CASE STUDY NEW HOME PURCHASE

Transcription

1 CASE STUDY NEW HOME PURCHASE KNOWLEDGE EXPECTED OF: Both FPSC Level 1 Certifi cants and CFP Professionals Background Mortgage Options Version 1.0.0, Updated Priya and Ebad purchased their home for $350,000 six years ago, but the value of the property has grown to $500,000 since then. The outstanding mortgage balance is $318,000, with four years remaining at a fi xed, annual interest rate of 4.29 percent. Now that Priya and Ebad are expecting their third child, they need more space. The couple has approached Robert, an FPSC Level 1 Certifi cant in Financial Planning, to help them understand the fi nancing options for purchasing a new $800,000 property. The closing date on the property is October 14 and closing costs are expected to total 1.5 percent of the purchase price. Real estate fees on the sale of their current property are expected to equal four percent of the sale price. However, they don t expect to sell their current home before November. The qualifying rate for mortgage applications is fi ve percent. Bridge loans are available at a variable rate of fi ve percent and prevailing mortgage rates are as follows: One-year fi xed rate open mortgage at 6.3 percent. One-year fi xed rate closed mortgage at 3.15 percent. Four-year fi xed rate closed mortgage at 3.75 percent. Five-year fi xed rate closed mortgage at 3.99 percent. Five-year variable rate closed mortgage at three percent. If Priya and Ebad pay out their current mortgage on the sale of their home, and take a new mortgage with a lower interest rate, they will be required to pay an interest rate differential of $4,128. Alternatively, they may take advantage of the portability clause within their mortgage agreement. This would enable them to transfer their current mortgage to the new property at a blended interest rate of 4.02 percent for four years, or 4.14 percent for fi ve years. Ebad and Priya expect to raise their children in the new house and have no plans to sell in the short term. Their previous choice of a fi ve-year fi xed interest rate mortgage was based on their parents advice. It provided the lowest fi xed interest rate at the time, and the comfort of knowing that their mortgage payments and amortization period were set and predictable. Since then, they have seen interest rates drop substantially and want to learn more about variable interest rate mortgages before deciding on their next mortgage. They understand that, while monthly payments will be fi xed, the amortization period may extend beyond the original date set if interest rates increase over time. This does not present a concern for the couple. Ebad and Priya s primary goal is to pay off their mortgage as quickly as possible. The couple plans on doing a large renovation within a few years. They would like to seek information and have come to Robert with a list of questions about mortgage options. Page 1

2 Credit Adjudication To help in adjudicating Ebad and Priya s mortgage application, Robert requested their credit bureau reports (as seen in Appendix A). The couple pays $305 per month toward their joint line of credit and Priya pays $460 per month toward a car loan. The value of her car is estimated at $15,000, while Ebad s car is worth $7,000. Their chequing account has a balance of $9,000. The couple is proud of the fact that they are able to save $400 per month in their Tax-Free Savings Accounts (TFSAs). Priya has been focused on saving for emergencies, so she prefers that the $31,000 in her TFSA be held in cash, while Ebad has invested $40,000 in a balanced mutual fund portfolio. Priya contributes $300 per month to an employersponsored defi ned contribution pension plan, estimated at $18,000, and recently contributed $5,000 to a personal RRSP. Ebad has no employer pension and saves $400 per month toward his RRSP in a growth-oriented mutual fund portfolio. The account has grown to $61,000. His goal is to maximize his RRSP contributions once he repays $25,000 in student loans. The couple also contributes $400 per month to a scholarship trust for their children s education. Priya earns $6,500 per month as a teacher, keeping $5,050 after taxes. The school board s top-up will ensure she maintains her full salary through her maternity leave. Ebad keeps $6,250 per month after taxes from his annual gross salary of $102,000. The couple s combined debt payment totals $2,850 per month. This includes $1,750 for their mortgage, $250 toward Ebad s student loan and $105 to Priya s $3,000 balance on her credit card. In addition, the couple spends $450 per month on transportation costs, including $300 for Ebad s transit pass and $150 toward gas for the cars. Each July, they pay their car insurance premiums in full, at a combined cost of $2,700. Their gas spending has increased on higher fuel cost, and because they now drive their children to a daycare that is farther from the train station than their former daycare provider. The new daycare charges them $2,000 per month for their two children. Their two children will continue to attend daycare while Priya is on maternity leave taking care of their newborn baby. Daycare costs are expected to remain constant at $2,000 per month, given that their eldest child s need for daycare will be replaced by their youngest child s need when Priya returns to work. Priya and Ebad s property taxes and home insurance are $4,200 and $960, respectively. Their gas, water and hydro bills total $100, $125 and $125 respectively every month. Food and house supplies average $1,000 per month, while lifestyle expenses, including eating out and vacations, total $18,000 per year. The couple has budgeted for an increase in monthly expenses on the new larger home in the amount of $700 per month for property taxes, and $200 each for gas and hydro expenses. The couple does not expect to have signifi cant excess cash fl ow to make additional payments on their mortgage beyond the normal prepayment options provided. Page 2

