Personal Finance

11

Out of the NestAs young adults begin to establish themselves independently oftheir parents, they may consider renting their own apartment,purchasing a home, or even beginning a family. Many financialfactors will need to be considered.

Insurance protects us from loss. If your rented apartment isburgled and your belongings are stolen or damaged, you canreplace them if you have coverage with an insurance policy.Your home can be insured against losses caused by fire orflooding. Your life can be insured so that the financial needs ofyour family are provided for in the event of your death.

Buying a home will probably require you to obtain amortgage. A variety of types of mortgages are available. Banksand credit unions use a formula called the gross debt serviceratio to determine how much money you can afford to spendon a mortgage. Purchasing a home also involves additionalcosts.

All of these factors are important considerations whendeciding to purchase a home.

Chapter 1

Personal Finance

Chapter GoalsIn this chapter, you will determine the costs ofbuying and insuring a home and you will solveproblems involving life insurance and mortgages.

Essentials of Mathematics 1212

Chapter ProjectIn the project for this chapter, you will imagine that you arebuying a home. You will choose the type of home you would

like—a house, a condominium, a townhouse, or an alternative type ofhousing—and research the total cost of buying this home. You will theninvestigate if and when such a home might be affordable for you.

As you complete the project activities, you will add the followingitems to your project file:

1. A description of the type of home you would like to purchase andinformation on three financial institutions that offer mortgages.

2. Calculations showing monthly, accelerated bi-weekly, and acceleratedweekly mortgage payment options.

3. A calculation of the gross debt service ratio to see whether yourpurchase is affordable.

4. Calculations of the annual property insurance premiums from threecompanies.

5. Calculations showing the additional one-time costs associated withbuying the home.

Researching the costs involved in buying a home, such as this house inWinnipeg, is the project for this chapter.

Chapter 1 Personal Finance 13

Life InsuranceThe purpose of any insurance is to protect individuals against unexpectedfinancial loss. When you purchase life insurance, you are purchasingfinancial security for your family in the event of your death. When youdie, the beneficiary will receive the full value of your insurance policyfrom the insurer. In this exploration, we will examine two types of lifeinsurance, term and whole-life. You will learn the benefits anddisadvantages of each type.

When you purchase term insurance, you are covered only for theterm of the policy. For example, a policy with a ten-year term is valid forten years. If you die in the eleventh year, there will be no coverage. Terminsurance is less expensive than whole-life, but you must be careful inselecting which type is best for you. If you are 20 years old, a ten-yearterm insurance policy is relatively inexpensive. But circumstances maychange. After the ten-year period, you will have to renegotiate a newpolicy. If your health has deteriorated, you may not be able to buy anycoverage.

Whole-life insurance is initially more expensive, but you are coveredfor life, regardless of changes in your health, and the premiums neverchange. Another positive attribute of whole-life policies is the “cashsurrender” option. An insured person can terminate the policy at anytime, and receive some cash back from his or her investment.

When calculating the premiums for insurance policies, insurancecompanies often add a policy fee. If you choose to pay your premiums ona semi-annual or monthly basis, the handling fees will be slightly higher.

Exploration 1

GoalsIn this exploration, you will distinguish terminsurance from whole-life insurance and learnhow smoking and gender affect life insurancepremiums.

New Termsbeneficiary: the person who will receive theinsurance money.

insurer: the company providing the insurance.

policy: a written contract or certificate ofinsurance.

premium: how much you pay for an insurancepolicy (monthly, semi-annually, or annually).

14

Table 1 Ten-Year Term Life InsuranceAnnual Premium for Term Plus

Male Non-Smoker Female Non-Smoker Male Smoker Female Smoker

Issue Rate per $1,000 Issue Rate per $1,000 Issue Rate per $1,000 Issue Rate per $1,000

$100,000 – $250,000 – $500,000 – $100,000 – $250,000 – $500,000 – $100,000 – $250,000 – $500,000 – $100,000 – $250,000 – $500,000 –Age $249,999 $499,999 $3,000,000 $249,999 $499,999 $3,000,000 $249,999 $499,999 $3,000,000 $249,999 $499,999 $3,000,000

20 0.85 0.81 0.77 0.80 0.76 0.73 1.43 1.36 1.30 1.32 1.25 1.2021 0.85 0.81 0.77 0.80 0.76 0.73 1.43 1.36 1.30 1.32 1.25 1.2022 0.85 0.81 0.77 0.80 0.76 0.73 1.43 1.36 1.30 1.32 1.25 1.2023 0.85 0.81 0.77 0.80 0.76 0.73 1.43 1.36 1.30 1.32 1.25 1.2024 0.85 0.81 0.77 0.80 0.76 0.73 1.43 1.36 1.30 1.32 1.25 1.20

25 0.85 0.81 0.77 0.80 0.76 0.73 1.43 1.36 1.30 1.32 1.25 1.2026 0.86 0.82 0.78 0.80 0.76 0.73 1.47 1.40 1.34 1.33 1.27 1.2127 0.87 0.83 0.79 0.80 0.76 0.73 1.52 1.44 1.39 1.34 1.28 1.2228 0.88 0.84 0.80 0.80 0.76 0.73 1.56 1.49 1.42 1.35 1.29 1.2329 0.89 0.85 0.81 0.80 0.76 0.73 1.61 1.53 1.46 1.36 1.30 1.24

30 0.90 0.86 0.82 0.80 0.76 0.73 1.65 1.57 1.51 1.38 1.31 1.2531 0.96 0.91 0.87 0.86 0.82 0.78 1.78 1.69 1.62 1.47 1.40 1.3432 1.02 0.97 0.93 0.92 0.87 0.84 1.91 1.82 1.74 1.57 1.50 1.4333 1.08 1.03 0.98 0.98 0.93 0.89 2.05 1.95 1.86 1.67 1.58 1.5234 1.14 1.08 1.04 1.04 0.99 0.95 2.18 2.07 1.98 1.77 1.68 1.62

35 1.20 1.14 1.09 1.10 1.05 1.00 2.31 2.20 2.10 1.87 1.78 1.7136 1.34 1.27 1.22 1.17 1.11 1.06 2.60 2.46 2.37 2.02 1.93 1.8437 1.48 1.41 1.35 1.24 1.18 1.13 2.88 2.74 2.62 2.18 2.07 1.9838 1.62 1.54 1.47 1.31 1.24 1.19 3.17 3.01 2.88 2.33 2.21 2.1239 1.76 1.67 1.60 1.38 1.31 1.26 3.45 3.28 3.15 2.49 2.37 2.27

40 1.90 1.81 1.73 1.45 1.38 1.32 3.74 3.55 3.40 2.64 2.51 2.4041 2.06 1.96 1.87 1.56 1.48 1.42 4.22 4.02 3.84 2.90 2.76 2.6442 2.22 2.11 2.02 1.67 1.59 1.52 4.71 4.48 4.28 3.17 3.01 2.8843 2.38 2.26 2.17 1.78 1.69 1.62 5.19 4.93 4.73 3.43 3.26 3.1244 2.54 2.41 2.31 1.89 1.80 1.72 5.68 5.39 5.17 3.70 3.51 3.37

45 2.70 2.57 2.46 2.00 1.90 1.82 6.16 5.85 5.61 3.96 3.76 3.6146 3.03 2.88 2.76 2.23 2.12 2.03 6.60 6.27 6.01 4.49 4.27 4.0847 3.36 3.19 3.06 2.46 2.34 2.24 7.04 6.69 6.40 5.02 4.76 4.5748 3.69 3.51 3.36 2.69 2.56 2.45 7.48 7.11 6.81 5.54 5.27 5.0549 4.02 3.82 3.66 2.92 2.77 2.66 7.92 7.52 7.21 6.07 5.76 5.52

50 4.35 4.13 3.96 3.15 2.99 2.87 8.36 7.94 7.61 6.60 6.27 6.0151 4.88 4.64 4.44 3.40 3.23 3.09 9.26 8.80 8.43 7.24 6.88 6.5952 5.41 5.14 4.92 3.65 3.47 3.32 10.16 9.66 9.25 7.88 7.48 7.1753 5.94 5.64 5.41 3.90 3.71 3.55 11.07 10.52 10.07 8.51 8.09 7.7454 6.47 6.15 5.89 4.15 3.94 3.78 11.97 11.37 10.89 9.15 8.69 8.33

55 7.00 6.65 6.37 4.40 4.18 4.00 12.87 12.23 11.72 9.79 9.31 8.9156 7.60 7.22 6.92 4.91 4.66 4.47 13.60 12.91 12.38 10.52 9.99 9.5757 8.20 7.79 7.46 5.42 5.15 4.93 14.32 13.61 13.04 11.24 10.68 10.2358 8.80 8.36 8.01 5.93 5.63 5.40 15.05 14.30 13.70 11.97 11.37 10.8959 9.40 8.93 8.55 6.44 6.12 5.86 15.77 14.98 14.36 12.69 12.06 11.55

60 10.00 9.50 9.10 6.95 6.60 6.32 16.50 15.68 15.02 13.42 12.75 12.2161 11.60 11.02 10.56 7.86 7.47 7.15 18.70 17.77 17.02 14.87 14.12 13.5362 13.20 12.54 12.01 8.77 8.33 7.98 20.90 19.86 19.02 16.32 15.51 14.85

Add policy fee of $75 per yearSemi-annual payment (multiply annual premium by 0.52)Monthly payment (multiply annual premium by 0.09)



Table 2 Whole-Life InsuranceAnnual Whole-Life Premium

Male Female Male Female Male Female

Non-Smoker Non-Smoker Smoker Smoker Under 18 Under 18

Issue Rate Issue Rate Issue Rate Issue Rate Issue Rate Issue Rateper $1,000 per $1,000 per $1,000 per $1,000 per $1,000 per $1,000

Issue Premium Premium Premium Premium Issue Issue Premium Premium IssueAge Rate Rate Rate Rate Age Age Rate Rate Age

