Description
Being able to review an application and determine that structure that is most beneficial for the client’s short and long terms goals is one of the most important parts of any mortgage. The following scenarios will guide you on possible options and methods of determining the appropriate mortgage structure or course of action for you client.
Problem #1: Approved or Wait?
Consider the following, a client has purchased a property and has a high TDS ratio preventing him from being approved by an A lender. Since he only has 5% to put down (he also has closing costs), he must be approved by an A lender with high ratio mortgage insurance to purchase the property. Here are the particulars, the Summary and Application are available on the following pages.
Relevant Information:
Credit Cards ~19% Interest No Amortization Qualified at 3% of Balance
Lines of Credit ~8% Interest No Amortization Qualified at 3% of Balance
Personal Loans: ~8% Interest 5-7 Year Amort. Qualified at contract payment
Closing costs of 1.5% of Purchase Price required on every purchase transaction
Employment:
Income: $110,000 Annually Employer: Province of Ontario
Tenure: 10 Years Income Type: Salary
Credit:
Scotia Visa Opened in 2010 Scotia Master Card Opened in 2011
Limit: $25,000 Limit: $30,000
Balance: $10,000 Balance: $20,000
TD Visa Opened in 2005 Other Info: Has never missed a payment
Limit: $2,500 Beacon Score of 750
Balance: $1,000
Purchase Property:
Closing Date: Within 45 days Value: $500,000
Address: 123 Fake Street, Toronto Down: $25,000
Ontario, 0O0 O0O Closing Costs: $7,500
Square Feet: 2000 Property Tax: $5,000
Type: 2 Storey Detached Garage: Single Attached
Services: Municipal Heat: Forced Air
Assets:
Cash: $32,500 Car: $10,000
Problem:
Complete the application in Filogix based on this information and determine a structure or course of action for the client to take in order to be approved for this purchase.
Do not worry about validation issues and estimate any information not provided.
Hint: The TDS ratio is out of line; how would you correct this? You will often encounter borrowers who have existing mortgages and are looking to refinance or consolidate their debts. The difficulty here lies in determining which structure would be the most beneficial to the client. This most often refers to costs involved with the new mortgage.
Problem #2: First or Second?
Consider the following scenario, a borrower has a current first mortgage maturing in just over 1 year from today’s date and they are looking to consolidate his debts. The current first mortgage is with TD, carries a rate of 3.0%, is variable and has 26 years left on its 30-year amortization. The value of this mortgage is $250,000, it had an original balance of $274,017, and has a payment of $1,152.52 per month. The property is valued at $400,000 and the borrower wants to pay out $40,0000 good debt (I/R1 standing). The credit score if 575 and the income is more than enough to keep the ratios in line. We have an approval from a B lender for a new first mortgage and an approval from a private lender for a second mortgage with the following terms:
Position: First Position: Second
Rate: 4.5% Rate: 10%
Lender Fee: 1% Lender Fee: 5%
Broker Fee: 1% Broker Fee: 5%
Legal Fee: $1,500 Legal Fee: $3,000
Amount: $300,000 Amount: $50,000
Term: 1 Year Term: 1 Year
Amortization: 30 Years Amortization: Interest Only
Monthly Payment: $1,512.65 Monthly Payment: $416.67
Combined Payment: $1,569.19
Amortization schedules for the current first and proposed first are attached.
Problem:
Which structure would you select and why?
Hint: The best option, is almost always the one that works out to be the cheapest for the client.
Problem #1: Solution
The solution here is to consolidate the credit cards with a personal loan from a bank, the calculation is made based on a rate of 8%, loan amount of $30,000 and a 6-year amortization. Rates can be lower, and amortizations can be longer, but is a good estimation to use.
Problem #2: Solution
Mortgage interest per period is calculated in the following fashion:
Mortgage Period Interest Cost = (Payment Amount * Payment Frequency) – (Current Principal Balance – Principal Balance at End of Period)
New First Mortgage
First let’s calculate the total cost of the new first mortgage structure:
New First Mortgage Interest per year: $13,276 (From Amortization)
Lender Fee: $3,000 (1% * 300,000)
Broker Fee: $3,000 (1% * 300,000)
Legal Fee: $1,500 (estimated)
Discharge Fee: $500 (estimated)
Prepayment Penalty: $1,866 (3 months interest)
(The prepayment is calculated based on the interest portion of the payment 4 years into a 30-year amortization $622)
Total Costs: $23,142
The next step is to calculate the net amount the client will receive:
Total Mortgage Amount: $300,000
Lender Fee: -$3,000
Broker Fee: -$3,000
Legal Fee: -$1,500
Discharge Fee: -$500
Prepayment Penalty: -$1,866
Existing Mortgage: -$250,000
Debts: -$40,000
Net to Client: $134
Remove the net amount to the client from the total costs gives us a total cost of $23,008
New Second Mortgage
Now the cost of the new second mortgage structure:
Current Mortgage Interest this year: $7,365 (refer to equation)
Second Mortgage Interest this year: $5,000 (10% * 50,000)
Lender Fee: $2,500 (5% * 50,000)
Broker Fee: $2,500 (5% * 50,000)
Legal Fee: $3,000 (Always more expensive for private seconds)
Additional Payment Cost $678 (First + Second Payment – New First Payment)
Total Cost: $21,043
The next step is to calculate the net amount the client will receive:
Total Mortgage Amount: $50,000
Lender Fee: -$2,500
Broker Fee: -$2,500
Legal Fee: -$3,000
Debts: -$40,000
Net to Client: $2,000
Remove the net amount to the client from the total costs gives us a total cost of $19,043
With costs of the mortgages in hand, we must now take into account the difference in principal balance at the end of the term:
New First Only: $295,124.54
Current First: $243,536.06
New Second: $50,000
Second Discharge: $500
Total: $294,036.06
Difference: $1,088.46
Since the new first would be more expensive, we add this cost to the costs of the new first, bringing us a final total of:
New First Only: $23,008
New Second: $19,043
Total Savings with Second Mortgage: $3,965
You can see that the two options are similar, but the second mortgage option is cheaper. It also keeps their current mortgage lower in the amortization schedule which equates to more of their payment going to principal as oppose to interest. In this case, the SECOND MORTGAGE is the better option, even though the combined payment is higher than a new first mortgage.
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