Chapter 14 - Mortgage Loan Repayment And Refinancing Options

Question 1

In a Reverse Annuity Mortgage, the periodic payments are made by the _______ to the ________.

Payments are made by the LENDER to the BORROWER.

Question 2

In graduated payment mortgages, payments are decreased during the loan term.

False

Payments are increased during loan term. It is based on the premise the borrower’s income will rise and will pay more and eventually catch-up to the constant method payments.

Question 3

If a variable rate mortgage is “open”, it means that it can be paid off anytime without an interest penalty.

True

Question 4

When a lender offers a low upfront rate, typically as a marketing incentive, and then raises the rate to market levels after a short period of time, the rate is commonly referred as a:

Teaser rate

Question 5

A variable mortgage rate is typically linked to the __________ rate, which will vary with changes in the overnight lending rate set by the Bank of __________.

Linked to the Prime Rate

Bank of Canada.

Question 6

Prepayment Penalty formula - 3 months Interest Formula

1 Take Contract Interest Rate Conversion for J12 monthly payment.

2. Divide by 12 to calculate monthly rate and convert to % by pressing % key
3. Take OSB and multiply by the monthly % rate.

Question 7

Prepayment Penalty formula - 3 months Interest Formula. (Method when PMT frequency is already Monthly.

1. Find OSB61. The period after 5 years or 60 months

2 multiply the interest by 3. Equals the penalty.

Question 8

Interest Rate Differential. (IRD) what does mean?

The IRD calculation is an attempt by the lender to recover loss of interest as a result of prepayment

The IRD penalty calculations is based on the difference the contract rate and the current comparable rate (for remaining term) multiplied bye OSB and term remaining.

IRD Penalty OSB X Time remaining in the term.

Question 9

What is Interest Rate Differential Formula

Step 1. Calculate payment based on contract rate.

Step 2. Find the difference in interest rate from Contract rate and current comparable interest rate. Divide it by 12 and press %. Contract Rate 6.5. Market Rate 3.5. Difference of 3.0. Divide 3.0 by 12 to get monthly %. Hit % button and you get .0025.

Step 3. Calculate OSB at period of term. If prepayment is a 2 years in a 5 years term calculate OSB24.

Step 4. Multiply OSB24 with monthly interest percentage found in step 2.

Step 5. Multiply the results in step 4 by remaining months in the term. In this case OSB24 x 36 months.

Question 10

What is Interest Rate Adjustment on funds advanced?

This is the date between when funds are advanced from the lender to the beginning of the first payment.

The objective is to calculate the amount of interest owing from the borrower to the lender on these funds that were advanced early.

Question 11

What is Interest Rate Adjustment on funds advanced FORMULA?

1. Calculate number of days between funds advanced date and amount of loan. This is N.
2. P/yr = 365
3. PV. Amount of Funds Advanced
4. FV. The Amount of the Loan

5 Press PMT will give daily interest amount and multiply this by number of days in N or step 1 in this formula

Question 12

Balloon Payments.

Mortgage that allows extra payments

Step 1. Calculate OSB end of Term stated in the loan. Ex. 10 year term. OSB120 (10x12)

Assume Borrower made $10,000 balloon PMT end of year 3 and 7

Step 2
You are finding FV of each balloon PMT.

N=84 (7 years to term)
PV= 10,000
Pmt=0
Press FV

Now calculate the balloon pmt at 7th year

N=36. (3 Years to term)
PV= -10,000

Step 3
OSB120 less FV@ 3 years and FV @ 7 years.

Question 13

How do you Calculate Final Pmt?

Step 1. Calculate Payment as per info given. Round as per noted in question.

Step 2. Press N and you get the total number of payments to fully amortized. It will be a whole number plus some fraction

Step 3. Multiply the fraction against the monthly payments and this amount is your final payment.

Question 14

What is Reverse Annuity Mortgage (RAM) and how it is calculated. (CHIP ADS ON TV)

Remember the total amount of payment is NEGATIVE value in FV.

Usually older people take out a loan against the Equity in their home. Bank will set a % of Market Value it is willing to lend the homeowner will receive a monthly payment based on mortgage rates.

ie, 30% of market value of 100,000. J1 = 5%, Term 10 years. Payments monthly.