18 3.50 2.82 4.31 3.13 18 0 1.75 1.53 019 3.54 2.85 4.41 3.20 19 1 1.78 1.56 120 3.60 2.89 4.51 3.26 20 2 1.80 1.59 221 3.96 3.04 4.72 3.44 21 3 1.89 1.63 322 4.07 3.20 4.93 3.62 22 4 1.98 1.67 4

23 4.17 3.35 5.15 3.81 23 5 2.05 1.71 524 4.28 3.51 5.36 3.99 24 6 2.12 1.75 625 4.38 3.66 5.57 4.17 25 7 2.24 1.82 726 4.61 3.86 5.88 4.41 26 8 2.35 1.89 827 4.82 4.05 6.19 4.66 27 9 2.47 1.97 9

28 5.05 4.25 6.49 4.90 28 10 2.58 2.05 1029 5.26 4.44 6.80 5.15 29 11 2.71 2.16 1130 5.46 4.64 7.11 5.39 30 12 2.83 2.27 1231 5.76 4.90 7.56 5.72 31 13 3.01 2.34 1332 6.03 5.16 8.01 6.04 32 14 3.19 2.41 14

33 6.30 5.41 8.45 6.37 33 15 3.31 2.50 1534 6.59 5.67 8.90 6.69 34 16 3.42 2.58 1635 7.11 5.93 9.35 7.02 35 17 3.46 2.66 1736 7.32 6.31 10.04 7.50 3637 7.78 6.70 10.74 7.98 37

38 8.25 7.08 11.43 8.47 3839 8.71 7.47 12.13 8.95 3940 9.28 7.85 12.82 9.43 4041 9.75 8.42 13.86 10.14 4142 10.32 8.99 14.90 10.85 42

43 10.90 9.55 15.95 11.55 4344 11.48 10.12 16.99 12.26 4445 12.40 10.69 18.03 12.97 4546 12.81 11.21 19.15 13.68 4647 13.55 11.73 20.26 14.38 47

48 14.28 12.26 21.38 15.09 4849 15.02 12.78 22.49 15.79 4950 16.34 13.30 23.61 16.50 5051 16.70 14.03 25.06 17.44 5152 17.63 14.76 26.52 18.38 52

53 18.56 15.49 27.97 19.32 5354 19.51 16.22 29.43 20.26 5455 21.15 16.95 30.88 21.20 5556 21.79 17.93 32.73 22.39 5657 23.17 18.91 34.57 23.58 57

58 24.53 19.89 36.42 24.78 5859 25.89 20.87 38.26 25.97 5960 27.70 21.85 40.11 27.16 6061 29.32 23.21 42.40 28.71 6162 31.39 24.57 44.70 30.25 62

Add policy fee of $75 per yearSemi-annual payment (multiply annual premium by 0.52)Monthly payment (multiply annual premium by 0.09)


Table 3 Cash Surrender ValuesWhole-Life Insurance

Male FemaleCash Surrender Value per $1,000 of Insurance Cash Surrender Value per $1,000 of Insurance

Issue Age Policy Issue Age

20 25 30 35 40 45 50 55 60 65 70 Year 20 25 30 35 40 45 50 55 60 65 70

0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0

0 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 0 0 0 0

0 0 0 0 0 0 0 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 0

1 1 1 2 3 5 7 9 11 15 18 4 1 1 1 1 2 4 5 7 9 12 16

2 3 4 6 8 14 18 23 28 35 41 5 1 2 3 5 7 11 14 19 24 30 37

4 6 8 11 14 23 29 36 44 54 64 6 3 4 6 8 11 18 23 30 38 48 58

6 8 11 15 20 32 40 50 61 74 87 7 4 6 9 12 16 25 33 42 52 65 79

7 10 14 19 25 40 51 64 78 94 110 8 6 8 11 15 20 32 42 53 67 83 100

8 13 18 24 30 49 62 77 94 113 133 9 7 10 14 19 24 40 51 65 81 100 121

10 15 21 28 36 58 73 91 111 133 156 10 9 12 16 22 29 47 60 76 95 118 142

14 21 29 38 52 91 109 130 152 175 201 11 12 17 23 30 42 75 91 111 133 158 186

17 27 37 48 68 124 145 168 193 218 245 12 15 22 29 38 55 103 122 146 171 199 231

21 34 44 58 83 157 181 207 234 260 290 13 18 27 36 46 68 131 154 181 208 239 275

24 40 52 68 99 190 217 246 275 303 335 14 20 32 42 55 81 160 185 216 246 280 319

28 46 60 78 115 223 252 284 316 345 380 15 23 37 49 63 94 188 216 251 284 320 364

33 54 73 94 141 256 288 323 356 387 424 16 28 44 59 76 116 216 247 285 321 361 408

39 62 86 110 167 289 324 362 397 430 469 17 32 50 70 89 138 244 278 320 359 401 453

44 69 99 126 193 322 360 401 438 472 514 18 37 56 80 103 159 273 310 355 397 442 497

50 77 112 142 219 355 396 439 479 515 558 19 41 63 91 116 181 301 341 390 434 482 542

55 85 125 158 245 388 432 478 520 557 603 20 46 69 102 129 203 329 372 425 472 523 586

63 96 140 181 284 405 451 499 544 587 626 21 52 78 114 149 237 348 393 448 498 555 627

71 107 154 204 324 423 470 520 568 616 650 22 59 87 126 168 272 367 414 471 525 587 669

78 117 169 226 363 440 489 541 592 646 673 23 65 96 138 188 306 387 435 494 551 618 710

86 128 183 249 403 458 508 562 616 675 698 24 71 105 151 207 341 406 456 517 578 650 752

94 139 196 272 442 475 527 582 640 705 726 25 78 114 163 226 375 425 477 540 604 682 793

105 154 217 312 458 493 546 603 664 734 756 26 87 126 179 262 393 444 498 563 630 714 834

116 168 236 353 474 510 565 624 688 764 794 27 96 139 195 297 411 163 519 586 657 746 876

127 183 254 393 490 528 583 645 712 793 841 28 105 151 212 332 429 482 539 609 683 777 917

138 197 273 434 506 545 602 666 736 823 906 29 114 163 228 367 446 502 560 632 710 809 959

149 212 292 474 522 563 621 687 760 852 1,000 30 124 176 244 402 464 521 581 655 736 841 1,000

164 231 333 489 538 580 640 708 784 882 - 31 136 192 276 419 482 540 602 678 762 873 -

179 250 374 504 554 598 659 729 808 911 - 32 149 209 306 436 500 559 623 701 789 905 -

193 269 415 519 570 615 678 749 832 941 - 33 161 225 340 453 518 578 644 724 815 936 -

208 288 456 534 585 633 697 770 856 970 - 34 174 241 372 470 536 597 665 747 842 968 -

223 307 497 549 601 650 716 791 880 1,000 - 35 186 258 404 487 554 617 686 770 868 1,000 -

242 348 511 564 617 668 735 812 904 - - 36 202 287 421 505 571 636 707 796 894 - -

261 389 526 579 633 685 754 833 928 - - 37 219 316 438 522 589 655 728 816 921 - -

280 429 540 594 649 703 773 854 952 - - 38 235 345 455 539 607 674 749 839 947 - -

299 470 554 609 665 720 792 875 976 - - 39 252 375 472 556 625 693 770 862 974 - -

318 511 569 624 681 738 811 896 1,000 - - 40 268 404 489 573 643 712 791 885 1,000 - -

Table 3 Cash Surrender ValuesWhole-Life Insurance

Male FemaleCash Surrender Value per $1,000 of Insurance Cash Surrender Value per $1,000 of Insurance

Issue Age Policy Issue Age

20 25 30 35 40 45 50 55 60 65 70 Year 20 25 30 35 40 45 50 55 60 65 70

357 525 583 639 697 755 830 916 - - - 41 295 421 506 590 661 732 812 906 - - -

395 539 596 654 713 773 849 937 - - - 42 322 438 523 607 679 751 833 931 - - -

434 553 612 669 729 790 867 958 - - - 43 350 455 540 624 696 770 853 954 - - -

472 567 626 684 745 808 886 979 - - - 44 377 472 557 641 714 789 874 977 - - -

511 581 641 699 761 825 905 1,000 - - - 45 404 489 574 658 732 806 895 1,000 - - -

525 595 655 714 777 843 924 - - - - 46 421 506 591 675 750 827 916 - - - -

539 609 669 729 793 860 943 - - - - 47 438 523 608 692 768 847 937 - - - -

553 623 684 745 809 878 962 - - - - 48 455 540 625 710 786 866 958 - - - -

567 637 698 760 825 895 961 - - - - 49 472 557 642 727 804 885 979 - - - -

581 651 713 775 841 913 1,000 - - - - 50 489 574 659 744 821 904 1,000 - - - -

595 665 727 790 857 930 - - - - - 51 506 591 676 761 839 923 - - - - -

609 679 741 805 872 948 - - - - - 52 523 608 693 778 857 942 - - - - -

623 693 756 820 888 965 - - - - - 53 540 625 711 795 875 962 - - - - -

637 707 770 835 904 983 - - - - - 54 557 642 728 812 893 981 - - - - -

651 721 784 850 920 1,000 - - - - - 55 574 659 745 829 911 1,000 - - - - -

665 735 799 865 936 - - - - - - 56 591 676 762 846 929 - - - - - -

679 749 813 880 952 - - - - - - 57 608 693 779 863 946 - - - - - -

693 762 828 895 968 - - - - - - 58 625 711 796 880 964 - - - - - -

707 776 842 910 984 - - - - - - 59 642 728 813 897 962 - - - - - -

721 790 856 925 1,000 - - - - - - 60 659 745 830 915 1,000 - - - - - -

735 804 871 940 - - - - - - - 61 676 762 847 932 - - - - - - -

749 818 885 955 - - - - - - - 62 693 779 864 949 - - - - - - -

762 832 899 970 - - - - - - - 63 711 796 881 966 - - - - - - -

776 846 914 985 - - - - - - - 64 728 813 896 983 - - - - - - -

790 860 928 1,000 - - - - - - - 65 745 830 915 1,000 - - - - - - -

804 874 943 - - - - - - - - 66 762 847 932 - - - - - - -

818 888 957 - - - - - - - - 67 779 864 949 - - - - - - - -

832 902 971 - - - - - - - - 68 796 881 966 - - - - - - - -

846 916 986 - - - - - - - - 69 813 898 983 - - - - - - - -

860 930 1,000 - - - - - - - - 70 830 915 1,000 - - - - - - - -

874 944 - - - - - - - - - 71 847 932 - - - - - - - - -

888 958 - - - - - - - - - 72 864 949 - - - - - - - - -

902 972 - - - - - - - - - 73 881 966 - - - - - - - - -

916 986 - - - - - - - - - 74 896 983 - - - - - - - - -

930 1,000 - - - - - - - - - 75 915 1,000 - - - - - - - - -944 - - - - - - - - - - 76 932 - - - - - - - - - -

