exhibit 7-
need to sell, the financing options, and the features 10: shows the components of a
home purchase offer.
and condition of the home.
• Once a price has been agreed upon, the buyer
must deposit earnest money—a portion of the
purchase price that the buyer deposits as evidence of
good faith to show that the purchase offer is serious. • Concept Check 7-3
THE FINANCES OF HOME BUYING

• Assignment: Have
• Financing a home purchase requires obtaining a students compare mortgage
mortgage, being aware of the types of mortgages, and qualification requirements and
settling the real estate transaction. procedures of several lenders in
your area.
Step 4: Obtain Financing
• Personal savings, pension plan funds, sales of
investments or other assets, and assistance from
relatives are the most common sources of down
payment money.
• Federal law requires that you have mortgage

insurance if your mortgage represents 75 percent or
more of the total price you pay for your home. This
coverage protects the lender from financial loss due to
default.
• It can be obtained through the Canada Mortgage
and Housing Corporation (CMHC), a federal Crown
corporation, or GE Capital Mortgage Insurance
Company, a private company.
• To qualify for a mortgage, you must meet criteria
similar to those that must be met for other loans.
• The major factors that affect the affordability of
• Text Reference: The
your mortgage are your income, other debts, the
“Financial Planning for Life’s
amount available for a down payment, the length of Situations” feature provides
the loan, and current mortgage rates. information and warnings on
• The mortgage loan for which a person can qualify paying off your mortgage early.
is larger when interest rates are low than when they
are high. As interest rates rise, fewer people are able
to afford the cost of an average-priced home.
• Obtaining a mortgage requires the potential
7-7
borrower to submit an application form containing
personal and financial data.
• The conventional mortgage has equal payments over
25 years based on a fixed interest rate. The mortgage
payments are set at a level that allows amortization
of the loan, that is, the balance is reduced with each
payment.
• The variable-rate mortgage (VRM), also referred to
as a flexible rate mortgage, has an interest rate that
increases or decreases during the life of the loan based
on changes in market interest rates. A rate cap
restricts the amount that the interest rate can increase
during the loan term.
• Split or multi-rate mortgages allow you to arrange part
of your mortgage at one rate and term and another part
at another rate and term.
• Most mortgage lenders offer options to your payment
plan that will allow you to speed up your payment
schedule.
• The vendor take back (VTB) mortgage is a loan
extended to you as the buyer by the seller. This type
of loan frequently has the advantage of a lower rate
than most institutions offer.
• A second mortgage, more commonly called a home
equity loan, allows a homeowner to borrow on the
paid-up value of the property.
• Reverse mortgages provide an elderly homeowner
with tax-free income in the form of a loan that is paid
back (with interest) when the home is sold or the
homeowner dies.
• Refinancing refers to obtaining a new mortgage on
your current home at a lower interest rate.
Step 5: Close the Purchase Transaction

• The closing involves a meeting of the buyer, seller,
and lender of funds, or representatives of each party,
to complete the transaction. • Text Highlight: Exhibit 7-
• Closing costs, also called settlement costs, are the 11: Common additional
fees and charges paid when a real estate transaction is costs associated with
completed. purchasing a house are
discussed.
• Title insurance protects the owner or the lender
against financial loss resulting from future defects in
the title and from other unforeseen property claims not
excluded by the policy.
• A deed is a document that transfers ownership of
property from one party to another.
• An escrow account is money, usually deposited
with a financial institution, for the payment of
7-8
property taxes and homeowner’s insurance
Home Buying: A Final Word

• For most people, buying a home is the most expensive
decision they will undertake. As a reminder, Exhibit
7-12 provides an overview of the major elements to
consider when making this critical financial decision.
SELLING YOUR HOME • Concept Check 7-4