3 Credit Bureau File Name: Ebad Age: 36 Current Address: 123 Anywhere Street, Anyplace Town, Canada At Address Since: 6 years Previous Address: 123 Another Street, Another Town, Canada At Address Since: 23 years Current Occupation: Sales Manager Employer: Widgets Are Us Tenure: 12 Years Previous Occupation: Student Employer: University of Anyplace Tenure: 4 Years Lender Date Opened Credit Limit Balance Last Payment Date Type of Debt ABC Mortgage Company 2-Jan-08 $325,000 $318, Jan-20XX M M1 ABC Credit Card 1-Jul-08 $10,000 $- 21-Jan-20XX R R1 ABC Bank Line of Credit 12-Aug-08 $10,000 $9,000 2-Jan-20XX R R1 As of February 28, 20XX Status Date Reason for Closed Closure Number of Credit Enquiries Soft Hard In Last 30 Days 2 0 In Last 60 Days 2 0 In Last 90 Days 2 0 Credit Bureau File Name: Priya Age: 33 Current Address: 123 Elsewhere Street, Anyplace Town, Canada At Address Since: 6 years Previous Address: 123 The Other Road, The Other Town, Canada At Address Since: 10 years Current Occupation: Teacher Employer: Anyplace Town School Board Tenure: 10 Years Previous Occupation: Student Employer: University of Anyplace Tenure: 4 Years Lender Date Opened Credit Limit Balance ABC Mortgage Company 2-Jan-08 $325,000 $318,000 ABC Credit Card 1-Sep-10 $10,000 $3,000 Last Payment Date 31-Jan- 20XX 21-Jan- 20XX Type of Debt ABC Bank Line of Credit 12-Aug-08 $10,000 $9,000 2-Jan-20XX R R1 Autos R Us 2-Nov-12 $20,000 $7, Jan- 20XX M R I Status M1 R2 I1 Date Closed Reason for Closure C-Cell Phone Company 4-Mar-05 $- $82 4-Mar-07 O O9 Sep Non-Payment As of February 28, 20XX Number of Credit Enquiries Soft Hard In Last 30 Days 1 0 In Last 60 Days 1 0 In Last 90 Days 1 0 Page 3

4 Knowledge Expectations Financial Analysis The FPSC Level 1 Certifi cant in Financial Planning and CFP Professional should be able to: Construct a current net worth statement for the couple. Personal Net Worth for Priya and Ebad Priya Ebad Joint Total House $- $- $500,000 $500,000 Car $15,000 $7,000 $- $22,000 Total Lifestyle Assets $15,000 $7,000 $500,000 $522,000 Chequing account $- $- $9,000 $9,000 Tax-Free Savings Account (TFSA) $31,000 $40,000 $- $71,000 Registered Retirement Savings Plan (RRSP) $5,000 $61,000 $- $66,000 Workplace pension $18,000 $- $- $18,000 Total Investable Assets $54,000 $101,000 $9,000 $164,000 Total Assets $69,000 $108,000 $509,000 $686,000 Credit card $3,000 $- $- $3,000 Line of credit $- $- $9,000 $9,000 Car loan $7,000 $- $- $7,000 Student loan $- $25,000 $- $25,000 Total Short Term Liabilities $10,000 $25,000 $9,000 $44,000 Mortgage $- $- $318,000 $318,000 Total Long Term Liabilities $- $- $318,000 $318,000 Total Liabilities $10,000 $25,000 $327,000 $362,000 Net Worth $59,000 $83,000 $182,000 $324,000 The FPSC Level 1 Certifi cant in Financial Planning and CFP Professional should be able to: Construct a cash fl ow statement for the couple. Page 4