958 - - - - - - - - - - 77 949 - - - - - - - - - -

972 - - - - - - - - - - 78 966 - - - - - - - - - -

986 - - - - - - - - - - 79 983 - - - - - - - - - -

1,000 - - - - - - - - - - 80 1,000 - - - - - - - - - -

Every effort has been made to ensure the accuracy of the above values, but accuracy is not guaranteed.In the event of a discrepancy, the insurance policy governs.



Example 1Jason Rettinger is a 32-year-old male non-smoker. He wants to purchasea 10-year term life insurance policy worth $120,000. Find his annualpremium, and then find his monthly premium.

If Jason decides to pay monthly premiums, the total cost over theyear would be $213.24 ($17.77 � 12). Compared to paying one annualpayment of $197.40, this is an additional cost of $15.84 to cover thehandling of his account.

SolutionLook in the Ten-Year Term Life Insurance table for a 32-year-old malenon-smoker. Be sure to select the first column in the male non-smokersection, since the next column is the rate for policies between$250,000 and $499,999. The premium for Jason would be $1.02 perthousand dollars of coverage.

The easiest way to calculate his annual premium is:

� �$1$212,0,40000

�

� $122.40

Now add the $75 policy fee (see Table 1 footnote):

$122.40 � $75.00 � $197.40 (annual premium)

To find the monthly premium, multiply the annual premium by 0.09:

$197.40 � 0.09 � $17.77 (rounded)

Jason pays $17.77 per month for his life insurance.

$1.02 � $120,000��

$1,000


Example 2Lynne is a 20-year-old non-smoking female who wishes to purchase awhole-life policy worth $75,000. Find her premiums if she decides tomake semi-annual payments.

SolutionUse the Whole-Life Insurance table, and look for the column for non-smoking females. Sliding down to 20-year-olds, and going across to theappropriate column, you will see a rate of $2.89 per thousand dollars ofcoverage.

�$2.89

$1�

,0$0705,000

� � $216.75

Remember to add the policy fee

$216.75 � $75.00 � $291.75

Now use the footnote on this table to calculate the amount for semi-annual payments. Multiply the annual premium by 0.52:

$291.75 � 0.52 � $151.71

Lynne pays $151.71 semi-annually for her life insurance.


Example 3Wayne is 22 years old and he smokes. He is considering purchasing a 10-year term insurance policy in the amount of $200,000. His agent adviseshim that if he quits smoking, the insurance will be much less expensive.Calculate the difference in the annual premiums if Wayne were to quitsmoking.

Class DiscussionDiscuss why smokers have to pay more for life insurance than non-smokers. Why do men have to pay more for life insurance than women?

Solution22-year-old Male Smoker 22-year-old Male Non-Smoker

� $286.00 � $170.00

$286.00 � $75.00 � $361.00 $170.00 � $75.00 � $245.00

Subtract to find the difference in annual premiums:

$361.00 � $245.00 � $116.00

$0.85 � $200,000��

$1,000$1.43 � $200,000��

$1,000


Example 4Jim Chow bought a $50,000 whole-life policy when he was 20 years old.When he turned 50, he decided to cancel his insurance and take the cashsurrender value. How much did he receive?

Class ActivityAs a class, research the rates of several companies that offer lifeinsurance. Assume you are a 20-year-old and that you wish to buy$100,000 of whole-life insurance. Find the total monthly premiums forthe following cases:

• male smoker• male non-smoker• female smoker• female non-smoker

The class should compile a table that lists the companies and therates they would charge. Which company would your class select? Listthe reason(s) why you chose that company.

SolutionUse the Cash Surrender Values table. Find the issue age of 20 in the“Male” column. Since Jim had this policy for 30 years (50 � 20 � 30),slide down the column labelled “Policy Year” to 30. You should see avalue of $149 per thousand dollars.

$149.00 � �$$510,0,00000

� � $7,450.00

The cash surrender value of Jim’s policy is $7,450.00


Notebook Assignment1. Denise Gill is a 33-year-old non-smoker. What will her annual

premium be for a $100,000, 10-year term life insurance policy?

2. Kevin Wong is 30 years old and smokes. Calculate his annualpremium for a $50,000 whole-life policy.

3. Harry and Sally Heller are both 25 years old, and non-smokers. Theyeach decide to purchase $200,000 whole-life insurance policies.

a) Find the monthly premium each will have to pay.

b) Why does Harry have to pay more than Sally?

4. Howard was 25 years old when he bought an $80,000 whole-lifeinsurance policy. At the age of 60, he decided to cancel his policyand take the cash surrender value.

a) How much money can he expect back?

b) List 2 reasons why someone might choose term life insuranceinstead of whole-life.

c) List 2 reasons why someone might choose whole-life insuranceinstead of term.

5. Luen is comparing the insurance costs of smokers and non-smokers.He selects a 27-year-old male, and picks $300,000 insurance over a10-year term.

a) Find the annual premium for a smoker and a non-smoker.

b) What is the difference in the premiums?

c) Find the percent difference compared to the non-smoking rate.

6. Malvina Antoniak is a 25-year-old smoker. What is her semi-annualpremium for $270,000 of whole-life insurance?

7. A man buys a $60,000, 10-year term life insurance policy when he is28. If he dies when he is 39, how much will his beneficiary collect?


Extension8. Twin girls have decided to purchase $260,000 of life insurance on

their twentieth birthday. One buys 10-year term life insurance, whilethe other decides to purchase whole-life insurance. Both are non-smokers.

a) Determine the total cost of premiums that each would pay over40 years. The 10-year term life policy is renewable after each 10-year period, but at the new rates for this twin’s age.

b) Find the cash surrender value after 40 years.

c) Which twin selected the better coverage? Explain your reasoning.

An insurance salesperson explains the various types of life insurance.


Exploration 2

Calculating Mortgage PaymentsMost people need to borrow money to purchase a home. Generally, ahome is the largest purchase of your life. This exploration will help youunderstand how mortgages work.

To buy or sell a home today it is important to understand theconcepts and to know the vocabulary. This can save you time and money;it can also prevent you from obtaining a mortgage ill-suited to yourneeds.

Three important words are: “interest,” “principal,” and “equity.”When you first buy a home, you’re likely to make a down payment onthe property. But, because you financed the purchase, you are now indebt and the lender “owns” most of the property’s value. In traditionalmortgages, the monthly payments on the loan are weighted. During thefirst years, they are largely interest; in time, more of each payment iscredited to the loan itself, or the principal. Gradually as you pay off theprincipal, you build up equity, or ownership, and decrease your unpaidbalance, or debt. Your equity also increases if the value of the homeincreases. This process of gradually obtaining equity and reducing debtthrough payments of principal and interest is called amortization.

GoalsIn this exploration, you will learn to calculateprincipal, interest, and equity. You will alsolearn about different types of mortgages.

New Termsamortization period: the length of time inyears that you will need to pay off amortgage.

equity: the portion of the value of yourproperty that you own.

interest: the cost of borrowing money.

principal: the amount you initially borrow.

unpaid balance: the portion of the valueof your property owed to the financialinstitution.

First-time home buyers can usually secure financing with only 5% ofthe purchase price as a down payment. The National Housing Actrequires that all mortgages with less than a 25% down payment beinsured against loss. People who need mortgages over 75% of theprincipal are required to pay a higher rate (between 0.5% and 3.75%higher).

Many different types of mortgages are available from financialinstitutions. This exploration will look at some of them briefly, but willfocus on fixed-rate, closed mortgages.

Career ConnectionName: Philippe GagnonJob: insurance adjusterCurrent salary: $2,000 per month Education: grade 12; coursesthrough Insurance Institute ofCanada

Career goal: branch manager atan insurance company officeKeyword search: Canadacourses insurance adjuster


New Termsclosed mortgage: a mortgage which does not allowpayments on the principal.

fixed-rate mortgage: a mortgage with the interestrate locked in for a specified period of time.


Types of MortgagesFixed-rate mortgages can be negotiated with a financial institution for anynumber of years. These mortgages guarantee the monthly payment forthe selected term (for example, 2 years). With a fixed rate, you are able tobudget your mortgage payments and are protected from any spikes ininterest rates. Usually this type of mortgage is locked in, and you wouldbe charged a penalty to pay extra on the principal, or to pay it off beforethe end of the term. However, some fixed-rate mortgages allow for anextra payment annually.

Variable-rate mortgages are popular with people who believe theinterest rates are going to fall or remain constant. If the rates fall, theamount of interest charged each month against the principal borrowedwill be less. You can still budget your mortgage payment, which staysconstant. These mortgages are usually considered to be open, and youcan pay against the principal at any time and can close the mortgagewithout penalty. If the rates go up suddenly, you may want to switch overto a fixed-rate mortgage to protect yourself.

