FINE4050: L4:
Copyright © 2023 M.A. Milevsky
FINE4050:
Mortgages & Housing
Lecture 4, Fall 2023
Prof. Moshe A. Milevsky
Schulich School of Business
York University
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FINE4050: Lecture #4
• HW grades posted by 8am on Tuesday (Oct/3)
• Grading scheme as follows…
• If you (i.) honestly attempted to answer all
questions, and (ii.) presented the information
coherently, and (iii.) explained your assumptions
and work...then you will score 20/20.
• If solutions are missing, or explanations are
garbled or disorganized, points are removed.
• I will focus more on the qualitative than the
quantitative! (for this homework).
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FINE4050: L4:
Copyright © 2023 M.A. Milevsky
FINE4050B: Lecture #4 (Friday)
• Time to start thinking about group projects.
• Get into groups of THREE students (no more, no
less) and stay tuned for CANVAS instructions on
how to ‘register’ your group.
• The deliverable is a presentation of 20 minutes.
• More information on content will follow.
• Decide whether you want to present in person on
(Friday) November 17th, or submit a video which
is due on (Friday) November 24th…
• Think: Financial or Insurance Product or Strategy.
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FINE4050A: Lecture #4 (Monday)
• Time to start thinking about group projects.
• Get into groups of THREE students (no more, no
less) and stay tuned for CANVAS instructions on
how to ‘register’ your group.
• The deliverable is a presentation of 20 minutes.
• More information on content will follow.
• Decide whether you want to present in person on
(Monday) November 20th, or submit a video
which is due on (Monday) November 27th…
• Think: Financial or Insurance Product or Strategy.
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FINE4050: L4:
Copyright © 2023 M.A. Milevsky
FINE4050: Lecture #4
• I hope you reviewed (L3) material on Debt.
• Theme for today: Mortgages & Housing
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Housing Decisions?
Buy vs. Rent
Where to Buy?
Finance Cost
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FINE4050: L4:
Copyright © 2023 M.A. Milevsky
Before Financing, Other Costs…
• Legal Fees. Lawyer. Can’t buy without one.
• Land Transfer Tax: 0.5% to 2.0% of house price.
• Land Title Fee: Depends on Province.
• Municipal Land Transfer Tax (e.g. Toronto)
• Provincial Mortgage Registration Fee.
• Mortgage Insurance (to be explained.)
• Title Insurance (Protection against fraud.)
• Moving Costs (obviously)
• Ongoing: Home Insurance, Property Taxes,
Maintenance, Utilities, etc.
• So, you aren’t buying a stock on Robinhood!
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LEVERAGE (Review)
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FINE4050: L4:
Copyright © 2023 M.A. Milevsky
Debt-to-Equity Ratio: 9 vs 4 to 1
$900
$400
$500
$1000
$100
20% DOWN
$100
10% DOWN
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FINE4050: L4:
Copyright © 2023 M.A. Milevsky
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Can this happen???
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FINE4050: L4:
Copyright © 2023 M.A. Milevsky
August 2023: Up 1.1% year-over-year
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Beware of the data problems with
computing a real estate index!
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Home Financing: Big Picture
• You want to buy a house that costs $X, but
you only have $Y << $X saved-up.
• You do have $Z in human capital, and the
bank is willing to lend you money
(partially) against this value.
• So, think of yourself as a company issuing
debt to finance a project.
• Go back to corporate finance for a few
minutes and think about You Inc.
• There are many (many) ways to finance.
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FINE4050: L4:
Copyright © 2023 M.A. Milevsky
Will the bank lend you the money?
• Is the house worth what you are paying?
• Debt Capacity: What is future net cash-flow?
• What is your credit rating (i.e. how healthy is
your credit report?)
• Is Gross Debt Service Ratio acceptable?
§ Mortgage + Property Taxes/Gross Family Income (<30%)
• Is Total Debt Service Ratio acceptable?
§ + other Debt Payment/Gross Family Income (<40%)
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Mortgage Financing:
What decisions do you have?
1. Amortization period
2. Frequency of payments
3. Term for Renegotiation
4. Open or Closed.
5. Variable or Fixed.
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Can I pay it off early?
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CMHC Insurance: Very Important
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FINE4050: L4:
Copyright © 2023 M.A. Milevsky
Homeowners
w/o Mortgage
Homeowners
with Mortgage
MPDI
Ratio > 20%
Number of Households
3.7 Million
4.9 Million
1.8 million
Household’s Disposable
Income
$57,000
$73,700
$59,000
Spent on Food
13.4%
12.1%
13.4%
Spent on Shelter
14.9%
30.2%
43.6%
Spent Transportation
17.7%
17.6%
18.3%
Spent on Recreation
7.5%
7.4%
7.3%
Disposable Income that is
Saved
14.7%
3.5%
-13.0%
Statistics Canada, Survey of Household Spending 2008
Perspectives on Labour and Income, Summer 2011
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THEY AREN’T SAVING ANYTHING!
(other than the house.)
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FINE4050: L4:
Copyright © 2023 M.A. Milevsky
Final Comments (Friday Class)
• Level One: Make sure you understand the
total cost of home-ownership, in terms of upfront payments & fees, as well ongoing costs.
• Level Two: Verify mortgage mathematics.
• NEXT WEEK (Oct/6): Income Taxes in Canada.
• ZOOM LECTURE at 9am. Link on CANVAS
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Final Comments (Monday Class)
• Level One: Make sure you understand the total
cost of home-ownership, both in terms of upfront payments & fees, as well ongoing costs.
• Level Two: Verify mortgage mathematics.
• NEXT WEEK (Oct/9): Thanksgiving.
• In two weeks, live lecture (Oct/16):
• Basic Income Taxes in Canada
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