Preparing Your Home for Selling
• The effective presentation of your home can result • Current Example: Real
in a fast, financially favorable sale. Real estate estate professionals suggest that
your home be made as appealing
salespeople recommend that you make needed home as possible so potential buyers
repairs and paint the exterior and interior areas. can imagine themselves living
there. The smell of fresh-baked
Determining the Selling Price bread or cookies can add to the
• Putting a price on your home can be a difficult appeal.
decision. You face the risk of not selling it • Discussion Question: What
immediately if the price is too high, and you may not types of improvements would
add to the sale value of homes in
get a fair settlement if the price is too low. this area?
• An appraisal, which is an estimate of the current • Assignment: Have students

talk to people who have sold
value of the property, can provide a good indication of their houses on their own.
the price you should set for it.
Sale by Owner
• If you decide to sell your home without the use of a
real estate professional, price the home and then
advertise it through local newspapers and through a
flier describing it in detail.
• Use the services of a lawyer or title company to
assist you with the contract, the closing, and other
legal matters.
• Supplementary Resource:
Listing with a Real Estate Agent Talk to a real estate agent and
use newspaper housing ads to
• If you decide to sell your home with the assistance determine the factors that
of a real estate agent, you can probably choose among influence the selling price of
real estate businesses in your area. homes.
• Your real estate agent will provide you with
various services. These services include suggesting a
selling price, making potential buyers and other agents
aware of your home, providing advice on features to
highlight, conducting showings of your home, and
handling the financial aspects of the sale.
• Concept Check 7-5
7-9
CONCLUDING ACTIVITIES
• Point out the chapter summary and key terms in the text margin.
• Discuss selected end-of-chapter Financial Planning Problems, Financial Planning Activities, and Life
Situation Case.
• Use Chapter Quiz in the Instructor’s Manual.
CHAPTER 7 QUIZ ANSWERS
True-False Multiple Choice

1. F 9. A
2. F 10. C
3. T
4. T 11. B
5. F 12. B
6. F 13. C
7. F 14. C
8. T 15. B
16. B
7-10
Name ________________________________________ Date____________________________
CHAPTER 7 QUIZ
TRUE-FALSE
_____1. Several financial benefits are associated with renting your place of residence.
_____2. A lease is mainly designed to protect the rights of the landlord.
_____3. Financial risks are associated with the purchase of a home.
_____4. Cooperative housing and condominiums are forms of home ownership.
_____5. Higher property values result in lower property taxes.
_____6. Refinancing and a second mortgage are essentially one and the same.
_____7. There is no ability to negotiate on the price of a home you are interested in
purchasing.
_____8. A variable rate mortgage usually has a lower initial interest rate than a fixed
rate mortgage.
MULTIPLE CHOICE
______9 A common advantage associated with home ownership is
a. financial benefits.
b. ease of mobility.
c. limited financial risks.
d. low initial costs.
______10 Most real estate professionals believe that the most important factor in
selecting a home is
a. price.
b. style.
c. location.
d. desired features.
______11 The major factor that affects a person’s qualification for a mortgage is
a. current interest rates.
b. the applicant’s credit rating.
c. the value of the property being purchased.
d. the source of the down payment funds.
______12 Most lending institutions believe that a person can afford a monthly payment
of about __________ percent of gross income less any long-term debts.
a. 20
b. 30
c. 40
d. 50
______13 A __________ mortgage allows a person to borrow on the paid-up value of a

home.
a. conventional
7-11
b. growing equity
c. second
d. share appreciation
______14 One of the advantages of owning your own home is:
a. The easy ability to move
b. Few or no responsibilities for maintenance
c. The growth in equity while you own the home
d. Lower initial costs
______15 A(n) ____________ is a form of home ownership that consists of individually
owned units and shared common areas.
a. Single family dwelling
b. Condominium
c. Cooperative
d. Duplex
______16 The ____________ ratio is your monthly shelter costs as a percentage of your
gross monthly income.
a. TDS
b. GDS
c. Loan to value
d. Gross debt service
SUPPLEMENTARY ACTIVITY
For each of the following types of mortgages, describe life situations and economic conditions that could
make this type of home loan an appropriate choice.
Type of mortgage Description of life situation Description of economic conditions
Conventional, fixed-rate,
fixed-payment
Variable Rate
Split or Multi rate
Vendor take back
Second mortgage
7-12
Reverse mortgage
Refinancing
(Note: This activity may be done as a discussion in a large group, as a small group exercise, or as an out-
of-class assignment.)
ANSWERS TO CONCEPT QUESTIONS, OPENING CASE QUESTIONS, FINANCIAL