TechnologyInformation about mortgages can befound through a financial institution’sweb site or from :

www.canadamortgage.comor www.cba.ca

Many web sites contain financial toolsand calculators relating to mortgages.Banking laws, including mortgages, aredifferent in Canada than in othercountries. Canadian web sites should beused.

New Termsopen mortgage: a mortgage thatallows additional payments on theprincipal.

variable-rate mortgage: a mortgagewhere the interest rate may change frommonth to month.


Table 4 Amortization Table

Blended Payment of Principal and Interest per $1,000 of Loan

Interest Rate 5 Years 10 Years 15 Years 20 Years 25 Years4.00% 18.40 10.11 7.38 6.04 5.264.25 18.51 10.23 7.50 6.17 5.404.50 18.62 10.34 7.63 6.30 5.534.75 18.74 10.46 7.75 6.44 5.675.00 18.85 10.58 7.88 6.57 5.82

5.25 18.96 10.70 8.01 6.71 5.965.50 19.07 10.82 8.14 6.84 6.105.75 19.19 10.94 8.27 6.98 6.256.00 19.30 11.07 8.40 7.12 6.406.25 19.41 11.19 8.53 7.26 6.55

6.50 19.53 11.31 8.66 7.41 6.706.75 19.64 11.43 8.80 7.55 6.857.00 19.75 11.56 8.93 7.70 7.007.25 19.87 11.68 9.07 7.84 7.167.50 19.98 11.81 9.21 7.99 7.32

7.75 20.10 11.94 9.34 8.13 7.478.00 20.21 12.06 9.48 8.28 7.638.25 20.33 12.19 9.62 8.43 7.798.50 20.45 12.32 9.76 8.59 7.958.75 20.56 12.45 9.90 8.74 8.12

9.00 20.68 12.58 10.05 8.89 8.289.25 20.80 12.71 10.19 9.05 8.449.50 20.91 12.84 10.33 9.20 8.619.75 21.03 12.97 10.48 9.36 8.7810.00 21.15 13.10 10.62 9.52 8.94

10.25 21.27 13.24 10.77 9.68 9.1110.50 21.38 13.37 10.92 9.84 9.2810.75 21.50 13.50 11.06 9.99 9.4511.00 21.62 13.64 11.21 10.16 9.6311.25 21.74 13.77 11.36 10.32 9.80

11.50 21.86 13.91 11.51 10.48 9.9711.75 21.98 14.04 11.66 10.65 10.1412.00 22.10 14.18 11.82 10.81 10.3212.25 22.22 14.32 11.97 10.98 10.4912.50 22.34 14.46 12.12 11.14 10.67

12.75 22.46 14.59 12.28 11.31 10.8513.00 22.58 14.73 12.43 11.48 11.0213.25 22.70 14.87 12.59 11.64 11.2013.50 22.82 15.01 12.74 11.81 11.3813.75 22.94 15.15 12.90 11.98 11.5614.00 23.07 15.29 13.06 12.15 11.74

14.25 23.19 15.43 13.21 12.32 11.9214.50 23.31 15.58 13.37 12.49 12.1014.75 23.43 15.72 13.53 12.67 12.2815.00 23.56 15.86 13.69 12.84 12.46


SAMPLE

In order to complete an amortization schedule, you will need todetermine the monthly payment from an amortization table. You willneed to calculate the owner’s equity, unpaid balance, interest on unpaidbalance, principal, and the owner’s new equity.

Below are the six simple steps. Complete them in order for as manymonthly payments as the schedule requires.

1. Calculate the monthly payment using the amortization table on page27. Then write in the unpaid balance and the owner’s equity.

2. To find the interest payment, multiply the unpaid balance by theinterest rate and divide by 12.

3. Subtract the interest from the monthly payment to find the principalpayment.

4. Add the principal payment to the owner’s equity.

5. Subtract the principal payment from the unpaid balance.

6. Repeat for as many months as required.

The table below is a useful way to organize your information.

Owner’s Unpaid Monthly Interest PrincipalEquity Balance Payment Payment Payment

TechnologySpreadsheet software can be used to calculateamortization schedules. You may also use a searchengine such as Google or Altavista and type in“amortization table.” You will be able to accessmany financial calculator programs that areavailable on-line.

The following example illustrates these steps.

Example 1Write an amortization schedule for three months, given a mortgage of$85,000 (after a $20,000 down payment), at 6% over 20 years.

Solution1. First, write the unpaid balance (the amount actually borrowed) and

the owner’s equity (or down payment) in first line of the table.Calculate the monthly payment using the amortization table:

6% over 20 years is $7.12 per $1,000 borrowed

�$7.12

$1�

,0$0805,000

� � $605.20/month

2. Unpaid balance multiplied by interest rate divided by 12 gives the

interest:

� $425.00/month

3. Monthly payment minus the interest gives the principal:

$605.20 � $425.00 � $180.20

4. Add this principal to the owner’s equity:

$20,000 � $180.20 � $20,180.20

5. Subtract the principal amount from the unpaid balance to give the new unpaid balance:

$85,000 � $180.20 � $84,819.80

6. Go back to step 2.

Repeat these steps to complete the schedule for the next two months:

Owner’s Unpaid Monthly Interest PrincipalEquity Balance Payment Payment Payment

$20,000 $85,000 $605.20

$20,180.20 $84,819.80 $605.20 $425.00 $180.20

$20,361.30 $84,638.70 $605.20 $424.10 $181.10

$20,543.31 $84,456.69 $605.20 $423.19 $182.01

$85,000 � 0.06 ——12 months


24 3

1

5

1

Example 2Mr. and Mrs. Smith purchased a home for $160,000. They made a downpayment of $35,000. If they negotiated a mortgage at 7�

14

�% over 25 years,calculate:

a) the amount they would need to borrow for the mortgage

b) the monthly mortgage payment

c) the amount of interest on the first payment

d) the amount of interest they would pay over the life of themortgage


Solutiona) $160,000 is the purchase price of the home. If the Smiths made a down

payment of $35,000, they would need to borrow the balance:$160,000 � $35,000 � $125,000

They would borrow $125,000.

b) Find 7�14

�% in the amortization table. A rate of 7�14

�% over 25 years requires a payment of $7.16 per $1,000 borrowed:

�$7.16

$x1,

$010205,000

� � $895.00

The monthly payment would be $895.00.

c) To find the amount of interest on the first payment, multiply the balance by the rate and divide by 12 months:

� $755.21

The Smiths will pay $755.21 in interest on their first payment.

d) To find the total amount of interest they will pay over the life of the mortgage, multiply the monthly payment by the number of months and subtract theprincipal borrowed:

monthly payment � number of months � principal borrowed � total interest paid

$895 � 12 months � 25 years � $268,500

$268,500 � $125,000 � $143,500

Over the life of the mortgage, the Smiths will pay $143,500 in interest.

$125,000 � 0.0725———12


Project ActivityYou must find a home to purchase. Assume that you have aninheritance of $30,000 to use as a down payment on your

home. Use local real estate figures or data from www.mls.ca. Assume thatyou and your partner are earning a gross family income of $65,000.Describe the home you want to purchase. Then find three providers ofmortgage money, and justify why you would select one over the others.Include your data on mortgages.

Mental MathDetermine the monthly mortgage payment:

a) $6.50 per $1,000 for $100,000

b) $5.00 per $1,000 for $120,000

c) $4.00 per $1,000 for $150,000

Finding a home that you can afford may be a challenge.


Notebook Assignment1. Find the monthly payments on the following mortgages:

a) $50,000 at 5.5% over 15 years

b) $85,000 at 6—12

—% over 25 years

c) $182,250 at 7—12

—% over 15 years

d) $78,380 at 6% over 10 years

2. Kevin McIlwraith is considering purchasing a condominium in NorthVancouver for $149,750. He has $55,500 saved for a down payment.The credit union is offering him a mortgage at 5.5% over 20 years.Find his monthly payment including principal and interest.

3. A $70,000 mortgage was offered by a loans officer at a rate of 6%over 20 years. How much interest would be paid over the life of themortgage?

4. Create an amortization schedule showing the principal and interestover the first four months of an $80,000 mortgage at 7—1

2—% over 20

years, with a $15,000 down payment. Assume monthly payments.

5. Explain why you might consider taking out a mortgage with a highermonthly payment over a shorter amortization period.

6. Pierre LaFrance is considering both a variable-rate and a fixed-ratemortgage. List two advantages to each. Which would yourecommend, and why?

7. Sam Tamaki has two bank offers to consider for his $105,500mortgage. One option is at 7% over 20 years, while the other is at6% over 25 years. Calculate the amount of interest he would payover the life of each mortgage. Show which would be the betterchoice if payments are made monthly.


Extension8. Mila Obradovic wants to purchase a home costing $180,000. She has

$40,000 saved up for the down payment. The bank will only finance$110,000 at 7—1

2—% over 25 years. She has arranged a second mortgage

through her family at 9% over 20 years for the balance. Find the totalmonthly mortgage payments she will be making.

Paying off a mortgage for a large house such as this one in Arviat, Nunavut,will often take 25 years.


Exploration 3

Exploring Mortgage PaymentsThis exploration is designed to encourage you to look at mortgageoptions other than the conventional monthly “fixed-rate” mortgagesstudied in the previous exploration.

You will explore various payment options for mortgages, and will beasked to make decisions involving budgetary concerns with shorteramortization periods, bi-weekly payments, weekly payments, and annualcontributions.

A basic mortgage of $125,000 at 7�14

�% over 25 years will cost$143,500 in interest. There are a few payment options you shouldconsider that can dramatically reduce the amount of interest you have topay. Using an on-line financial calculator or a spreadsheet program canmake it much easier to compare different situations.

Payment Optionsa) semi-monthly: this saves very little over the life of the mortgage.

