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1 Real Estate Division Welcome to the Webinar! The session will begin shortly. While you wait: Audio testing: If you can hear the moderator doing sound checks, please click under the People list located towards the lower right hand side of the window. If you cannot hear, click and we will get you set up. [To fix this yourself: 1) exit and re-run the setup wizard ; 2) if possible, use a plug-in Internet connection, as wireless is sometimes unstable; 3) to receive audio via telephone, click on the blue phone ( ) and dial in to hear the audio - keep in mind it is a long distance call] Text chat: Feel free to chat to your classmates. Simply type in the box at the bottom left of the window, and press Enter on your keyboard. You can send text to the whole class ( Main Room ) or to an individual you select. People with their names in bold are presenters and moderators chat to them if you are experiencing problems. Other Icons: try these out you can raise your hand, clap, laugh, tell the instructor you approve, disapprove, speed up or slow down.

2 Real Estate Division Real Estate Finance in a Canadian Context BUSI 221: Project 2 Preparation Sharon Gulbranson

3 Topics Introduction Debrief Project 1 Project 2 Preparation Questions UNIVERSITY OF BRITISH COLUMBIA 3

4 Important Financial Calculations and Formulation interest rate conversions payment calculations outstanding balance calculations Use of calculator steps Use of formulation for example PV = PMT x a[[n, j m ]] + FV(1 + i) -N FV = PMT x s[[n, j m ]] UNIVERSITY OF BRITISH COLUMBIA 4

5 Multiple choice question 1 The daily interest rate equivalent to an annual rate of 8% per annum, compounded quarterly is: (1) % (2) % (3) % (4) % UNIVERSITY OF BRITISH COLUMBIA 5

6 Calculator Steps 8 shift NOM% 4 shift P/YR shift EFF% shift P/YR shift NOM% = E-2 i da = % UNIVERSITY OF BRITISH COLUMBIA 6

7 Multiple choice question 2 If the maximum loan is $250,000 under LTV and $275,000 under GDSR, the overall maximum loan is: (1) $250,000 because LTV takes priority (2) $275,000 because GDSR takes priority (3) $250,000 because the lender will choose the lowest value. (4) $275,000 because the lender will choose the highest value. UNIVERSITY OF BRITISH COLUMBIA 7

8 Question 1 and 2: Residential and Commercial Qualification Interest rates: Brief explanation, state rate and compounding frequency Show work Overall max loan, compare LTV and GDSR UNIVERSITY OF BRITISH COLUMBIA 8

9 Question 3: History of Rates Provide ample and detailed discussion Show graph and supporting table Look at general trends and specific blips in time Provide source explicitly and on table UNIVERSITY OF BRITISH COLUMBIA 9

10 Question 4: Mortgage Products Identify and compare basic and unique products Compare products and provide some details Give reasons for similarities/differences UNIVERSITY OF BRITISH COLUMBIA 10

11 Question 5: Mortgage Loan Insurers Discuss all three mortgage loan insurers Include table Add some detail to list UNIVERSITY OF BRITISH COLUMBIA 11

12 Question 6: Internet Research Project Follow framework: overview, description, and analysis On topic: legal issue related to mtg finance Use headings/sub-headings Sample text required UNIVERSITY OF BRITISH COLUMBIA 12

13 Project 2: Chapters 9-12 Part A: Short Answer Questions 60 marks 5 questions mostly calculations (chapter 9/10 concepts) UNIVERSITY OF BRITISH COLUMBIA 13

14 Project 2: Part B (40 marks) Mortgage Case Study Residential Mortgage Underwriting Analysis OR Commercial Research Project 1,000 word term paper UNIVERSITY OF BRITISH COLUMBIA 14

15 Part A: Question 1 Arrears and Default See lesson 8 review/discussion question 3 Parts (a) and (b): pmt and OSB Use a time diagram for part (c) Several techniques to solve (c) UNIVERSITY OF BRITISH COLUMBIA 15

16 Question 1: Arrears and Default Basic Formulation: OSB = FV of loan assuming no payments FV of payments actually made OSB = PV(1 + i) N - PMT x s[[n, j m ]] UNIVERSITY OF BRITISH COLUMBIA 16

17 Multiple choice question 3 With a loan amount of $550,000 and an interest rate of j 2 =10.7% over an amortization period of 20 years, calculate the monthly payment rounded up to the next higher $10. (1) $5,480 (2) $5,500 (3) $5,565 (4) $5,570 UNIVERSITY OF BRITISH COLUMBIA 17

18 Calculator Steps 10.7 shift NOM% 2 shift P/YR shift EFF% shift P/YR shift NOM% PV 240 N 0 FV PMT -5, UNIVERSITY OF BRITISH COLUMBIA 18

