Introduction to buying vrs. renting a home. The GDSR formula.

1. Buying a New Home ...
or is renting a
better idea?
Dad's new house by flickr user Patrick Haney

2. Tara wants to drive a small economy car priced at $19 800 before
taxes. PST is 7% and GST is 5%. She has $3500 to use as a down
payment for buying or leasing. If she buys the car, she will get a 4 year
loan at 8.5% to pay for it. If she leases the car, she wants to buy the car
at the end of the lease. The lease will be for 3 years at 8.5% and the
residual value will be 43% of the original price. Tara will also need a 2
year loan (at 8.5%) at the end of the lease to buy the car.
HOMEWORK
(a) What is the total cost of buying the car?
N=48
Cost w. Tax is $22 176
I%=8.5
After Down Payment: $18 676
PV=18676
PMT=-460.33
Monthly Payment: $460.33
FV=0
P/Y=12
C/Y=12
PMT: END BEGIN
Total Cost of Car:
48 * $460.33 + $3 500.00 = $25 595.84

3. Tara wants to drive a small economy car priced at $19 800 before
taxes. PST is 7% and GST is 5%. She has $3500 to use as a down
payment for buying or leasing. If she buys the car, she will get a 4 year
loan at 8.5% to pay for it. If she leases the car, she wants to buy the car
at the end of the lease. The lease will be for 3 years at 8.5% and the
residual value will be 43% of the original price. Tara will also need a 2
year loan (at 8.5%) at the end of the lease to buy the car.
(b) What is the total cost of owning the car if Tara leases it first?
Residual Value
HOMEWORK N=24
$19 800.00 * 0.43 = I%=8.5
N=36
$8 514.00 PV=8514
I%=8.5
Depreciation PMT=-387.01
$19 800.00 - $8 514.00 = PV=17654.32 FV=0
PMT=-348.84
$11 286.00 P/Y=12
FV=-8514
C/Y=12
Taxes
P/Y=12
PMT: END BEGIN
$11 286.00 * 0.12 =
C/Y=12
$1 354.32
Lease: $16 058.24
PMT: END BEGIN
PV of Lease Loan
Buy-Out: $9 288.24
$19 800.00 + $1 354.32 - $3 500.00 =
Total Cost: $25 346.48
$17 654.32

5. Tara wants to drive a small economy car priced at $19 800 before
taxes. PST is 7% and GST is 5%. She has $3500 to use as a down
payment for buying or leasing. If she buys the car, she will get a 4 year
loan at 8.5% to pay for it. If she leases the car, she wants to buy the car
at the end of the lease. The lease will be for 3 years at 8.5% and the
residual value will be 43% of the original price. Tara will also need a 2
year loan (at 8.5%) at the end of the lease to buy the car.
HOMEWORK
(c) Name two benefits of leasing the car instead of buying.

6. What are some
advantages of
buying? Of leasing?

7. HOMEWORK
Ted's Truck
(a) Ted, a construction worker, wants to buy a new pickup truck priced
at $36 699.00 plus PST (7%) and GST (5%). His current truck has a
trade-in value of $6800.00. What is the total cost of the truck if Ted
has $3500.00 for a down payment, and takes out a three-year loan at
8.5% for the balance? What is the value of each monthly payment?
(b) Ted also considers leasing the truck (still priced at $36 699.00)
for three years. He is able to use the old truck valued at $6800.00
plus $3500.00 as the down payment. The lease rate is 7.3%, and
the residual value is set at $22 499.00. What is the total cost of the
lease? How much is the monthly lease payment?
(c) At the end of the three-year lease, Ted may decide to buy the
truck for the residual value, plus PST and GST. He would take out
a two-year loan at 7.5% to pay for the truck. What is the total cost
of the truck after the loan for the residual value is paid off?
(d) Which is more economical - buying the truck (#a) or leasing the
truck and then buying it later?
(e) What are some advantages of buying rather than leasing the
truck that Ted might consider?

