BUSINESS (Loans,Mortgages,LOC)

Question 1

Goldilocks scenario for Central bankers

Answer 1

-keeping economy ‘not too hot’ (inflationary) or ‘not too cold’ (recessionary)
*markets right now are teetering on a recession, which will have implications for you student loans, savings and future employment

Question 2

Fiscal stimulus

Answer 2

-BoC is government owned crown corporation, but operates largely independently from the federal government (ultimately accountable to Parliament)
-BoC does not set spending of taxing priorities

Question 3

Monetary policy

Answer 3

-involves controlling interest rates and influencing the supply of money

Question 4

Fiscal policy

Answer 4

-what the government does when it changes tax rates and levels of government to influence the overall demand in the economy

Question 5

Credit cards

Answer 5

-essentially a form of a loan
-using someone else’ money to buy something today

Question 6

Secured loans

Answer 6

-can back your debt with some sort of collateral or something that has value (property, investments, etc.)
Ex. HELOC

Question 7

HELOC

Answer 7

-home equity line of credit
-a line of credit (LOC) is a revolving loan
-pledge your house as collateral, if can’t pay=bank could force you to sell your house

Question 8

LOC

Answer 8

-revolving loan
-given a loan limit and you can make withdrawal and deposits on a continuous basis
-can’t exceed the predetermine limit

Question 9

Unsecured loans

Answer 9

-opposite of secured
-interest rate is higher because the bank assumes more risk

Question 10

Annual percentage rate (APR)

Answer 10

-‘effective rate’
-interest rate and all other fee
-must be converted to annual rate
-by law credit card companies and loan issuers most show APT

Question 11

Mortgages

Answer 11

-type of loan secured with real estate or personal property
-minimum payment you need for down payment depends on the purchase price of the home
>if less than 20%, must purchase mortgage loan insurance (ex. Canada mortgage and housing corporation CMHC)

Question 12

Second mortgage

Answer 12

-second mortgage on same property
-HELOC is considered a type of second mortgage
>revolving line of credit, no end date, keep making payments based on monthly balance

Question 13

Closed mortgage

Answer 13

-cannot be prepaid, renegotiated or refinance before maturity except according to its terms
-least expensive mortgages tend to be closed mortgages

Question 14

Open mortgage

Answer 14

-can be prepaid at any time, without requiring the payment of additional fees

Question 15

Fixed-rate mortgage

Answer 15

-rate of interest is fixed for a specific period of time

Question 16

Variable rate mortgage

Answer 16

-interest rate is not fixed
-rate changes when benchmark (prime rate) changes
-often referred to as an adjustable rate mortgage (ARM): slight difference
*VRM has a fixed payment while ARM has a payment that floats with interest rate

Question 17

Amortization period

Answer 17

-time over which all regular payments would pay off the mortgage
-usually 25 years for a new mortgage

Question 18

Posted vs. best rates

Answer 18

-posted: what banks advertise publicly
-banks often have the capacity to offer lower rates
-bank ranks are always higher than mortgage broker

Question 19

Do you qualify for a mortgage?

Answer 19

Stress test: banks calculate your ability to pay using whatever is greater 5.35% or current rate+2%
-add 2% as money is ‘cheap’ today, but what if mortgage rates go up
-can you handle a $500 increase on your mortgage payments?

Question 20

How much mortgage can you afford?

Answer 20

-monthly housing costs (should be less than 32% of gross household monthly income)
-total monthly debt load (should be less that 40% of gross monthly income)

Question 21

CMHC (Canadian Mortgage and Housing Corporation)

Answer 21

-need mortgage loan insurance if paying less than 20% down payment
-helps stabilize the housing market (during economic slumps when down payments are harder to save, it ensures ability of mortgage funding)

Question 22

Canada’s national debt:

Answer 22

-pay it by selling bonds
-taxes

Question 23

2022 term and interest rates?

Answer 23

-longer the term=higher the rate

Question 24

This years rates compared to a year ago?

Answer 24

*prime has raised a lot (4%)
-shorter the term=higher the rate (anticipate the rates will come down)

Question 25

What does your house really cost you?

Answer 25

-look at totally interest you will pay over the amortization period
-increasing interest by 2% now, will cost you around $200,000 more over the 25 years

Question 26

Time till half the principal is paid off:

Answer 26

-3% mortgage, by year 15
-12% mortgage, by year 20
*equity in the house increases much slower with higher interest rates
*in the beginning, most of the mortgage goes to paying interest (hard to get a second mortgage at the beginning)

Question 27

Proper use of credit cards:

Answer 27

-if buy something in early June, don’t have to pay it until late July
>21 day grace period (from the old days when you had to send bills and payments in the mail)
-if do a cash advance=no grace period, paying interest right away

Question 28

Retroactive interest:

Answer 28

-if don’t pay balance in full, must pay interest on each new purchase on the state retroactively