19 Time Diagram April 1: Loan Begins May- Nov: Pmts of $5480/ mo for 7 months Dec 20 th: late pmt Jan 1 st : 50% pmt Feb and March: no pmts Mar 1st: OSB =?? UNIVERSITY OF BRITISH COLUMBIA 19

20 Lesson 8: R/D Question 3 (Part (c)) Option 1: FV of loan (no payments) - FV of payments actually made First, find the FV of loan (no payments) as at March 1 NB: Loan begins April 1 of previous yr FV = $550,000(1+i mo ) 11 FV = $605, UNIVERSITY OF BRITISH COLUMBIA 20

21 R/D Lesson 8, Question 3 Deduct the FV of first 7 payments (made in full and on time) May 1 Nov 1 payments Use a two step process to solve: FV= $5,480 x s[[7, j 12 ]](1+i mo ) 4 FV= $39,378.70(1+i mo ) 4 FV= $40, UNIVERSITY OF BRITISH COLUMBIA 21

22 R/D Lesson 8, Question 3 Deduct the FV of Dec 20 th payment FV=(Dec 1 equivalent pmt)(1+i mo ) 3 where Dec 1 equivalent pmt = PV = $5,480(1+i da ) -19 PV = $5,450.35; therefore, FV = $5,450.35(1+i mo ) 3 FV = $5, UNIVERSITY OF BRITISH COLUMBIA 22

23 R/D Lesson 8, Question 3 Deduct the FV of Jan 1 st payment Jan 1 st payment = 50%($5,480) = $2,740 FV = ($2,740)(1+i mo ) 2 FV = $2, UNIVERSITY OF BRITISH COLUMBIA 23

24 R/D Lesson 8, Question 3 Summary: OSB as at March 1 FV of loan (no payments ) FV of all payments made FV = $605, ($40, $5, $2,788.02) FV = $605, $49, FV = $555, UNIVERSITY OF BRITISH COLUMBIA 24

25 R/D Lesson 8, Question 3 Option 2: Find OSB as you go through time (current balance) and adjust payment as required i.e., find the OSB 7 with regular payment then adjust payment to December 1 st equivalent and find OSB one period later etc. UNIVERSITY OF BRITISH COLUMBIA 25

26 R/D Lesson 8, Question 3 Option 3: Find OSB at end assuming all payments are made (in full and on time). To this OSB, add the FV of shortfall in payments OSB = OSB regular + Pmt x s[[n, j 12 ]] AND/OR + PV(1+i) N where PMT and PV are the shortfall amounts UNIVERSITY OF BRITISH COLUMBIA 26

27 Question 2: Extra Payments Part (a): find payment and OSB on regular terms Part (b): impact on OSB if Katie makes additional payments of $100/month Part (c): impact on OSB if Katie makes $100/month additional payment AND a lump sum payment at end of 2 nd year UNIVERSITY OF BRITISH COLUMBIA 27

28 Question 2, Part (c) = OSB from part (b) FV of lump sum payment Use following formula for FV calculation: FV = PV(1+i mo ) N UNIVERSITY OF BRITISH COLUMBIA 28

29 Part (d)-accelerated biweekly vs monthly payment Find interest savings over term and over amortization period Summarize results in a table and briefly comment HINT: Solve for all monthly calculations (term and amortization) and then switch to accelerated bi-weekly Use of INPUT and AMORT keys UNIVERSITY OF BRITISH COLUMBIA 29

30 Multiple choice question 4 Of the following repayment schemes, which one of the following is best for addressing interest rate risk? (1) Straight line principal reduction loans (2) Variable rate mortgages (3) Participation mortgages (4) Interest only loans UNIVERSITY OF BRITISH COLUMBIA 30

31 Variable Rate Mortgages (VRMs) What is it? Change in interest rate on regular basis throughout the term of the mortgage Why have VRM? Reduced interest rate risk for lender (however, increased borrower uncertainty) UNIVERSITY OF BRITISH COLUMBIA 31

32 Variable Rate Mortgage (VRM) Changes in rates can be reflected as changes in amortization, payments, amortization and payments, or OSB VRM can be open or closed Mortgage rate typically changes in line with the prime rate over the term of the mortgage UNIVERSITY OF BRITISH COLUMBIA 32

33 Question 3: Variable Rate Mortgage (VRM) Year 1: with chosen rate, find pmt and OSB 12 Year 2: yr 1 rate + 0.5%, PV is OSB 12 With yr 1 pmt, solve for amortization and ensure <25 years If ok, solve for OSB at end of 2 nd year If not, recalculate pmt, round up and then solve for OSB UNIVERSITY OF BRITISH COLUMBIA 33

34 Question 3 Year 3: with year 1 rate -1%, OSB at end of year 2 is new PV, and payment, solve for OSB at end of year 3 Summarize results in a table UNIVERSITY OF BRITISH COLUMBIA 34