PLANNING PROBLEMS, FINANCIAL PLANNING ACTIVITIES, AND LIFE
SITUATION CASE
CONCEPT QUESTIONS
Concept Check 7-1

1. How does a person’s employment and household situation influence the selection of housing?
A person who works at home would, for example, require home facilities different from a single
person or a household with several small children.
2. What are some common opportunity costs associated with the selection of housing?
Opportunity costs include lost interest on a down payment or security deposit and travel time to work
when living in the country.
Concept Check 7-2

1. What are the main benefits and drawbacks of renting a place of residence?
Advantages of renting are mobility, fewer responsibilities, and lower initial costs. Disadvantages are
few financial benefits, restricted lifestyle, and legal concerns.
2. Which components of a lease are likely to be most negotiable?
Some people will tell you that just about everything in a lease is negotiable; however, certain things
are likely to be more flexible than others. Most negotiable items include rent, amount of security
deposit, starting date of lease, and decorating.
Concept Check 7-3

1. What are the drawbacks of owning a home?
Disadvantages are financial uncertainty, limited mobility, and higher living costs.
7-13
2. What type of individual would prefer a condominium over a single-family dwelling?
Someone who likes having someone else deal with the maintenance of the building and common
areas and who is willing to sacrifice owning land to have that. Maybe even someone who doesn’t
need the extra space that a single-family dwelling provides. It all depends on a person’s lifestyle and
preferences.
3. What are the main sources of funding for a down payment?
Personal savings, pension plan funds, sales of investments or other assets, and assistance from
relatives are common sources.
4. What is the TDS ratio?
The TDS ratio is your monthly mortgage payment, including any outstanding debt as a percentage of
your gross monthly income.
5. How do changing interest rates affect the amount of mortgage a person can afford?
The lower the rate the higher the amount of the mortgage loan you can qualify for.
6. How can the quality of a school system benefit even homeowners in a community who do not have
school-age children?
The quality of a school system is an important factor affecting home prices in a community. By
maintaining quality schools, all homeowners in an area benefit from stable and increasing property
values.
7. What services are available to home buyers from real estate agents?
A real estate agent can help assess housing needs and determine the amount a person can afford to
spend. Agents also have information on available homes and obtaining a mortgage.
8. How does a seller’s market differ from a buyer’s market?
In times of high demand for housing, negotiating may be minimized; this situation is referred to as a
seller’s market, since the current owner is likely to have several offers for the property. On the other
hand, when home sales are low, a buyer’s market exists and a lower price is likely.
Concept Check 7-4

1. Under what conditions might a variable rate mortgage be appropriate?
A variable rate mortgage may be appropriate when interest rates are relatively high and they are
expected to decline. This situation would benefit the borrower as rates decline, or the homeowner
may refinance when rates drop at a lower-rate, fixed-rate mortgage.
2. When might refinancing a mortgage be advisable?
Refinancing might be appropriate when interest rates decline and a homeowner plans to stay in the
same house long enough for the savings from lower mortgage payments to recover the cost of
refinancing.
3. How do closing costs affect a person’s ability to afford a home purchase?
Closing costs can add several thousand dollars to the expense of buying a home. These are funds that
the homebuyer must have available to complete the real estate transaction.
7-14
Concept Check 7-5
1. What actions are recommended when planning to sell your home?
When planning to sell your home, make needed repairs, consider new paint, clear out living and
storage areas, and remove unnecessary furniture and other items.
2. What factors affect the selling price of your home?
Home prices are affected by location, size, condition, features, and current market demand.
3. What should you consider when deciding whether to sell your home on your own or to use the
services of a real estate agent?
If you decide to sell by owner, you will need to price, advertise, and show the house. Some people
would like to save money by taking on these tasks and not use a real estate agent. If you would like
someone else to handle these and other duties, you may decide to use the services of a real estate
agent.
OPENING CASE QUESTIONS
1. What factors affect a person’s ability to buy a house?

