PERSONAL FINANCIAL PLANNING ASSIGNMENT -

1. You are planning to buy a 4-bedroom house in Oshawa that has a price of $600,000. One of the local banks has offered you a mortgage at a quoted rate 8.00% per year. Interest will be compounded semi-annually. The bank has indicated that they will require a down payment of $200,000. The bank is prepared to lend you the remainder of the purchase price of the house. The amortization period will be 20 years and the term of the mortgage will be 2 years. You are going to make weekly payments on your mortgage. The payments will be made at the end of each week. Therefore you will make 52 payments per year. You have heard from your friend who has just completed the Introduction to Finance course, that by making additional payments on your mortgage during the initial term of the mortgage you can reduce the total number of payments and consequently the total amount of interest you pay over the entire life of the mortgage. Your friend has shown you a sample amortization schedule template (below).

Sample Mortgage Schedule

a) Prepare a mortgage amortization schedule to illustrate how the mortgage will be repaid over the next 20 years and calculate the following:

i. What is the amount of your weekly payment?

ii. How much will you pay in total on your mortgage over the life of your mortgage?

iii. What is total interest that will be paid over the term of your mortgage?

iv. How much principal will you have paid off during the initial term of your mortgage?

v. Use the amortization table to determine the first payment where the interest portion of the payment is less than 50% of the total payment. Identify the payment number where this occurs.

2. Lawrence, a family friend (from Ontario) has asked if you would help him fill out his 2015 Income Tax return. He has a very simple return. His employment income from his full time job as a sales representative was $185,250 in 2015. He paid the full allocation to CPP and EI in 2015. As well, he made the maximum RRSP contribution allowable during the year (he has no unused contribution room). After probing further, he also provided documentation of his charitable contributions that added up to $18,500 for the year and he has received $4,350 in dividends from Canadian Corporations.

Lawrence noted he has a diversified portfolio of securities with a market value of $70,000 and an ACB (adjusted cost base) of $50,000. He expects an average compound growth rate of the value of the portfolio to be 8% p.a. He has been trying to decide on if he should sell the portfolio now, pay tax, and reinvest the remainder, or he could hold on without selling until he retires in 14 years. In either case he will sell everything at the end of 14 years.

a) Prepare a T1 General, Federal Tax Schedule 1 and an Ontario Tax (ON 428) for the tax year 2014 for Lawrence.

b) How much more money will he have in 14 years, after tax, if he chooses to hold everything until then instead of selling now and reinvesting. Note: for these calculations assume his marginal tax rate is 40% and average rate is 27% now and then.

3. Should You Rent or Buy?

Bobby and Mary are considering buying a $375,000 one-bedroom home. They have saved up 80,000 to be used as a down payment and for covering closing cost (estimated to be about $10,000). The bank has offered them a first mortgage at an interest rate of 4.75% p.a., to be amortized over 25 years. Apart from the monthly mortgage payments, the property taxes are $3,750/year, Insurance premium $450/year and Condo fees of $495/month.

Alternatively, they can rent the condominium at $1,500/month with rent increase of 4% per year. As well, property tax, insurance premiums and condo fees are expected to increase by the same rate. Note, they can invest their money and earn an after-tax rate of return of 5.5%.

The planning period is three years.

a) Should they rent or buy?

Attachment:- Finance Assignment.zip