5 Cash Flow for Priya and Ebad Monthly Annual Gross income for Priya $6,500 $78,000 Taxes -$1,450 -$17,400 Net Income $5,050 $60,600 Gross income for Ebad $8,500 $102,000 Taxes -$2,250 -$27,000 Net Income $6,250 $75,000 Total Cash Inflows $11,300 $135,600 Mortgage $1,750 $21,000 Car loan $460 $5,520 Line of credit $305 $3,660 Student loan $250 $3,000 Credit card $105 $1,260 Total Debt Payments $2,870 $34,440 Property taxes $350 $4,200 Gas $100 $1,200 Hydro $125 $1,500 Water $125 $1,500 Home insurance $80 $960 Food and household supplies $1,000 $12,000 Total Housing Expenses $1,780 $21,360 Car insurance $225 $2,700 Gas for cars $150 $1,800 Transit pass $300 $3,600 Total Transportation Costs $675 $8,100 Daycare $2,000 $24,000 Total Childcare Costs $2,000 $24,000 General lifestyle expenses $1,500 $18,000 Total Lifestyle Expenses $1,500 $18,000 Workplace pension $300 $3,600 Registered Retirement Savings Plan (RSP) $400 $4,800 Tax-Free Savings Account (TFSA) $400 $4,800 Registered Education Savings Plan (RESP) $400 $4,800 Total Savings Contributions $1,500 $18,000 Total Outflows -$10,325 -$123,900 Net Cashflow $975 $11,700 Page 5

6 Knowledge Expectations Mortgages The FPSC Level 1 Certifi cant in Financial Planning and CFP Professional should be able to: Calculate that the clients realtor fees will be $20,000. Calculate that the proceeds from the clients sale of their current home, after realtor expenses, will be $480,000. Calculate that, once Priya and Ebad pay off the $318,000 mortgage on their existing property, they will have $162,000 in equity available, which they may use as a down payment for their new property. Explain to the couple that the mortgage on their existing property must be paid and discharged upon the sale of the property. Prepare 1 a discharge statement for the clients based on an expected November 1 sale date of their existing property. Explain to the couple that the discharge statement displays the calculations involved with the payout and discharge of the mortgage that is registered against their existing property. Present the calculations to the clients and disclose all costs related to the discharge of the mortgage on their existing property. Explain to the couple that the information displayed on their discharge statement, including the interest rate differential (IRD), any discharge fees, and total costs, is based on their expected sale date of November 1. As such, it is subject to change, should there be a change in the sale date of their existing property. Explain that the discharge statement contains an IRD, which compensates the lender for the potential loss of earnings if the mortgage is paid out prior to the date that was contractually agreed upon. Explain to Priya and Ebad that they can avoid the IRD if they enact the portability clause within their current mortgage agreement. Explain that the portability clause within their mortgage agreement enables Priya and Ebad to transfer the terms of their existing mortgage (the current balance, interest rate, payment amount and amortization period) to their new property. In doing so, the lender will deem that they have not broken the terms of their existing mortgage contract, enabling Priya and Ebad to avoid having to pay the IRD. Explain to the couple that they will have $162,000 2 in equity, which may be used as a down payment for their new property. Identify that the clients do not have additional sources that may be used toward the down payment on the new property. Explain common closing costs payable at the time of a residential property purchase, including lawyer fees, land-transfer costs, set-up and installation fees for utilities. Calculate that the closing costs for the purchase of the new property are expected to be $12, FPSC Level 1 Certifi cants in Financial Planning are not expected to prepare a discharge statement manually. Instead, they are expected to prepare a discharge statement as per their fi nancial institution s process. 2 The couple will have $157,872 if they are required to pay the IRD to pay out and discharge their current mortgage in favour of setting up a new mortgage. The new mortgage will be based on today s interest rates rather than on porting their existing mortgage to their new property. Page 6