The amount a person can afford when buying a house is affected by income, amount of down
payment money available, current interest rates, and other debts.
2. What are common sources of a down payment? Why should home buyers not use all their savings for
the down payment on a home purchase?
Common down payment sources include personal savings and investments, gifts from relatives,
loans, or use of retirement savings. If home buyers use all their savings for a down payment, they may
have financial difficulties when funds are needed for closing costs, home repairs, or family
emergencies.
3. What problems could arise in a co-ownership housing arrangement?
The problems encountered with a co-ownership housing arrangement may include differences of
opinions between the individuals involved, financial difficulties faced by one of the people, or
changes in the life situation of one of the individuals.
4. Locate Web sites that provide housing information that would be of value to Mike and Ike during
their home buying activities.
Useful Web sites would include www.themortgage.com, www.canmortgage.com, and www.cmhc-schl.gc.ca.
5. What is one risk they need to consider with their financing decision and how to prepare for
changes?
One very important risk that Mike & Ike should watch for is the rising interest rate environment on the variable
rate mortgage that they are considering. Under new rules set out by the government they would have to qualify
for the mortgage (GDS & TDA) ratios based on the 5yr rate but can still elect the variable rate. What happens
when the rate goes up 0.5% or even more as this usually has a 3-month reset rate? One thing that I like to
recommend to clients when they choose variable rates is to round up the payment (in this example to $1,800)
and pay this amount as now you’re paying quicker and any variable rate adjustments will not impact the
mortgage payment amount (although it pays less principle after adjustment) and can be a better budget number
to use.
7-15
FINANCIAL PLANNING PROBLEMS
1. What type of housing would you suggest for people in the following life situations?
a. A single parent with two school-age children
b. A two-income couple without children
c. A person with both dependent children and a dependent parent
d. A couple near retirement with grown children
While answers may vary, suggested responses may be found in Exhibit 7-1
2. Based on the following data, would you recommend buying or renting?
Rental Costs Buying Costs

Annual rent, $7,380 Annual mortgage payments, $9,800
Insurance, $145 ($9,575 is interest)
Security deposit, $650 Property taxes, $1,780
Insurance/maintenance, $1,050
Down payment/closing costs, $4,500
Growth in equity, $225
Estimated annual appreciation, $1,700
Assume an after-tax savings interest rate of 6 percent and a tax rate of 28 percent.
Rental Costs Buying Costs
$7,380 Rent $9,800 Mortgage payments
145 Insurance 2,830 Property Taxes,insurance, maintenance
39 Interest lost on security deposit 270 Interest lost on down payment closing costs
Less:
$7,564 Total rental costs 225 Growth in equity
1,700 Annual appreciation
$10,975 Total buying costs
Mortgage interest and property taxes potentially could be deductible for self-employed individuals
but not taken into consideration here. In addition, in a real-life situation, they could qualify for a
provincial tax credit for the rent and property taxes. These factors will change the bottom line.
3. Use the buy-versus rent analysis on page 202 to compare two residences that you might consider.
Compare house purchase to renting a house or an apartment.
This activity can help students understand renting vs. buying in a practical situation.
7-16
4. Calculate the gross debt service (GDS) and the total debt service (TDS) ratios for the following data.
(Obj. 3)
Monthly mortgage payment = $2100

