Question 1
Your client is wondering whether they will have to take out an insured or conventional mortgage.
Based on the following information, what is the maximum insured and conventional mortgage your client could take out that would meet the bank’s requirements?
Price offered on the promise to purchase: $1,450,000
Value according to the income approach: $1,325,000
Gross income (average monthly rents):
Three 6 ½ apartments: $1,400 per month
Two 5 ½ apartments: $1,100/month
Eight 4 ½ apartments: $695/month
1 penthouse apartment: $2,000/month
1 penthouse apartment: $1,870/month
Local vacancy rate: 2%
Bad debt rate: 4%
Information on the immovable:
Maintenance and repair: 15% of effective gross income
Electricity: 8% of effective gross income
Taxes: 12% of effective gross income
Insurance: $10,000
Conventional mortgage rate: 6% over 25 years
Insured mortgage rate: 5.25% over 25 years
Requirements for a conventional mortgage:
Bank’s debt-to-income ratio: 1.40
Bank’s debt service ratio: 70%
Requirements for an insured mortgage:
Bank’s debt-to-income ratio: 1.30
Bank’s debt service ratio: 85%
CMHC premium: 4.5%
Tax on the CMHC premium: 9%
Underwriting fee: $150/apartment
You must show your calculations to get the points.
Q:
Client wants to know if they’ll need an insured or conventional mortgage.
Need to find max loan for both based on bank ratios + lending value.
1) Basic Info
Price: $1,450,000
Value (income approach): $1,325,000
→ Lending value = $1,325,000
Rents (monthly):
3 × 6½ @ $1,400 = 4,200
2 × 5½ @ $1,100 = 2,200
8 × 4½ @ $695 = 5,560
1 PH @ $2,000 = 2,000
1 PH @ $1,870 = 1,870
Total = 15,830 × 12 = 189,960 (GPI annual)
Vacancy 2% + bad debt 4% = 6%
→ EGI = 189,960 × (1−0.06) = 178,562
2) Operating Expenses
Maint/repairs 15% = 26,784
Electricity 8% = 14,285
Taxes 12% = 21,427
Insurance = 10,000
Total = 72,496
NOI = 178,562 − 72,496 = 106,066
3) Lending Value Limits
Conv. 70% = 1,325,000 × 0.70 = 927,500
Insured 85% (base) = 1,325,000 × 0.85 = 1,126,250
4) Debt Coverage Tests
Formula → Loan = NOI ÷ (DCR × k)
Conventional
Rate 6% → k = 0.077316
DCR = 1.40
= 106,066 ÷ (1.40 × 0.077316) = 979,887
Compare LTV (927,500) → LTV limits it
Max conv = 927,500
(DCR check = 106,066 ÷ (0.077316×927,500) = 1.48 ok)
Insured (CMHC)
Rate 5.25% → k = 0.07191
DCR = 1.30
= 106,066 ÷ (1.30 × 0.07191) = 1,134,602 (total loan incl. fees)
Now back out base loan:
Premium 4.5%, tax 9%, fee 150×15=2,250
→ total = base × 1.04905 + 2,250
→ base = (1,134,602 − 2,250) ÷ 1.04905 = 1,079,407
Check LTV = 1,079,407 ÷ 1,325,000 = 81.5%
→ DCR is limiting
Add back fees:
Premium 48,573
Tax 4,372
Fee 2,250
= Total insured = 1,134,602
Max insured base = 1,079,407
Total with CMHC = 1,134,602
5) Results Summary
Type
Rate
DCR
LTV
Max Loan
Limiting Factor
Conventional
6.0%
1.40
70%
927,500
LTV
Insured (CMHC)
5.25%
1.30
85% (base)
1,079,407 (base) / 1,134,602 total
DCR
6) Notes
Bank uses the lower of price or value (1.325M).
Vacancy + bad debt = 6% applied to GPI.
Expenses as % of EGI (except insurance fixed).
CMHC premium 4.5% + 9% tax + $150/unit fee.
25-year amortization, monthly payments.
Final Answer:
Conventional: $927,500
Insured (base): $1,079,407
Insured (total with CMHC): $1,134,602
→ So, client could qualify for a conventional at $927,500,
but if they want a higher loan, they’d need an insured mortgage.
Question 2
The bank requires a debt coverage ratio (DCR) of 1.37, a break-even rate (BER) of 70%. The information for the immovable is as follows:
Potential gross income: $400,000
Vacancy rate: 4%
Bad debt rate: 2%
Operating expenses: $140,000
Given the information above, what is the maximum mortgage possible, given a mortgage rate of 5.00% over 25 years that meets both criteria?