7 Explain to Priya and Ebad that the total amount required to purchase their new home is estimated at $812,000, including the purchase price and closing costs. Calculate that Priya and Ebad will require a mortgage estimated at $650,000 3 to purchase their new property. Explain to Priya and Ebad that they have two choices when handling the payout and moving from their current mortgage set-up to a new one. They may pay out and discharge their current mortgage in favour of setting up a new $654,128 mortgage, with the entire value of the mortgage based on today s interest rates. The $654,128 is the difference between the $812,000 purchase price (including closing costs) and the $157,872 4 equity they had in their existing property being used as the down payment for their new property. This option would require them to pay the IRD upon the sale of their existing property. Alternatively, the couple may port their $318,000 mortgage from the existing property to the new one and, that way, avoid the IRD. Under this option they will need to borrow additional funds to purchase their new property. The new mortgage will combine the $318,000 mortgage at an interest rate of 4.29 percent with the $332,000 at an interest rate of 3.75 percent or 3.99 percent. The interest rate will depend on whether the couple decides to take a fi xed-rate mortgage over four or fi ve years. If Priya and Ebad pay off their current mortgage balance, pay the IRD and set up a new mortgage at today s rates: Explain to the couple that, should they decide to discharge their mortgage, there are four common types of mortgages to consider: A closed fi xed-rate mortgage A closed variable-rate mortgage An open fi xed-rate mortgage An open variable-rate mortgage Explain to the couple that a fi xed-rate mortgage can protect them from increasing interest rates and payment amounts, and potentially longer amortization periods, because they would be fi xed for the mortgage term agreed on. Compare this to a variable rate mortgage where an increase or a decrease in the variable interest rate may result in a higher or a lower payment amount, and a longer or a shorter amortization period. Exemplify that, while fi xed rates can protect the borrower from rising interest rates, they may also result in higher costs if variable rates fall below the fi xed rate that the borrower is locked into. Similarly, a variable rate may enable the borrower to benefi t from decreasing interest rates. But he or she may also end up paying higher interest if the interest rate rises above the fi xed rate that locks the borrower in. Explain that, while past performance does not necessarily indicate future performance, historically short-term interest rates have tended to be lower than long-term interest rates. 5 Explain to the couple that a closed mortgage has limits on the amount of prepayments they can make over the mortgage term, whereas an open mortgage has no prohibitions on prepayments, including full payout of the mortgage. Identify that repaying their mortgage as quickly as possible is the most important factor in the couple s decision to choose a mortgage. 3 The couple will require a mortgage estimated at $654,128 if they are required to pay the IRD to pay out and discharge their current mortgage. They would do this in favour of setting up a new mortgage based on today s interest rates, rather than on porting their existing mortgage to their new property. 4 $500,000 - $20,000 real estate commissions - $318,000 principal mortgage - $4,128 IRD. 5 When a comparison of the Bank of Canada s conventional mortgages is conducted, one-year and five-year reports are used. In addition, the variable, prime interest rates charged by banks may also be viewed using the Prime Business Loan report. All reports can be found at: bankofcanada.ca/rates/interest-rates/selected-historical-interest-rates/. Page 7

8 Identify that repaying a mortgage as quickly as possible requires that the cost (via the interest rate) be as low as possible, or that the payments be as high as possible. Explain to the couple that, based on their preference to pay down the mortgage as quickly as possible without making larger prepayments, they should consider mortgages that provide the lowest cost, that is those with the lowest interest rates. Mortgages with variable interest rates and shorter term fi xed interest rates refl ect short-term market interest rates. Such mortgages enable couples like Priya and Ebad to access the lowest interest rates possible given that mortgages with longer term fi xed interest rates tend to carry a risk premium to protect the lender from increasing rates. The couple should also consider closed mortgages since open mortgages tend to have a higher rate to compensate the lender for earlier payout of the mortgage. Given these choices, the couple should consider a fi ve-year closed mortgage with a variable interest rate, or a one-year closed mortgage with a fi xed interest rate. The one-year closed mortgage with a fi xed interest rate will protect the couple from increasing interest rates, but will do so at a cost of about $ over the following year. Given their risk tolerance, they may consider a variable-rate mortgage in order to take advantage of fl uctuating interest rates and amortizations. Calculate that the couple will require a $654,128 mortgage for their new property. Calculate that the loan-to-value ratio for their new property is percent. Identify that Priya and Ebad will require mortgage default insurance for their new property given that the loanto-value ratio is percent. Identify that Priya and Ebad may buy their mortgage default insurance from the Canada Mortgage Housing Corporation (CMHC). Direct them to the CMHC website if they wish to learn more about mortgage default insurance. Calculate that Priya and Ebad may face a mortgage default insurance premium of up to $11, Explain to Priya and Ebad that they have the option to pay the mortgage default insurance premium upfront. Alternatively, they may finance the cost through their mortgage by adding the premium to their mortgage balance and amortizing it over the life of the mortgage. 7 In this case, they may not be in a position to pay it upfront without using a large portion of their emergency funds. Calculate that, if the couple has another $14,128 available for their down payment, they may not be required to buy mortgage default insurance. This would save them up to $11,774 in premiums and $3, in interest costs (if amortized at the rate of three percent over 19 years with monthly payments). If Priya and Ebad port their mortgage: Explain to the couple that they must maintain a mortgage term that is at least as long as their current one. In this case, the couple may choose a fi xed-rate mortgage over four or fi ve years. Calculate that they will require an estimated mortgage of $650,000 on their new property. Calculate that the loan-to-value for their new property is percent. Identify that Priya and Ebad may buy their mortgage default insurance from the CMHC. Direct them to the CMHC website if they wish to learn more about mortgage default insurance. 6 Premiums are subject to the provincial sales tax if premiums are charged in Manitoba, Ontario or Quebec. 7 The provincial sales tax cannot be added to the loan amount. Page 8

