Marly’s husband recently passed away from a sudden illness. She is a single mom caring for her daughter Emma, who is 4 years old. Marly received the proceeds from her husband’s life insurance policy in the amount of $100,000 which she prefers not to touch but to use this money for Emma’s future education in a Registered Education Savings Plan (RESP).
Marly has always rented, and she would like more stability for Emma. She recently made an offer on her first home which was just accepted! The condo was listed at $250,000 but the sellers accepted $20,000 below their list price (which is in fact market value). Based on her budget in trying to make ends meet, Marly only wants to put a down payment of 5% which she knows results in the requirement for mortgage loan insurance from the Canada Mortgage and Housing Corporation (CMHC) at 4% of the mortgage plus 9.975% Quebec sales tax on the CMHC mortgage loan insurance.
Marly is also aware that she needs to pay Property Transfer Duties (also called “Welcome Tax”) on this condo:
a) Her brother is a real estate agent who helped her find the condo. He also agreed to help her calculate the amount needed to cover the Property Transfer Duties under the city of Montréal and the CMHC mortgage loan insurance (she decided to pay the CMHC as a lump sum even though she knows she has the choice of either paying the mortgage loan insurance as a lump sum or increasing her mortgage payments). (2 marks)
Show the calculations for the CMHC mortgage loan insurance: (1 mark)
Show the calculations for the Property Transfer Duties: (1 mark)
b) Marly is going to cover the Property Transfer Duties, the CMHC mortgage loan insurance, down payment and new furniture by withdrawing funds from her Registered Retirement Savings Plan (RRSP) under the Home Buyer’s Plan (HBP). What is the maximum amount she can withdraw from her RRSP if Marly’s RRSP market value is $32,740. (See Table D).
Calculation for RRSP withdrawal under the HBP: (.25 marks)
c) What is the minimum annual repayment that Marly must repay under the HBP on an annual basis. (See Table D).
Calculation for the RRSP repayment under the HBP: (.25 marks)
d) Even though Marly had a pre-approval certificate she knows that she still must go through the financing steps to ensure that she can purchase the condo. The bank asked her to bring in some information to calculate her financial ratios. Marly’s gross annual income is $91,400. The condo’s monthly heating costs would be $420, while the annual property taxes would be $3,130, along with monthly condo fees of $250. Marly has debt of $522 per month for her car loan. Calculate her Gross Debt Service (GDS) ratio using a monthly mortgage payment of $1,555.
Calculation GDS: (1 mark)
e) Does Marly meet the GDS ratio requirement? (Underline and highlight your response). (.25 marks) Yes or No
f) Marly wants to ensure that her credit is in good standing but is concerned that ordering her credit report will make things worse by impacting her credit score. To reassure her, her brother has explained the two types of credit checks. For each, determine whether the credit check is a “hard hit” or “soft hit”. (.25 marks for .05 marks each)
• Your query on your credit report: _____________
• Applying for a car loan: _____________
• Employment application: _____________
• Applying for a new credit card: _____________
• Rental application: _____________
g) Marly is trying to understand Registered Education Saving Plans (RESPs). Are the following statements True or False? (Underline and highlight your response).
(.25 marks for .05 marks each)
• A Registered Education Savings Plan (RESP) is a tax-deferred investment plan:
True or False
• An RESP helps to save for a child’s high school education: True or False
• As Emma’s mother, Marly can contribute to Emma’s RESP: True or False
• Marly can claim a tax deduction for the RESP contribution made to Emma’s plan:
True or False
• There is no annual limit on RESP contributions and the lifetime RESP contribution limit is $50,000: True or False
a)
Calculations for CMHC mortgage loan insurance:
Mortgage amount = $250,000 - 5% down payment = $250,000 - ($250,000 * 5%) = $250,000 - $12,500 = $237,500
CMHC mortgage loan insurance = $237,500 * 4% = $9,500
9.975% of CMHC mortgage loan insurance = $9,500 * 9.975% = $947.38
Property Transfer Duties:
Under the city of Montréal, the Welcome Tax rate is 0.5% for the first $50,000 of the property value, 1% for the next $50,000, 1.5% for the next $200,000, and 2% for any amount over $250,000.
Property Transfer Duties = ($50,000 * 0.5%) + ($50,000 * 1%) + ($200,000 * 1.5%) + ($237,500 - $250,000) * 2%
Property Transfer Duties = $250 + $500 + $3,000 + $550 = $4,300
b)
Maximum RRSP withdrawal under the HBP:
Maximum withdrawal = $32,740 * 0.25 = $8,185
c)
Minimum annual repayment under the HBP:
Minimum repayment = $8,185 / 15 = $545.67
d)
Calculation for GDS:
GDS ratio = (monthly housing costs + car loan) / gross annual income * 100%
GDS ratio = ($1,555 + $420 + $250 + $522) / ($91,400 / 12) * 100%
GDS ratio = ($1,555 + $420 + $250 + $522) / ($91,400 / 12) * 100%
GDS ratio = $2,747 / $7,616.67 * 100% = 36.08%
e)
Does Marly meet the GDS ratio requirement?
No
f)
Credit Check types:
- Your query on your credit report: Soft hit
- Applying for a car loan: Hard hit
- Employment application: Soft hit
- Applying for a new credit card: Hard hit
- Rental application: Soft hit
g)
True or False for RESP:
- A Registered Education Savings Plan (RESP) is a tax-deferred investment plan: True
- An RESP helps to save for a child’s high school education: False
- As Emma’s mother, Marly can contribute to Emma’s RESP: True
- Marly can claim a tax deduction for the RESP contribution made to Emma’s plan: False
- There is no annual limit on RESP contributions and the lifetime RESP contribution limit is $50,000: False