Property taxes = $200
Heating costs = $115
Other housing costs = $70
Personal loan payment = $150
Car loan payment = $200
Credit card payment = $150
Gross monthly household income = $7800
GDS = ($2100 + $200 + $115 + $70) / $7800

GDS = 31.86 %
TDS = ($2100 + $200 + $115 + $70 + $150 + $200 + $150) / $7800
TDS = 38.27 %
5. Estimate the affordable monthly mortgage payment, the affordable mortgage amount, and the
affordable home purchase price for the following situation:
Monthly gross income, $2,950
Down payment to be made, 15 percent of purchase price
Other debt (monthly payment), $160
Monthly estimate for property taxes and insurance, $210
25-year loan at 6.5 percent.
Based on example A (with other debts), Exhibit 7-7

Affordable monthly mortgage payment, $810 (($2,950 x 0.40) - $160 - $210)
Affordable mortgage amount, $120,896 (($810/6.70) x $1000)
Affordable home purchase, $142,230($120,896/ (1-0.15))
6. Based on Exhibit 7-7, what would be the monthly mortgage payments for each of the following
situations?
a. A $100,000, 15-year loan at 7.5% APR compounded semi-annually
b. A $200,000, 25-year loan at 9% APR compounded semi-annually
c. A $165,000, 20-year loan at 10% APR compounded semi-annually
What relationship exists between the length of the loan and the monthly payment? How does the
mortgage rate affect the monthly payment?
Solution
a. $9.21  100 = $921