The monthly payment is simply divided into halves.

b) accelerated bi-weekly: this option can save you manythousands of dollars. It takes your monthly payment and dividesit by two to make it bi-weekly. But, there are 52 weeks in a year,and therefore 26 bi-weekly payments. As a result, you wouldmake an additional two payments per year, reducing yourprincipal more quickly, and lowering the total interest you haveto pay. This option is especially advantageous for those who getpaid bi-weekly.

34

GoalsIn this exploration, you will examine variousmortgage payment plans and make decisions aboutthe best way to pay off a mortgage.

c) accelerated weekly: this option can save slightly more. It takesyour monthly payment and divides it by four to find a weeklypayment. But, with 52 weeks in a year, you are making fouradditional payments when compared to the monthly amount.This reduces your principal faster, and lowers the amount ofinterest paid.

d) double-up: some lending institutions offer a “double-up” planwhere you are allowed to pay double your usual amount on oneor more occasions during the year. This extra payment goesdirectly against the principal.

e) lump sum: on the anniversary of your mortgage, or the renewaldate, you may be allowed to pay a “lump sum.” This goesdirectly against your principal, and reduces the amount ofinterest considerably.

f) shorter amortization periods: although the monthly paymentsare higher, you can save thousands over the life of the mortgage.

The figures in the table below were obtained from an on-linemortgage calculator. The table shows the effect of different paymentoptions on a $142,772.35 mortgage amortized over 25 years at 7%.

Comparison of Mortgage Amortization Periods

Payment Payment Amort. Interest InterestSchedule Amount (years) Paid Saved

Monthly $1,000.00 25 $157,227 0

Accelerated $500.00 20.58 $124,353 $32,874Bi-weekly

Accelerated $250.00 20.52 $123,849 $33,378Weekly

Note: figures may vary slightly depending on the financial institution.

By making accelerated bi-weekly payments, $32,874 is saved and themortgage amortization period is reduced from 25 years to 20.58 years. Bypaying weekly, $33,378 is saved and the mortgage amortization period isreduced from 25 years to 20.52 years.



Example 1Nancy Moreau is comparing mortgages at her financial institution. Theloans officer wants her to accept a 25-year amortization period because ithas a much lower monthly payment. But Nancy thinks she can pay themortgage off sooner. This will save her many thousands of dollars. Themortgage is $130,000 at 6—1

2—%. Nancy wants to pay it off over 15 years.

Determine the amount of interest she would save if the loan wereamortized over 15 years instead of 25 years.

SolutionFind the monthly payments for both situations:

6 % over 25 years 6 % over 15 years

� $871.00/month � $1,125.80/month

Total interest paid over life of the mortgage:

$871 � 12 � 25 � $261,300 $1125.80 � 12 � 15 � $202,644

$261,300 � $130,000 � $131,300 $202,644 � $130,000 � $72,644

The difference is:

$131,300 � $72,644 � $58,656

Even though the monthly payments are higher, a shorter amortization period reducesthe borrowing costs over the life of the mortgage.

$8.66 � $130,000��

$1,000$6.70 � $130,000��

$1,000

1�2

1�2


Example 2Jillian is considering mortgage options. Her monthly payment over 20years will be $593.96 on a $90,000 mortgage at 5% (using a mortgagecalculator). If she converts this to accelerated bi-weekly payments, hermortgage will be paid off in 17.7 years.

a) Find the amount of her accelerated bi-weekly payments.

b) How much would this save her in interest charges over the life ofthe mortgage?

c) How much extra would she pay in a year?

You can see clearly that the mortgage will be paid off sooner with theaccelerated bi-weekly payments. Also, the amount of interest paid overthe life of the mortgage is substantially reduced.

37

Solutiona) $593.96 � 2 � $296.98

b) Monthly Payments:

$593.96 � 12 � 20 � $142,550.40

$142,550.40 � $90,000 � $52,550.40

Accelerated Bi-weekly Payments:

$296.98 � 26 � 17.7 � $136,670.20

$136,670.20 � $90,000 � $46,670.20

Total Saved:

$52,550.40 � $46,670.20 � $5,880.20

c) $296.98 � 26 � $7,721.48

$593.96 � 12 � $7,127.52

$7,721.48 � $7,127.52 � $593.96

Note that this amount is one month’s mortgage payment.


Example 3Liam is researching his options on a mortgage of $120,000 at 6% over 25years. Using an on-line mortgage calculator, find:

a) the monthly payment

b) the accelerated bi-weekly payment

c) the amount of interest saved if he chooses the bi-weekly option.

38

SolutionUsing a mortgage calculator, you find that by paying bi-weekly, Liam can save$20,636 and shorten the amortization period from 25 years to 21 years.

AcceleratedPayments Monthly Payments Bi-weekly

Mortgage Amount $120,000 $120,000

Interest Rate 6% 6%

Payment $773.15 $386.58

Years to Repay 25 21

Total Interest $111,949 $91,313

Interest Savings $20,636

continued on the next page

a b

c


Mortgage Payoff Schedule

Monthly Payments Accelerated Bi-weekly PaymentsYear Payments Balance Payments Balance

$120,000 $120,000

1 $9,278 $117,864 $10,051 $117,065

2 $9,278 $115,596 $10,051 $113,949

3 $9,278 $113,189 $10,051 $110,640

4 $9,278 $110,632 $10,051 $107,127

5 $9,278 $107,919 $10,051 $103,398

6 $9,278 $105,038 $10,051 $99,437

7 $9,278 $101,979 $10,051 $95,232

8 $9,278 $98,731 $10,051 $90,768

9 $9,278 $95,283 $10,051 $86,028

10 $9,278 $91,623 $10,051 $80,994

11 $9,278 $87,736 $10,051 $75,650

12 $9,278 $83,610 $10,051 $69,976

13 $9,278 $79,230 $10,051 $63,952

14 $9,278 $74,597 $10,051 $57,55

15 $9,278 $69,642 $10,051 $50,764

16 $9,278 $64,400 $10,051 $43,553

17 $9,278 $58,853 $10,051 $35,896

18 $9,278 $52,926 $10,051 $27,767

19 $9,278 $46,653 $10,051 $19,135

20 $9,278 $39,993 $10,051 $9,971

21 $9,278 $32,293 $10,051 $240

22 $9,278 $25,416 $241 $0

23 $9,278 $17,446 $0 $0

24 $9,278 $8,985 $0 $0

25 $9,279 $0 $0 $0


Example 4Debbie Webb is on a very restricted budget. Her mortgage is $100,000 at5% for 20 years. Her take-home pay is $2,200 per month. Since no morethan 30% of her pay should be dedicated to housing costs, can Debbieafford to move to an accelerated bi-weekly option?

Project ActivityCreate a spreadsheet showing the amortization schedule ofpayments for your home. Include monthly, accelerated bi-

weekly, and accelerated weekly options, showing the amount of interestyou will have to pay over the life of the mortgage.

SolutionDebbie’s monthly dedicated housing cost is limited to:

$2,200 � 0.3 � $660.00

Estimated Payment of Principal and Interest (using a mortgage calculator):

Payment Options Payment Years to Repay Mortgage

Monthly $657.00 20

Accelerated Bi-weekly $328.56 17.43

—$328.5162

� 26— � $711.88

So, Debbie could not afford the accelerated bi-weekly payments within theparameters of her budget .


Notebook Assignment1. Bev Joyce is thinking of purchasing a home worth $140,000. She has

$40,000 saved up for the down payment. Her mortgage is at 4.75%over 25 years. Use an on-line mortgage calculator or a spreadsheetprogram to determine:

a) her monthly payment

b) if she chose the accelerated bi-weekly option, how much shewould save in interest.

2. Yvette Beaulieu has secured a mortgage of $120,000 at 6% over 20years, making monthly payments. Her lending institution will allow herto double-up one payment per year.

a) Calculate her monthly payment.

b) Calculate the amount of interest she will pay over the life of themortgage.

c) Use a spreadsheet to determine the effect of her double-uppayments on the interest.

3. Marcel Pelletier is paying $750 per month towards his mortgage. Hismonthly take-home pay is $2,500. Other budget items are: food andutilities, $600; car expenses, $400; entertainment expenses, $400; andsavings, $350. With his mortgage renewal date coming in a year, he hasthe option to pay a lump sum towards the principal. How would yousuggest he alter his budget, and by how much, to save up for this extrapayment?

4. Mona Katsumoko is paid on a weekly basis. She presently has amortgage of $65,000 at 7% amortized over 15 years. The monthlymortgage payment is $580.45. Determine:

a) the amount of interest she will pay over the life of the mortgage

b) the amount her payments would be if she exercised the acceleratedweekly payment option

c) when the mortgage would be paid out if she made acceleratedweekly payments

d) the amount of interest she would save by making acceleratedweekly payments.

Problem AnalysisProblem Analysis


Number PatternsPattern 1Choose any number from 2 to 9.Multiply it by 41.Multiply the result by 271.

Try this with several one-digit numbers.

What do you notice about the result? Why does this work?

Pattern 2Select any three-digit number, for example: 123.Repeat the digits to get a six-digit number: 123,123.Divide this number by 13, then by 11, then by 7.

What did you get? Try this with a few more three-digit numbers.What happens? Why do you always get this result? Give an explanation.

Pattern 312 � 1112 � 121

1112 � 12321

11112 � 1234321

111112 � 123454321

Continue this pattern:

1111112 � ______________________

11111112 � ______________________

111111112 � ______________________

1111111112 � ______________________

11111111112 � ______________________

Does the pattern continue? What happens to the pattern when you reach

11111111112 (ten 1s)? Why?

GamesGames


A Weird WillA wealthy lawyer owned 11 expensive cars. When he died, he left aweird will. It asked that his 11 cars be divided among his three sons in aparticular way. Half of the cars were to go to the eldest son, one-fourth tohis middle son, and one-sixth to the youngest.

Everybody was puzzled. How can 11 cars be divided in such a way?

While the sons were arguing about what to do, a mathematics teacherdrove up in her new sports car. “Can I be of help?” she asked.