9 Identify that Priya and Ebad will require mortgage default insurance for their new property, given that their loan-to-value ratio is 81.5 percent. Calculate that Priya and Ebad may face a mortgage default insurance premium of up to $11, Explain to Priya and Ebad that they have the option to pay the mortgage default insurance premium upfront. Alternatively, they may finance the cost through their mortgage by adding the premium to their mortgage balance, and amortizing it over the life of the mortgage. 9 In this case, they may not be in a position to pay it upfront without using a large portion of their emergency funds. Calculate that, if the couple has another $10,000 available for their down payment, they may not be required to buy mortgage default insurance. This would save them up to $11,700 in premiums and $3, in interest costs (if amortized at the rate of three percent over 19 years with monthly payments). Comparisons of Mortgage Choices: Calculate that the minimum monthly payments for: The fi ve-year, closed variable interest rate mortgage is $3, The four-year, closed fi xed interest rate mortgage is $3, The fi ve-year, closed fi xed interest rate mortgage is $3, Identify that all mortgage payments may be maintained by the couple based on their cash fl ow. Identify that, if the couple is comfortable paying the minimum payment for the fi ve-year mortgage with closed fi xed interest rates, they should apply that payment to the other mortgage options, including the four-year, closed fi xed and fi ve-year closed variable interest rate choices to achieve their goal of being debt-free faster. Calculate that if the couple s monthly payment is $3,521.52, the remaining balance after four years for: The fi ve-year mortgage with closed variable interest rates may be $557, The four-year mortgage with closed fi xed interest rates will be $576, Calculate that the protection for the four-year mortgage with closed fi xed interest rates may cost the couple up to $19,394.91, 15 assuming interest rates do not decrease. Explain that the variable interest rate would have to rise to more than 3.75 percent today, and remain there for the next four years, for Priya and Ebad to benefi t from the longer term fixed rate. 8 Premiums are subject to the provincial sales tax if premiums are charged in Manitoba, Ontario or Quebec. 9 The provincial sales tax cannot be added to the loan amount. 10 N = 24 X 12 = 288; I/Y = 3%; PV = $654,128; FV = 0. CPT PYMT = $3, N = 24 X 12 = 288; I/Y = 3.75; PV = $654,128; FV = 0. CPT PYMT = $3, N = 24 X 12 = 288; I/Y = 3.99%; PV = $654,128; FV = 0. CPT PYMT = $3, I/Y = 3%; PV = $654,128; FV = 0. PYMT = $3, CPT N = 250. Amort: P1 = 1; P2 = 48. CPT BAL = $557, TI/Y = 3.75%; PV = $654,128; FV = 0. PYMT = $3, CPT N = 277. Amort: P1 = 1; P2 = 48. CPT BAL = $576, $576, $557, = $19, Page 9