8. Buying a New Home ...
or is renting a
better idea?
Dad's new house by flickr user Patrick Haney

9. Some things to keep in mind if you rent are:
1. You need to pay monthly rental payments in advance, and
probably also one month's rent in advance as damage deposit.
You do not, however, need to pay a large down payment and the
various fees required when buying.

10. Some things to keep in mind if you rent are:
1. You need to pay monthly rental payments in advance, and
probably also one month's rent in advance as damage deposit.
You do not, however, need to pay a large down payment and the
various fees required when buying.
2. Renting a home is cheaper in the short term than buying, but
it does not create any assets.

11. Some things to keep in mind if you rent are:
1. You need to pay monthly rental payments in advance, and
probably also one month's rent in advance as damage deposit.
You do not, however, need to pay a large down payment and the
various fees required when buying.
2. Renting a home is cheaper in the short term than buying, but
it does not create any assets.
3. You need to know what is included in the rental payment. For
example, are the utilities (especially water, hydro, heating)
included? Is the home furnished or partly furnished?

12. Some things to keep in mind if you rent are:
1. You need to pay monthly rental payments in advance, and
probably also one month's rent in advance as damage deposit.
You do not, however, need to pay a large down payment and the
various fees required when buying.
2. Renting a home is cheaper in the short term than buying, but
it does not create any assets.
3. You need to know what is included in the rental payment. For
example, are the utilities (especially water, hydro, heating)
included? Is the home furnished or partly furnished?
4. If you buy a house, the value of the house normally
increases with time. If you rent a house, the rental payments will
increase over time, and you do not create any assets.

13. Some non-financial factors to
consider when renting
1. There may be restrictions to your lifestyle if you rent. For
example, you may not be able to have pets in a rented home, or
modify the home to suit your personal needs.

14. Some non-financial factors to
consider when renting
1. There may be restrictions to your lifestyle if you rent. For
example, you may not be able to have pets in a rented home, or
modify the home to suit your personal needs.
2. You are not responsible for repairs, maintenance, or
property taxes. For example, if the hot water tank needs
replacing, the owner is responsible.

15. Some non-financial factors to
consider when renting
1. There may be restrictions to your lifestyle if you rent. For
example, you may not be able to have pets in a rented home, or
modify the home to suit your personal needs.
2. You are not responsible for repairs, maintenance, or
property taxes. For example, if the hot water tank needs
replacing, the owner is responsible.
3. If you need the home for only a short time, it may be better
to rent so that you can avoid the inconvenience and expense of
reselling the home.

16. Some non-financial factors to
consider when renting
1. There may be restrictions to your lifestyle if you rent. For
example, you may not be able to have pets in a rented home, or
modify the home to suit your personal needs.
Now, we will look at the
2. You are not responsible for repairs, maintenance, or
costs associated with
property taxes. For example, if the hot water tank needs
buying and renting a home.
replacing, the owner is responsible.
3. If you need the home for only a short time, it may be better
to rent so that you can avoid the inconvenience and expense of
reselling the home.

17. quot;How Much Can I Afford to Pay for a Home?quot;
Banks and other lending institutions have developed a formula that
allows you to calculate the maximum price of a home you can afford.
This formula is known as the Gross Debt Service Ratio, or GDSR.
According to this formula, anyone buying a home should spend no
more than 32% of gross income on household or accommodation
expenses, including mortgage payments, property taxes, heating
and condo/strata fees. The formula may be written as:
Find your maximum mortgage
Looking for a house? amount and monthly payment
http://is.gd/zxd5 http://is.gd/zxay

18. Lucy Brown wants to buy a condo, but does not know how much money
she should spend based on her income. She earns $44 000 per year,
and has saved $9000 for a down payment. The property taxes for the
condo she likes are $1500 per year, and the heating costs average $90
per month. The condo/strata fees are $180 per month. The bank will
give her a 25-year mortgage at an interest rate of 7.5%. What is the
maximum price she can afford for a condo, based on spending no more
than 32% of her gross income on household and accommodation
expenses?
HOMEWORK