After the sons explained the situation, she parked her sports car next tothe lawyer’s 11 cars and hopped out. “How many cars are there now?”The sons counted 12.

Then she carried out the terms of the will. She gave half of the cars, 6, tothe oldest son. The middle son got one-fourth of 12, or 3. The youngestson got one-sixth of 12, or 2.

“6 plus 3 plus 2 is 11. So, one car is left over. And that’s my car.”

She jumped into her sports car and drove off. “Glad to be of service!”

Can you write a similar will for 17 cars?

Gross Debt Service RatioThe gross debt service ratio (GDSR) is a formula used by most financialinstitutions to determine whether or not you can afford the property youhave selected. It starts with a general rule that total household expensescannot exceed 32% of gross income. Your mortgage application willlikely be denied if the gross debt service ratio is over 32%.


Exploration 4

GoalsIn this exploration, we will discuss thegross debt service ratio and determineeligibility for mortgage loans.

New Termsgross debt service ratio: a formulaused by most financial institutions todetermine whether or not you canafford the property you have selected.

Career ConnectionName: Darice Whyte

Job: supervisor, mortgage services

Current salary: $65,000 per year

Education: grade 12; certified general accountant program

Career goal: mortgage broker

Keyword search: CGA Canada (www.cga-canada.org)


The formula is calculated as follows:

� 100

Note: the figures used in this table are mortgage payment amounts per$1.00 rather than per $1,000.00, as in a mortgage amortization table.

(monthly mortgage payment + monthly property tax � monthly heating costs)��

gross monthly income

Interest Rate Factor Table*

Rate Factor Rate Factor Rate Factor

6% 0.00640 8% 0.00763 10% 0.00894

6.5% 0.00670 8.5% 0.00795 10.5% 0.00928

7.0% 0.00700 9.0% 0.00828 11.0% 0.00963

7.5% 0.00732 9.5% 0.00861 11.5% 0.00997

* Based on 25-year amortization


Example 1You would like to purchase a condominium for $93,000. You are able tomake a down payment of $8,000. The bank will finance this property ata rate of 8—1

2—% over 25 years. Your gross monthly income is $3,000. The

monthly property taxes are $125 and the monthly utility costs are $150.Calculate the monthly mortgage payment and the gross debt service ratio.

Solution8�

12

�% over 25 years shows $7.95 per $1,000 borrowed.

$93,000 � $8,000 down payment � $85,000 (amount of mortgage)

$7.95 � —$$815,0,00000— � $675.75 (monthly mortgage payment)

Gross debt service ratio formula:

� 100 � 31.7%

Since the gross debt service ratio is under 32%, your application wouldlikely be accepted.

($675.75 � $125 � $150)��

$3,000

A condominium may be more affordable than a single family house.


Example 2Tom and Sarah Green want to purchase the home of their dreams inWinnipeg. They have saved $42,500 for the down payment on a housecosting $215,750. Tom’s job pays $2,400 per month, while Sarah has agross monthly income of $2,450. The mortgage company has offeredthem a rate of 7% over 25 years, subject to a favourable gross debtservice ratio. The utility company estimates the annual costs of gas andelectricity to be $2,640, and the municipality shows the property taxes tobe $3,600 a year. Use the gross debt service ratio to determine if theyqualify for this mortgage.

SolutionThe mortgage amount will be:

$215,750 � $42,500 down payment � $173,250

The table shows that 7% over 25 years will cost $7 per $1,000 borrowed.

$7.00 � —$1$713,0,20500— � $1,212.75

The monthly payment will be $1,212.75.

The gross debt service ratio is:

� 35.7%

The Greens’ application would probably not be accepted. Their monthlyhousehold expenses would exceed 32% of their gross income.

[$1,212.75 � ($2,640 � 12) � ($3,600 � 12)]��

$4,850


Lending institutions will ask that you complete anaffordability chart to determine the size of the mortgage bestsuited to your financial position. The following template willhelp you determine the price of the home you can afford.

Affordability ChartThe Formula Your Calculations

Gross monthly household income _______________

Multiply by 32% (GDSR) � 0.32

Total affordable household expenses � ______________

Subtract

Monthly property taxes � ______________

Monthly heating costs � ______________

One-half of condo/strata fees (if applicable) � ______________

Monthly mortgage payment your household can afford � ______________

To calculate total mortgage amount, divide by theestimated interest rate factor that corresponds to your interest rate (see table on page 45) � ______________

Maximum amount of mortgage you can afford � ______________

Add your cash down payment � ______________

Your maximum affordable price � ______________

Actual mortgage payment

� interest rate factor � actual total mortgage � ______________

Gross Debt Service Ratio

SAMPLE

� � 100(actual monthly mortgage payment + monthly property taxes + monthly heating)—————————gross monthly income


Example 3Jeremy Martin is asking the bank to approve his mortgage application.He earns $4,400 as gross monthly income. Jeremy hopes to purchase ahome using a $120,000 mortgage amortized over 25 years at 6�

12

�%. Hehas $25,000 saved for the down payment. The annual property taxes forthe home are $2,160, and the estimated monthly heating costs are $110.Complete the affordability chart to determine if Jeremy will be given themortgage.

Location is one of the main factors in determining the price of a house. Couldthis house be bought for $145,000 where you live?


SolutionThe Formula Your Calculations

Gross monthly household income $4,400


Total affordable household expenses � $1,408

Subtract

Monthly property taxes ($2,160 � 12) � $180.00

Monthly heating costs � $110.00

One-half of condo/strata fees (if applicable) � 0.00

Monthly mortgage payment your household can afford � $1,118

To calculate total mortgage amount, divide by theestimated interest rate factor that corresponds to your interest rate (see table page 45). � 0.0067

Maximum amount of mortgage you can afford � $166,865.67

Add your cash down payment � $25,000

Your maximum affordable price � $191,865.67

Actual mortgage payment

� interest rate factor � actual total mortgage � $804.00

Gross Debt Service Ratio

= � 100 � 24.9%

With a GDSR of 24.9%, Jeremy’s mortgage application is likely to beapproved.

($804.00 � $180.00 � $110.00)————$4,400

Many lending institutions will pre-qualify you for a mortgage, and willuse a form similar to the one above to calculate the maximum amount ofmoney they will lend you for a home.


SolutionThe Formula Your Calculations

Gross monthly household income $2,800


Total affordable household expenses � $896.00

Subtract

Monthly property taxes � $180.00

Monthly heating costs � $125.00

One-half of condo/strata fees (if applicable) � 0.00

Monthly mortgage payment your household can afford � $591.00

To calculate total mortgage amount, divide by theestimated interest rate factor that corresponds to your interest rate (see table on page 45) � 0.007

Maximum amount of mortgage you can afford � $84,428.57

Add your cash down payment � $12,500

Your maximum affordable price � $96,928.57

The maximum purchase price that Gill could afford would be $96,928.57.

Example 4Gil Dhaliwal has $12,500 saved up for a down payment. He earns about$2,800 each month. Using a bank rate of 7%, and estimating monthlyproperty taxes to be $180 and monthly heating costs to be $125,determine the maximum amount of mortgage he would be given.


Project ActivityApply your gross earnings, mortgage payment, estimatedheating costs, and estimated property tax (all monthly) to the

gross debt service ratio, and see if your mortgage will be accepted.

5252

If you aspire to own a home such as this one in Vancouver, you needto set financial goals early in life.


Notebook Assignment1. Glen Louie wants to buy a house with a mortgage payment of

$627.50. His gross monthly earnings are $3,100. He estimates themonthly heating costs to be $175, and the monthly property tax to be$185. Calculate his gross debt service ratio.

2. Lynne earns an income of $3,500 per month. She has saved $55,500for a down payment on a home costing $215,800. The heating costswill be about $220 per month, while the monthly property tax bill is$235. If she negotiates a mortgage at 4�

12

�% over 20 years, calculateher gross debt service ratio.

3. Paul Laroche has a monthly income of $3,700. His mortgage paymentis $650 per month. He estimates the annual heating costs to be$2,520. Annual property taxes are $2,220. Calculate Paul’s gross debtservice ratio.

4. Lorna has $22,000 saved up for a down payment. The bank isoffering her a mortgage at 6% over 25 years. Her monthly grossincome is $2,950. Assuming the heating bills will be $110 per monthand the monthly property taxes $140, find the maximum amount ofmortgage the bank is willing to allow.

5. List possible reasons explaining why banks will not allow customersto budget more than 32% of their gross income on householdexpenses.

6. A couple in Yellowknife with a combined total annual gross incomeof $62,000 wish to purchase a new home. They have found the homeof their dreams for $180,000. They have saved enough to make adown payment of $25,000. A friend has agreed to provide a 20-yearmortgage at 7�

14

�% interest. The annual tax bill on the house is $2,597.Monthly heating costs are estimated at $230. Find the monthlymortgage payment. Then, determine their gross debt service ratio. Doyou think they should purchase this home? Why?

Extension7. In Example 1 on page 46, your gross debt service ratio was 31.7%.

Explain why it may be an unwise decision to purchase this condo atthis time.


Property InsuranceImagine going home today and finding your home had burned down and allof your belongings were destroyed. If you had no insurance, you would beleft with nothing. With the right insurance coverage, you would receivesome money to replace your possessions.

Property insurance provides coverage in the event of your propertybeing damaged or destroyed by flooding, earthquake, vandalism, or fire.Some companies will sell you “market value” policies, where they give youthe present value of the item in the event of a loss. Used cars are the mostlikely items to be covered by market value insurance. Insurance companiesalso sell “replacement value” insurance, where no matter the age orcondition of the loss, the company agrees to replace it with new items.

Tenant’s Package PoliciesMost insurance companies have a “basic” or standard form of insurance, aswell as a “comprehensive” form. For our purposes, all policies will have a$500 deductible, meaning the policy-holder would be responsible forpaying the first $500 of the loss. You are able to purchase a $200 deductiblepolicy by adding 10% to the cost of the policy.