1) Compute NOI
2) DCR: NOI ÷ DCR → max annual debt → PMT → PV
3) BER: (BER × EGI − OPEX) → max debt → PMT → PV
4) Choose the smaller mortgage
Question 3
Calculate the following balances of the sale prices.
a) $55,000 at 11%, amortized over 20 years with a 4-year term and monthly payments, compounded quarterly (2 points)
b) $110,000 at 7.35% amortized over 5 years. Compounded semi-annually (annual payment of interest only) (2 points)
a)
55,000 at 11%, amortized 20 yrs, 4-yr term, monthly payments, comp. quarterly
Using BA II Plus:
2nd CLR TVM
P/Y = 12, C/Y = 4
N = 240
I/Y = 11
PV = 55,000
→ CPT PMT = -563.99 → so monthly payment $563.99
To find balance after 4 yrs (48 months):
2nd AMORT → P1 = 1, P2 = 48 → BAL ≈ 51,148.23
So payment = $563.99/month
Balance after 4 years = $51,148.23
b)
$110,000 at 7.35%, 5 years, interest-only, compounded semi-annually
Using BA II Plus:
2nd CLR TVM
P/Y = 1, C/Y = 2, END mode
N = 5
I/Y = 7.35
PV = 110,000
FV = -110,000
→ CPT PMT = -8,233.56 → annual payment $8,233.56
Total interest over 5 years = 8,233.56 × 5 = $41,167.80
Principal due at the end = $110,000
Question 4
Calculate the total tax payable in this situation.
For the purposes of calculation, please consider that the entire amount of capital gain is taxable at 50% only (the federal and provincial governments have postponed the application of this rule until 2026)
Purchase price of the immovable (land and building): $380,000
Breakdown of land value upon purchase: 20%
Proceeds at disposition of the immovable (land and building): $810,000
Undepreciated capital cost (UCC): $230,000
Breakdown of land value upon resale: 30%
Tax rate: 41%
Purchase-related expenses: $20,000
Purchase price (land + building): $380,000
Purchase costs: $20,000
Land share at purchase: 20% → Land ACB = 20%×380,000 + 20%×20,000 = $80,000
Building share at purchase: 80% → Building capital cost = 80%×380,000 + 80%×20,000 = $320,000
UCC (pre-sale): $230,000
Proceeds (total): $810,000
Land share at sale: 30% → Land proceeds = 30%×810,000 = $243,000
Building proceeds: 70%×810,000 = $567,000
Tax rate: 41%
Capital gains inclusion: 50% (per exam instruction)
1) Land – Capital Gain
Land CG = 243,000 − 80,000 = 163,000
Taxable (50%) = 163,000 × 50% = 81,500
2) Building – Recapture + Capital Gain
Recapture = 320,000 − 230,000 = 90,000 (fully taxable)
Building CG = 567,000 − 320,000 = 247,000
Taxable (50%) = 247,000 × 50% = 123,500
3) Total Taxable Amount
= Recapture 90,000 + Taxable CG (81,500 + 123,500)
= 90,000 + 205,000 = 295,000
4) Tax @ 41%
= 295,000 × 41% = $120,950
Answer: Total tax payable = $120,950.
Question 5
What is the maximum possible CCA in 2015 if an individual acquired an immovable with a building valued at $440,000 in 2012 and the CCA has been fully used each year since the acquisition?
Building value: $440,000
Class 1 CCA: 4%
2012 (half-year rule)
CCA = 440,000 × 4% × ½ = 8,800
UCC = 440,000 - 8,800 = 431,200
2013
CCA = 431,200 × 4% = 17,248
UCC = 431,200 - 17,248 = 413,952
2014
CCA = 413,952 × 4% = 16,558
UCC = 413,952 - 16,558 = 397,394
2015
CCA = 397,394 × 4% = 15,896
Maximum CCA 2015 = 15,896
Question 6
Here is some information on an immovable.
Proceeds at disposition: $5,000,000 in 2050
Adjusted cost base : $3,200,000
The amount of $5,000,000 is payable as follows:
2050 $1,000,000 cash
2051 $0 balance of the sale price
2052 $500,000 balance of the sale price
2053 $2,000,000 balance of the sale price
2054 $1,500,000 balance of the sale price
$5,000,000
Immovable sale – tax reserve calculation
Proceeds = 5,000,000; ACB = 3,200,000; Gain = 1,800,000
Payments: 2050 = 1,000,000; 2051 = 0; 2052 = 500,000; 2053 = 2,000,000; 2054 = 1,500,000
Reserve calculation:
2050 → 1,800,000 × (4,000,000 ÷ 5,000,000) = 1,440,000
2051 → 1,800,000 × (4,000,000 ÷ 5,000,000) = 1,440,000
2052 → 1,800,000 × (3,500,000 ÷ 5,000,000) = 1,260,000
2053 → 1,800,000 × (1,500,000 ÷ 5,000,000) = 540,000
2054 → 1,800,000 × (0 ÷ 5,000,000) = 0
Reserve over 5 years: 1,440,000; 1,440,000; 1,260,000; 540,000; 0