b. $8.28  200 = $1,656
c. $9.52  165 = $1,570.80
7-17
The longer the maturity of the loan, everything else constant, the smaller the payment. The size of the
monthly payment is affected by the principal amount borrowed, the maturity of the loan and the
mortgage rate (higher the rate, the higher the payment)
7. Which mortgage would result in higher total payments?
Mortgage A: $985 a month for 25 years,
Mortgage B: $780 a month for 5 years, and $1,056 for 25 years
A: $985  300 months = $295,500
B: ($780  60 months) + ($1,056  300 months) = $363,600
8. Kelly and Tim Johnson plan to refinance their mortgage to obtain a lower interest rate. They will
reduce their mortgage payments by $56 a month. Their closing costs for refinancing will be $1,670.
How long will it take them to recover the cost of refinancing?
$1,670  $56 = 29.82 (about 30 months; two and a half years)
9. You have bought a home that has a $750,000 mortgage and you have decided to use the variable
closed rate of 2.65 percent that your bank has available. The rate can adjust on a quarterly basis based on
market changes. What is the payment if you amortize the mortgage over 25 years? Assume 6 months
later the variable rate goes up to 3.15 percent as inflation has picked up. What is your monthly payment
now? What is the impact and risk associated with this market and variable rate interest rates?
As we are paying monthly we need to calculate an effective monthly rate for our formula. Remember
under the Bank Act in Canada all mortgages are compounded on a semi-annual basis. Therefore
EMR=(1+.0265/2)2/12 - 1 = 0.002196239
Therefore, the mortgage using a PV of annuity formula:
$750,000 = Mortgage Payment x ((1-1/1.002196239300)/0/002196239)
Mortgage payment = $3,416.03 a month
When rates go up after 6 months there will be (300 months -6 months) 294 months left on the
amortization schedule and the new EMR = (1+0.0315/2)2/12 - 1 = 0.002607937 or 0.2607937%
After 6 months of payments the balance outstanding on the initial mortgage is:
$3,416.03 x ((1-1/1.002196239294)/0.002196239) = $739,328.63
Therefore, the new mortgage amount will be:
$739,328.62 = Mortgage payment x ((1-1/1.002607937^294)/0.002607937) = $3,603.91
As you can see the risk is the increased payment that can have an impact on your ability to continue to
pay beyond your budget. If rates go up again in the short term you can sense of some issues here. Big
mortgages caused by the rapid increase in housing prices tied with an increasing interest rate environment
can be a cause for concern.
10. You estimate that you can save $3,800 by selling your own home yourself rather than using a real
estate agent. What is the future value of that amount if invested for five years at seven percent?
$3,800  1.4026 = $5,329.79 using table
Or $3,800 x (1.07)5 = $5,329.70
11. You want to pay off your mortgage on something called an accelerated bi-weekly payment plan (your
parents told you to do this). You have a mortgage of $500,000 amortized over 25 years at a rate of 3.5%
7-18
APR compounded semi-annually. What would the regular bi-weekly payment be? What would the
accelerated bi-weekly payment be? How much quicker would you pay off the mortgage and how much
interest would you save by doing the accelerated bi-weekly payment?
Regular BW payments We need to use and effective bi-weekly rate and amortized over 25 x 26 = 650
payments. EBWR = (1+.035)2/26 - 1 = 0.001335401
Therefore, payment under the regular BW schedule is:
$500,000 = Mortgage payment x ((1-1/1.001335401650)/0/001335401) for a bi-weekly mortgage payment
of $1,151.27.
Under the accelerated bi-weekly plan, we need to calculate the monthly mortgage amount and then just
divide the number in half to get the accelerated bi-weekly payment. Therefore, we need the effective
monthly rate (EMR) = (1+,035/2)2/12 - 1 = 0.002895624 and number of payments is (25x12)=300
payments.
$500,000 = Monthly mortgage x ((1-1/1.002895624300) / 0.002895624)
Monthly mortgage = $2,496.35 and thus we get an accelerated bi-weekly payment of $2,496.35/2 =
$1,248.18.
Now we need to determine how quickly we will pay off the mortgage under the accelerated bi-weekly
payment plan. Using PV formula, the EBWR and solving for n:
$500,000 = $1,248.18 x ((1 - 1/1.001335401n)/0.001335401)
($500,000/1,248.18) x 0.001335401 = 1 – 1/1.001335401n
n = ln(1/0.465060728) / ln1.001335401 n = 573.6874110 payments or 22.065 years
Therefore, total interest saved by paying accelerated bi-weekly is:
Regular bi-weekly total paid = $1,151.27 x 26 x 25 = $748,322.52
Accelerated bi-weekly total paid = $1,248.18 x 573.687411 = $716,062.39
As you can see you pay $248,322.52 in interest using regular bi-weekly compared to $216,062.39
under the accelerated bi-weekly schedule. Thus saving $248,322.52 - $216,062.39 = $32,260.14 in
interest payments.
FINANCIAL PLANNING ACTIVITIES
1. Interview several people about the factors that influenced their current residence.
This assignment can provide students with expanded awareness of factors that motivate housing
decisions. Encourage students to talk with people who live in various types of housing.
2. Compare the costs, facilities, and features of apartments and other rental housing in your area. You
may obtain this information through newspaper advertisements, information from rental offices, or
online searches of the World Wide Web.
This activity will be especially useful to students who plan to live on their own for the first time in the
near future, and those who may have recently moved to a new area.
3. Interview a tenant and a landlord to obtain their views about potential problems associated with
renting. How do their views on tenant-landlord relations differ?
7-19
This activity can help students appreciate another’s perspective with regard to renting housing.
4. Compare Renting vs Buying in your area. Look around your area and compare the cost of buying a
house and renting. You can compare renting an apartment or a house as well. Assume the average annual
maintenance costs on the purchase of your house would be 3% that you have to pay. Assume also that
you're disciplined and you invest any difference in amounts from renting into a diversified portfolio of
investments that averages you 8% over the 25 years comparable to a mortgage amortization period.
This activity can put into perspective the cost of renting but more so to understand the extra costs
that are not necessarily thought about initially when buying a home. Most just think of mortgage vs the
rent comparison.
5. Visit the sales offices of condominiums, new homes, and mobile homes. Based on the information
obtained, prepare a written or oral presentation comparing the benefits and potential concerns of these
housing alternatives.
This hands-on experience will give students the opportunity to see some of the advantages and
disadvantages of each housing alternative. After a few students visit each type, a class discussion can
bring out different points of view.
6. Interview a real estate agent about the process involving in selecting and buying a home. Ask about
housing prices in your area and the services provided by the agent. Also, obtain information about the
agent’s opinion as to what will happen to housing prices and interest over the next six months.
A debate continues as to whether real estate agents are worth the amount they charge for their
services. Some people have had pleasant experiences buying or selling a house without the services of
a real estate agent, but the opposite is also true for many who had a difficult time. This activity can
assist students in deciding whether they will want to use a real estate agent when the situation arises.
The housing prices in a community are affected by many factors; a real estate agent as well as other
information sources (newspaper articles, government officials, and insurance agents) can provide
current and expected home prices.
7. Talk with people who have different types of mortgages. What suggestions do they offer about
obtaining home financing? What were their experiences with closing costs when they purchased their
homes?
One of the best sources of information related to any purchase or financial decision is the experience
of others. Obtaining information about the types of mortgages most people have and the situation
under which they were obtained can be most educational.
8. Visit bank websites, such as http://www.royalbank.ca to learn how fixed rate and variable rate
mortgages differ. What are the advantages and disadvantages of each? Which would a first-time
home buyer likely prefer and why?
This activity will help students in the future, to make sure they make informed decisions in their
everyday life.
9. Contact several mortgage companies and other financial institutions to obtain information about
current mortgage rates, application fees, other charges, and the process for obtaining a mortgage.
This activity will help students better understand the mortgage application process.
10. Using Web sites such as http:// www.canadamortgage.com, http://www.cannex.com, or
http://money.canoe.ca, to obtain information on current mortgage rates available in different parts of
the country.
7-20
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Personal Finance Canadian 7th Edition