People renting apartments or houses do not have to insure the property.However, they may wish to buy insurance for the contents. This is usuallycalled a Tenant’s Package Policy.

Exploration 5

GoalsIn this exploration, you will investigateproperty insurance and select a policy tomeet your needs.

New Termsmarket value: the age anddeterioration of the items are reflected inthe appraisal.

replacement value: with reference toinsurance policies, it means stolen ordamaged items are replaced with newitems.

Tenant’s Package Policy: insurancepolicy that protects renters from loss ofcontents of their rental units or personalbelongings.


Table 5

Tenant’s Package Policy ($500 deductible)

All Areas

Coverage Amount Standard Form Comprehensive Form

$25,000 $158.00 $200.00

$30,000 $174.00 $226.00

$35,000 $199.00 $252.00

$40,000 $212.00 $269.00

$45,000 $235.00 $298.00

$50,000 $254.00 $324.00

$55,000 $272.00 $346.00

$60,000 $293.00 $373.00

$65,000 $315.00 $400.00

$70,000 $337.00 $427.00

$75,000 $359.00 $454.00

Each additional $1,000 $4.50 $5.50

$200 deductible: increase premium by 10%

Items such as an expensive TV can be insured by a Tenant’s Package Policy.


Example 1Brian Jones rents an apartment. He calculates that the value of his clothes,stereo equipment, furniture, and other possessions is $25,000. He wants tobuy a Tenant’s Package Policy with a $200 deductible to protect him againstfinancial loss in the event of a robbery. He chooses the comprehensive plan.Find his annual premium.

Homeowner’s InsuranceHome insurance for property owners is intended to protect in case of a lossdue to theft, fire, flooding, hail damage, and other destructive events. Mostmortgage companies require that any property they have financed beadequately insured. You only insure the building and its contents, since theland does not disappear in a fire. Some companies offer discounts if youhave smoke detectors installed, or if the building is made of concrete.Property insurance is only in the amount it would cost to rebuild thebuilding and replace the contents. Most companies offer both “broad” and“comprehensive” coverage. Comprehensive policies give you additionalcoverage for damages caused by such things as sewer back-up orvandalism.

SolutionRefer to the Tenant’s Package Policy table and find coverage for $25,000.Since he chooses the comprehensive form, slide over to the third columnand find the value $200.00. Since Brian wants a $200 deductible, add10% of this amount to the cost:

$200 � 0.10 � $20.00

$200 � $20 � $220.00

Brian’s annual premium will be $220.00

New Termsmetro: with reference to homeowner’sinsurance, this means a location withincity limits.

protected: with reference tohomeowner’s insurance, this means alocation within 300 metres of a firehydrant.

semi-protected: with reference tohomeowner’s insurance, this means alocation within 8 km of a firehall.

unprotected: with reference tohomeowner’s insurance, this means alocation more than 8 km from a firehall.


Table 6Homeowner’s Annual Rate ($500 Deductible)Home Metro Protected Semi-protected UnprotectedEvaluator Broad Comprehensive Broad Comprehensive Broad Comprehensive Broad Comprehensive

80,000 355 406 236 270 320 366 405 463

85,000 376 430 251 287 340 389 427 488

90,000 397 454 260 297 352 403 452 518

95,000 418 479 272 311 368 422 478 548

100,000 438 502 299 342 405 463 504 578

105,000 462 529 314 359 425 487 535 613

110,000 486 557 325 373 441 505 565 647

115,000 510 584 340 390 461 528 599 686

120,000 534 612 364 417 494 565 632 723

125,000 558 639 379 434 514 589 669 765

130,000 571 654 388 444 526 602 705 807

135,000 595 681 406 465 550 630 744 852

140,000 612 700 418 479 567 649 782 895

145,000 636 728 433 496 587 672 825 944

150,000 659 754 448 513 607 695 867 993

155,000 682 781 463 530 627 718 911 1043

160,000 705 808 481 550 652 746 979 1121

165,000 721 825 493 564 668 765 1029 1178

170,000 743 851 508 581 688 788 1104 1264

175,000 767 878 523 598 708 811 1157 1325

180,000 790 904 537 615 729 834 1210 1386

185,000 812 930 555 636 753 862 1267 1450

190,000 835 956 570 653 773 885 1323 1515

195,000 860 985 588 674 797 913 1352 1548

200,000 886 1014 603 691 818 936 1381 1581

205,000 905 1035 617 707 836 956 1428 1635

210,000 924 1056 631 723 854 976 1475 1689

215,000 943 1077 645 739 872 996 1522 1743

220,000 962 1098 659 755 890 1016 1569 1797

19* 21 14 16 18 20 47 54

*charges for each additional $5,000 increase$200 Deductible: add 10%Solid fuel burning appliance: add 25%

Age of Dwelling Discounts DiscountNew home — less than 5 years old 15%6–10 years old 10%

Other Discounts Discountmortgage free 10%non-smokers 5%burglar alarm 10%


The following examples assume that all policies have a $500deductible. For a $200 deductible, the policy is increased by 10%. Theinstructions to find the premiums over and above the listed amounts arefound at the bottom of the table.

Example 2John and Rishma Sunga bought a house in a Metro area and wish toinsure it. They calculate that the house and its contents are worth$125,000. They would like a $200 deductible limit on theircomprehensive policy. Calculate their annual premiums.

Project ActivityAssume you are purchasing a home worth $150,000. Find

the rates of three companies that insure property, and select one of thesecompanies to be your insurance provider. Justify why you selected thestandard or the comprehensive policy and a given deductible level.Calculate your annual property insurance premium. Be sure to includewhere you found the rates.

SolutionRefer to the Homeowner’s Annual Rate table.

Metro is within city limits.

The comprehensive rate for $125,000 is $639.00.

To get the $200 deductible, add 10% to the premium:

$639 � ($639 � 0.10) � $702.90

Mental MathDetermine the annual property insurance premiums:

a) $80,000 at $5.00 per $1,000

b) $100,000 at $6.50 per $1,000

c) $200,000 at $4.50 per $1,000


Notebook AssignmentTo complete this assignment, use Table 5 on page 55 and Table 6 on page57.

1. Ian Harding is renting an apartment. His possessions are worth$60,000. He wants a Tenant’s Package Policy with a $500 deductible.Find his annual premium.

2. Sam Smith’s house is located 8 kilometres from the nearest firehall.The building is worth $165,000. He wants to purchase acomprehensive policy with a $200 deductible. Find his annualpremium.

3. Henrietta Dumont has built her dream home just outside the city, butwithin 300 metres of a fire hydrant. The home is worth $210,000.She would like to get broad coverage, but with a $200 deductible.Find her annual premium.

4. A property is insured for $100,000 with a $200 deductible. A firedamages the the roof and collapses the garage. It will cost about$75,000 to repair the damage. How much money can the ownerexpect to receive from the insurer?

A house that is farther from a firehall will have higher insurance premiums.


5. Catherine Halliday bought a home 9 kilometres from town. She wantsto insure the property and her belongings. The home is worth$140,000. Catherine would like to have broad coverage with a $500deductible. Find her annual premium.

6. A property is purchased for $180,000, including the building and theland. Explain why the insurance company will only insure theproperty for $125,000.

Extension7. Rosie Miller visits the local insurance office to update her policies. She

is a 25-year-old non-smoker. Rosie just bought a home in MapleRidge worth $210,000. If she chooses to purchase $100,000 inwhole-life insurance and comprehensive property insurance with a$200 deductible, find her total annual insurance premiums.

When you purchase house insurance, it is calculated on the value of thebuilding separately from the value of the land.


Additional Costs in Purchasing a HomeBeyond the mortgage payment, moving into a new home can be quitecostly. Many one-time expenses are necessary to complete the transaction.Before a financial institution will approve a mortgage, you will need tohave the property appraised to verify its value. If you have a high-ratiomortgage, then you will have to purchase insurance through the CanadaHousing and Mortgage Corporation (CMHC). The municipality willdemand a property survey to ensure the building is within the specifiedboundaries. Lawyers have to register the title to your property. Variouscosts such as immediate repairs, decorating, landscaping, moving, utilityhook-ups, and appliances all have to be considered. They can add up tomany thousands of dollars, and can even cause you to reconsiderwhether the time is right to buy that house.

The buyers are partially responsible for some of the costs listedbelow, and the calculations can be tricky. For example, if you move into ahome on April 1, then you are not responsible for the whole year’sproperty taxes, just 9 out of 12 months, or 75% of them.

Exploration 6

GoalsIn this exploration, you will investigate additional costsassociated with buying a home and prepare a budgetthat itemizes them.


Example 1The Baileys live in Dauphin, MB, and are relocating to Winnipeg. Theypurchase a house for $120,000 and hire a mover to move their personalbelongings. The mover charges $1,500 plus GST.

They hire a lawyer to look after the legalities for a fee of $800 plusGST.

An appraisal of the property is done at a cost of $120 plus GST. Asurvey of the property is done for a cost of $450 plus GST.

The Baileys’ possession date is July 7th, 2003. The interestadjustment is $440. Annual property taxes are $1,750, for which theBaileys will pay for the six months of July to December.

Before moving in, the Baileys have sod installed in the yard for$1,500 plus PST and GST, and they replace the stove and refrigerator for$750 and $900, respectively. Both appliances have PST and GST addedto the cost. They split the costs of the appliances with the seller. Mrs.Bailey replaces the drapes in the living room for $500 plus PST and GSTand has the master bedroom and kitchen painted for $350 plus GST.

Additional Costs in Purchasing a Home

Item Amount

Appraisal Fee

Inspection Fee

Property Survey

Insurance for a High Ratio Mortgage

Home Insurance

Land Transfer Tax

Prepaid Property Taxes and Utilities

Legal Fees and Disbursements

Sales Tax

Moving Expenses

Service Charges

Immediate Repairs

Appliances

Decorating Costs

Total Additional Costs

SAMPLE


The Baileys need to increase their homeowner’s insurance. Theydecide to upgrade their existing policy and apply it to their new home forthe remaining four months of the policy year. The old annual premiumwas $264 and the new annual premium is $680.