35 Fixed or Variable? Borrowers have the advantage of lower interest costs if rates stay flat or decline, but risk of increased costs if rates rise VRMs allow lenders to better match assets and liabilities Choice for borrower depends on borrower s risk preferences, beliefs about interest rate trends, and terms of loan UNIVERSITY OF BRITISH COLUMBIA 35

36 Refinancing: When? pay off loan at the end of the term (mandatory refinancing) pay off loan during the term (voluntary refinancing) Cost/Benefit Analysis Benefit: reduced rate Cost: renewal fees; legal, survey, and appraisal fees; prepayment penalty; inconvenience UNIVERSITY OF BRITISH COLUMBIA 36

37 Why Refinance? Mandatory refinancing - term is up More attractive terms - reduced interest rate Release equity Improved financial leverage Enhance sales potential (if get reduced rate) UNIVERSITY OF BRITISH COLUMBIA 37

38 Refinancing Options NEW FIRST MORTGAGE SECOND MORTGAGE BLENDED RATE MORTGAGE UNIVERSITY OF BRITISH COLUMBIA 38

39 Question 4: Refinancing with 2 nd Mortgage Find max 2 nd mtg and total financing subject to LTV and DCR constraints Find ANNUAL payment and OSB today on existing mortgage LTV: find max total financing and max additional financing Income: Calculate NOI, apply DCR to obtain max total payment UNIVERSITY OF BRITISH COLUMBIA 39

40 Question 4 Using max additional 2 nd mortgage payment and 2 nd mortgage rate, solve for maximum loan Compare max loan under LTV and DCR to determine overall additional funds and from that determine overall total maximum loan UNIVERSITY OF BRITISH COLUMBIA 40

41 Multiple choice question 5 A SAM participation mortgage stands for: (1) single annuity mortgage (2) simple annual mortgage (3) shared appreciation mortgage (4) shared annuity mortgage UNIVERSITY OF BRITISH COLUMBIA 41

42 Participation Mortgages Participation helps hedge the risk associated with inflation The lender participates in one of two ways: taking a portion of the income OR taking a part of the gain in value when the property is sold How does it work? The lender normally charges a lower interest rate than on a std first mtg or increased amortization in exchange for some participation UNIVERSITY OF BRITISH COLUMBIA 42

43 Why Offer Participation Loans? pressure to increase yields strong competition for available investment funds lender s desire for protection (hedge) against the impact of unexpected inflation on LT fixed yield instruments opportunity to improve mortgage yields UNIVERSITY OF BRITISH COLUMBIA 43

44 Question 5: Participation Mtg (Income and SAM) Participation in two ways: in income and appreciation of property Calculate the payment and OSB term for base loan Calculate the shared NOI amount and add to payment Calculate the shared appreciation amount and add to OSB term UNIVERSITY OF BRITISH COLUMBIA 44

45 Question 5: Lender s Yield for Participation Mtg PV = PMT x a[[n, j m ]] + FV(1+i) -n Where: PV is the original loan amount PMT is the sum of the regular payment + participation payment FV is the OSB term + share in appreciation N is the term UNIVERSITY OF BRITISH COLUMBIA 45

46 Part B: Mtg Case Study: Res l Mortgage Underwriting Analysis Use of two primary websites to gather data: UNIVERSITY OF BRITISH COLUMBIA 46

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48 canadamortgage.com 48

49 Used to set parameters of affordability for case study Determines range of prices you can afford and is used to determine payment obligations with chosen property Include two documents from this site: part (b) and part (c) data 49

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52 Pick residential property or condo for sale that you can afford (based on down payment) include a printout of the selected property 52

53 Part (a) Calculate family income and cash reserves (using table at beginning of question) 53

54 Part (b and c) Determines range of prices that you can afford and select property to purchase With chosen property, determine down payment, mortgage payments, and other fees Include attachments 54

55 Part (d) What happens to pmt when term and amortization changes? Support with numbers. Determine % of income allocated to mtg payments and total pmt (before AND after tax) Comment on affordability 55

56 Part (e)-down Payment State % of down payment and thoroughly explain why you set it at this amount Discuss, in general, the purchaser s preferences for the chosen down payment vs mortgage underwriter s preferences 56

57 Part (f)- Mortgage Loan Insurance (MLI) Is MLI insurance required? Explain If MLI is required, state cost of mtg insurance How is MLI paid for? If MLI is not required, explain why and explain the benefits of not having it 57

58 Part (g) Calculate total cash after costs Comment on impact, if any, on maximum purchase price Support with calculations, if possible 58

59 Part (h) State and briefly explain four factors (other than household income) that a lender uses to determine the size of the loan 59

60 Part B: Commercial Research Project 1,000 word term paper on commercial financing, commercial underwriting, development financing, or leasehold financing More comprehensive than internet research paper in Project 1 Graded on writing ability, critical thinking, explanation of main points, and in-depth analysis of topic 60

61 Questions? UNIVERSITY OF BRITISH COLUMBIA 61