10 Capacity: Capital: Collateral: Calculate that if the couple s monthly payment is $3,521.52, the remaining balances after fi ve years for: The fi ve-year mortgage with closed variable interest rates may be $531, The fi ve-year mortgage with closed fi xed interest rates will be $563, Calculate that the protection for the fi ve-year mortgage with closed fi xed interest rates may cost the couple up to $32,173.29, 18 assuming interest rates do not decrease. Explain that the variable interest rate would have to rise to 3.99 percent today, and remain there for the next fi ve years, for the client to benefi t from the longer term fixed rate. Evaluate the couple s credit application based on the Five C s of Credit. Evaluate that the couple is less likely to have debt-repayment issues because of their stability, in terms of their employment and place of residence. Calculate that the couple s Gross Debt Service Ratio (GDSR) and Total Debt Service Ratio (TDSR) is percent 19 and 44 percent 20 respectively. Explain to the couple that their GDSR and TDSR are slightly above the CMHC guidelines of 32 percent and 40 percent, respectively. This may impact the credit adjudication decision or compel the couple to reduce limits on their credit cards. Evaluate that the couple has a net worth of $204,000. Of this amount, $40,000 (Priya s TFSA and the couple s bank account) may be liquidated at their full value without tax consequences. In addition, Ebad s TFSA containing $40,000 may also be liquidated to cover debt payments in the event of any interruptions in income. Evaluate that the couple s $162,000 in home equity will serve as collateral for the mortgage and provide assurance of repayment. 16 I/Y = 3%; PV = $654,128; FV = 0. PYMT = $3, CPT N = 250. Amort: P1 = 1; P2 = 60. CPT BAL = $531, I/Y = 3.99%; PV = $654,128; FV = 0. PYMT = $3, CPT N = 288. Amort: P1 = 1; P2 = 60. CPT BAL = $563, $563, $531, = $32, GDSR = ($3,885 mortgage payment based on a qualifying rate of fi ve percent over 24 years + $700 property taxes + $200 gas + $200 hydro) / ($6,500 + $8,500 gross incomes) = percent. 20 TDSR = ($3,885 mortgage payment based on a qualifying rate of fi ve percent over 24 years + $700 property taxes + $200 gas + $200 hydro + $460 car loan + $305 line of credit + $250 student loan + $600 credit card) / ($6,500 + $8,500 gross incomes) = 44 percent. Financial institutions regularly use conservative approaches to calculate debt ratios for credit adjudication purposes. In this instance, a typical approach is to utilize the actual payment, or three percent of unsecured credit balances, whichever is greater. The two separate credit cards have a credit limit of $10,000 each. Three percent of $10,000 X 2 = $600. Page 10

11 Credit History: Character: Evaluate that the couple has used credit appropriately in the past, as demonstrated by: The lower number of credit obligations they have. Ebad s timely repayment of all his credit obligations. Priya s more recent timely repayment of her credit obligations. Their focus on paying down debts to avoid 100 percent utilization of available credit limits. Their use of a mortgage to purchase an appreciating asset. The low number of requests for their credit bureau report, specifi cally hard checks. Evaluate that the couple s types of credit, including a large mortgage and a revolving credit product, such as a line of credit, demonstrate their credit worthiness. Evaluate that the couple s stability, in residence and employment, demonstrates that they are responsible. Evaluate that Priya s failure to pay the cell phone company, or have her credit bureau fi le corrected, opens up uncertainty about her timely management of debt repayments in the future. Explain to the couple that there are two types of mortgage charges that may be used to secure their property as collateral on their new mortgage: conventional and collateral. A conventional mortgage charge: May be registered for an amount that doesn t exceed the property s total value. May require a new charge to be registered, should the couple wish to refi nance their mortgage in the future. This would result in extra costs for the discharge and registration fees. May be transferable to another lender. May enable the couple to borrow additional money from another lender in second position behind the current mortgage. May not be used to securitize any unsecured debts that the couple fails to pay at the institution that holds this mortgage. A collateral mortgage charge: May be registered for an amount that exceeds the property s total value. This would enable future borrowing without the need to re-register the charge, and avoid additional discharge and registration costs. Is not transferable to another lender. Prohibits the couple from borrowing additional money from another lender in second position behind the current mortgage. However it does enable the couple to borrow an amount that doesn t exceed the value of the property from the lender that holds the charge. May be used to securitize any unsecured debts that the couple fails to pay at the institution that holds this mortgage. Explain that Priya and Ebad may benefi t from a collateral mortgage because it will enable them to borrow against the equity in the home for renovations, without having to register a new mortgage charge. Explain to the couple that they require a bridge loan. Page 11

12 Explain to the couple that a bridge loan is used to purchase their new property prior to the sale of their existing home, on the agreement that they will repay the loan using the proceeds from the sale of their existing home. Explain to the couple that, if the bridge loan is not repaid, the lender has the right to put a lien on their properties to ensure it receives repayment when any properties are sold. Calculate that Priya and Ebad will require a bridge loan of $162,000 to purchase their new property 14 days before the sale of their current property. Calculate that Ebad and Priya s cost of carrying a bridge loan for 14 days will be $ Process the mortgage and bridge loan application for the couple. CFP, CERTIFIED FINANCIAL PLANNER and are certifi cation trademarks owned outside the U.S. by Financial Planning Standards Board Ltd. (FPSB). Financial Planning Standards Council is the marks licensing authority for the CFP marks in Canada, through agreement with FPSB. All other are registered trademarks of, unless indicated Financial Planning Standards Council. All rights reserved. Page 12