It costs $65 plus GST to hook up a telephone and to activate thenatural gas costs $45 plus GST.

PST for Manitoba is 7%.Find the total additional costs the Baileys must pay.

SolutionItem Cost Tax Total

mover $1,500.00 $1,500.00 � 0.07 � $105.00 $1,605.00

lawyer $800.00 $800.00 � 0.07 � $56.00 $856.00

appraisal $120.00 $120.00 � 0.07 � $8.40 $128.00

survey $450.00 $450.00 � 0.07 � $31.50 $481.50

interest adjustment $440.00 0 $440.00

taxes ($1,750.00 � 0.5) � $875.00 0 $875.00

sod $1,500.00 $1,500 � 0.14 � $210.10 $1,710.00

appliances [(750 + 900) ÷ 2] � $825.00 $825.00 � 0.14 � $115.50 $940.50

drapes $500.00 $500.00 � 0.14 � $70.00 $570.00

painting $350.00 $350.00 � 0.07 � $24.50 $374.50

insurance [(680 � 264) � —142—] � $138.67 0 $138.67

utility hook-up $110.00 $110.00 � 0.07 � $7.70 $117.70

Subtotal $7,608.67 $628.70 $8,237.37

The total additional costs are $7,608.67 + $628.70 � $8,237.37


Project ActivityOnce you have decided on the mortgage details, you must listall the one-time additional costs of purchasing the home you

have selected. Include realistic estimates of what you think each categorymight cost. If it is an older home, will it require repairs? How will youprovide for necessary appliances like refrigerator, stove, washing machine,and dryer? Research the price of purchasing these items. Provide estimatesof CMHC insurance costs if you make a down payment of less than 25%.Research the cost of lawyers in your area for residential purchases.Compile a list of all the related one-time costs of moving into your home.

Notebook Assignment1. List at least six additional expenses to purchasing a home. Explain

three of the additional expenses.

2. The Smiths live in Carmacks, Yukon, and Mr. Smith has accepted ajob in Whitehorse, Yukon. They have purchased a house inWhitehorse for $180,000, using a down payment of $30,000. Themortgage is $150,000. They have hired a moving company thatcharges $1,800 plus GST.

The fees charged by their lawyer are $1,000 plus GST.An appraisal has been done on their new property for a fee of

$140 plus GST. A survey of the property is done for $375 plus GST.They call a house inspection service to make sure the house is in goodcondition. The inspector charges $400 plus GST and recommendsthat the siding be replaced. The possession date is August 5. Theinterest adjustment is $457. They have to pay 0.5% of the mortgageas insurance through CMHC. Annual property taxes are $2,850, forwhich the Smiths will pay the five months from August to December.

Before moving in, the Smiths want to build a fence and re-side thehouse at a cost of $5,000 plus GST, replace the carpet in the livingroom at a cost of $4,200 plus GST and PST, and paint the masterbedroom and kitchen at a cost of $650 plus GST.

The stove has to be replaced, and the new stove costs $850 plusGST and PST.

The Smiths increase their annual insurance premium to $590from $425 per year and pay the additional amount for the remainingfive months of the policy year.


The cost to hook up the phone is $65 plus GST, and to activatethe natural gas costs $45 plus GST.

Determine the additional costs for them to purchase their home.

3. Diane and Bill Roscoe are relocating from Trail to New Westminster,BC. They purchase a home for $297,000 and hire a mover at a costof $1,900 plus GST.

The Roscoes split the cost of $3,300 plus GST for re-shinglingthe roof with the seller. They decide to buy the seller’s appliances for$3,200.

They must pay an appraisal fee of $150 plus GST and a surveyfee of $395 plus GST.

The Roscoes’ possession date is June 15 and the interest cost is$375. Since their down payment was more than 25%, the Roscoes donot need insurance through CMHC.

Annual property taxes are $2,575, of which the Roscoes will paythe portion from July to December.

Diane and Bill want the interior of the home painted and thecarpets cleaned at a cost of $1,700 plus GST.

The cost for hooking up the telephone and cable is $460 plusGST and activating the gas costs $75 plus GST.

Their insurance premium increases from $375 to $425 per yearand they pay the difference for the six remaining months of thepolicy year.

The legal fees are $975 plus GST and PST. (Note that in BC PSTis 7.5% and applies to legal services, while in Manitoba it does not.)

Determine the additional costs for them to purchase their home.

The cost of building afence may be one of theadditional expenses ofpurchasing a new home.


Chapter Review

1. A 36-year-old female non-smoker takes out a 10-year term lifeinsurance policy with a face value of $300,000.

a) Calculate her annual premium.

b) How much will she pay in premiums in the first 4 years of thepolicy?

c) If she dies after 4 years, how much money will her beneficiaryreceive?

d) If she dies at age 47, how much money will her beneficiaryreceive?

2. Karl Becker is a 25-year-old non-smoker. He is interested inpurchasing a whole-life insurance policy with a face value of$320,000.

a) Calculate his annual premium.

b) Calculate his premium if he chooses to pay semi-annually.

c) Calculate the cash surrender value if he holds the policy until heis 50.

d) Calculate both the total annual and total semi-annual premiumsthat Karl would have paid during this period.

3. Rob Strickland purchased a home for $102,500. He is able to make adown payment of $30,000 on the home, with the balance from afixed-rate mortgage at 7—1

2—%. The mortgage is to be amortized over 15

years.

a) Find Kevin’s monthly mortgage payments.

b) Calculate the amount of interest Kevin will pay over the life ofthe 15-year amortization period.

4. The Singh family is considering buying a bungalow in Surrey with apurchase price of $389,000. They have saved a down payment of$90,000. The family’s gross monthly income is $7,480. They havesecured a 7—1

2—% mortgage over 15 years from their credit union. The

annual taxes on the property are $2,065, and the annual heatingcosts total $1,450.

a) Calculate the gross debt service ratio.

b) Will the credit union approve the mortgage for the Singhs?

5. The McMillan family has just purchased a home in Altona, MB. Theyhad more than 25% for a down payment and don’t need to getmortgage insurance through CMHC. They had a building inspectorgo through the house and satisfy them that there were no majorproblems. This service cost $300 plus GST. The McMillans retained alawyer to process the legal work. His fees are $300 plus GST, plus$110.20 in disbursements. The property survey costs $275 plus GST,and the appraisal of the property costs $250 plus GST. TheMcMillans will take possession on October 1, so they will have torepay their portion of the annual property taxes. Annual propertytaxes are $2,680. Various utility hook-up fees will total $220 plusGST. The moving company is charging them $1,280 plus GST.


Moving expenses can add significantly to the cost of buying a home.


Immediate repairs include an air conditioning unit at $1,800 plusGST and PST, and a painter to paint the interior of the house at acost of $1,600 plus GST. Find the total additional costs to purchasingthis home.

6. Louisa Melo rents an apartment in Port Coquitlam. Her personalpossessions have a value of $35,000. Louisa chooses a comprehen-sive tenant’s insurance policy with a $200 deductible. Calculate herannual insurance premium.

7. Amy and Victor Zhang own a home in Osoyoos, BC, worth$105,000. The home is located just outside the town, but within 300metres of a firehall. They are interested in purchasing a broadhomeowner’s policy with a $200 deductible. Find their annualproperty insurance costs.

A real estateappraiser assessesthe market value ofa home.


Now that you have investigated the feasibility of buying a home, use theinformation gathered in the project activities to present a written reportthat includes the following:

1. A description of the type of home you wish to purchase and whereyou will obtain a mortgage. The rates, monthly payments, and thereasons why you chose to deal with this provider must be included.

2. A spreadsheet showing the amortization schedule for your mortgage.

3. A calculation of the gross debt service ratio. You must justify whetheror not you can afford to purchase this home at this time. Explainyour reasoning.

4. A description of the type of property insurance and the annual costof insurance premiums.

5. An estimate of additional one-time costs of purchasing your home.Remember to add PST and GST where applicable.

Be sure to list where you obtained your figures, along with anypertinent web sites you might have consulted.

Project Presentation

With careful planning,buying a modest home,like the house shownhere in Arviat, NU, maybe an attainable goal.


Case Study

You are a financial advisor, and James Houston has come to you for yourprofessional opinion. He has just inherited $20,000, and he is thinking ofpurchasing a home. As his financial advisor, it will be your responsibilityto calculate his monthly property and life insurance costs, and mortgagecosts, and to determine the gross debt service ratio.

Life InsuranceJames is a 30-year-old non-smoking single parent with a 6-year-old child.He has no life insurance. He wants to purchase insurance to provide forhis child in the event of his death. Given that his mortgage will be about$125,000, and that the child will need support for at least 15 years,determine how much insurance James should have. Decide if he shouldhave 10-year term or whole-life insurance, and calculate the monthlypremiums. Justify why you selected the amounts you did.

MortgageThe house James wants is listed for sale at $142,750. He has the $20,000for a down payment. The best rate you can find for him is 6—1

4—% over 20

years. The house has annual heating costs of $1,800. The annualproperty taxes are $3,200. James has a gross monthly income of$4,150. Find his monthly mortgage payment, and calculate the grossdebt service ratio.

Property InsuranceThe house is worth $140,000, and is located in the city. Calculate theannual amount of home insurance you recommend for James, and findthe monthly costs. Provide a justification as to why you advised James tobuy this amount of home insurance.

Additional CostsWe know that purchasing a home has many additional costs. Whatadvice can you give James about how much he might expect to spend onthese additional costs? List some of the costs and estimate their values.

ConclusionNow that you have prepared this financial picture for your client, howwill you advise him? Provide justifications for your recommendations.

Personal Finance

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