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LEARNING OBJECTIVES CHAPTER SUMMARY

After studying this chapter, students will be able to:

• Ask students to comment on the opening case for the chapter.

I. Evaluating Housing Alternatives

EVALUATING HOUSING ALTERNATIVES • Text Highlight: Exhibit 7-

Selecting a Rental Unit

• The main drawbacks of renting are:

• The Canadian Charter of Human Rights recognizes

THE HOME BUYING PROCESS

What Are the Drawbacks of Homeownership? • Assignment: Have

• The most common form of home ownership is one

• A condominium (condo) consist of two parts: a

• Co-operatives (co-ops) are member-owned

Determine Amount of Down Payment

Calculate Your Affordable Home Purchase Price

• Will you have enough money to make your

THE FINANCES OF HOME BUYING

• Federal law requires that you have mortgage

Step 5: Close the Purchase Transaction

Home Buying: A Final Word

SELLING YOUR HOME • Concept Check 7-4

• An appraisal, which is an estimate of the current • Assignment: Have students

CHAPTER 7 QUIZ ANSWERS

True-False Multiple Choice

______13 A __________ mortgage allows a person to borrow on the paid-up value of a

Type of mortgage Description of life situation Description of economic conditions

Split or Multi rate

Vendor take back

ANSWERS TO CONCEPT QUESTIONS, OPENING CASE QUESTIONS, FINANCIAL

Concept Check 7-1

Concept Check 7-2

Concept Check 7-3

Concept Check 7-4

OPENING CASE QUESTIONS

1. What factors affect a person’s ability to buy a house?

2. Based on the following data, would you recommend buying or renting?

Rental Costs Buying Costs

$10,975 Total buying costs

Monthly mortgage payment = $2100

GDS = ($2100 + $200 + $115 + $70) / $7800

Based on example A (with other debts), Exhibit 7-7

a. $9.21  100 = $921

FINANCIAL PLANNING ACTIVITIES

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13 A ____ mortgage allows a person to borrow on the paid-up value of a