PV  = 0
FV = -30,000 (NEGATIVE)
N = 120 10x12
I/yr. 5%
P/yr =12

Question 15

Stress Test formula for Mortgage

Step 1. If asked calculate the Lending Value formula. LTV = Lending Value x LTV Ratio

Step 2 calculate PIG-T formula to find maximum monthly payment. Add 2% to contract rate and use this to find PV.

The lower of 1 or 2 will be amount of loan.

Question 16

what is Variable Rate Mortgage formula when rate changes.

Ex in one year rate increases by 1%
20 year mortgage or 240 PMTS

Year 1
Find PMT and OSB12

YEAR 2

1. NPEPN with new increase Rate
2. Enter OSB 12 as new PV
3. Enter new N. 240 minus 12

Answer 16

Ex in one year rate increases by 1%
20 year mortgage or 240 PMTS

Year 1
Find PMT and OSB12

YEAR 2

1. NPEPN with new increase Rate
2. Enter OSB 12 as new PV
3. Enter new N. 240 minus 12

Question 17

Graduated Payment Mortgage (GPM) what is it?

1. Total indebtedness of Borrower continues to grow until they become large enough to all interest and more towards principal.
2. GPM are typically lower than Blended Payments
3. GPMs represents significant capital risk to borrowers unless extremely conservatively low LTVs are used.

Question 18

What is considered Safety Margin?

It is the Debt Service Ratio. If safety Margin is 20%, then the Debt Service Ratio is 80%. Maximum payments would be:
PMT = Income x DSR.

Question 19

Blend and Extend Mortgage. How to Calculate?

Original Mtg. Ann Inc. 100k; Current OSB is 125,000; Pmts: 1,500. 10 more years left. GDS 30%. Max Ann PMT 27,600.
Curr Int Rt 4.5%, compounded monthly based on 20 year Amortization.

Step 1. Find PV based on $800 available for additional funds. 1500 for initial loan. Save into memory or write down

Step2. Just enter 2300 into PMT and enter PV.

Question 20

Insured or Uninsured mortgages have to qualify under stress test. Higher of BOC rate and contract rate plus 2%. This applies on mortgages from Federally regulated such as banks, insurance, trust companies. Not credit unions.

Stress test rate is also known as benchmark interest rate from Bank of Canada.

If you have to decide on a question do it right away. BOC rate. Or contract rate plus 2. Whichever is higher.

Question 21

Reverse Annuity Mortgages
— allows a means by which the equity rich
— mortgagor May postpone selling his house
— FV is negative. (Maximum value the lender is giving.
— PMT IS positive because money is paid to home owner.

Question 22

Teaser Rate Mortgage
— where a lender offers LOW up front mortgage rate and then raises the mortgage rate to market rates within 6 months to two years.

Question 23

“STICKY” Mortgages
Changes have tended to lag behind changes in bond yields in both upward and downward movements
— they have wide use of ADVANCE COMMITMENTS for a rate of interest BEFORE a loan is advanced.
— the long term nature of the loan contract
— a weak long secondary mortgage market

Question 24

Blend and Extend Mortgage
— takes advantages of the continued low rate borrowing on the current first mortgage funds as well as additional financing at a rate lower than the second mortgage, while avoiding prepayment penalties

Question 25

Graduated Mortgage
— payment will increase with years
— increasing indebtedness in the initial years of loan

Question 26

Sinking Fund Assisted Mortgage (SFAM)
— related to graduated payment mortgage
— method to reduce initial payments to improve affordability
— borrower gets two portions of the mortgage
1) 75% mortgage- payments to be made (smaller)
2) 25% kept in a Savings Fund to be used to draw down for rest of the payment

Thinking is that incomes will increase in later years and borrower will be in a better position to cover the full mortgage once the fund is depleted

Question 27

Interest Accruing Mortgage
— no payments of interest or principal are made during life of loan
— the RISKIEST mortgage to the lender.

Question 28

Open Mortgages
— generally have short terms, higher rates Allows prepayment anytime
—

Question 29

Closed Mortgage
— cannot repay outstanding balance during the term
— The Interest Act (federal) allows borrowers to prepay all outstanding debt (with additional 3 months interest penalties in lieu of notice) at anytime after 5 years from the initiation of the mortgage

Question 30

Default— a borrower is not making any mortgage payments

Question 31

A Bonus— the portion of Face Value of a mortgage loan which exceeds the funds actually received by the borrower

Question 32

Partially Amortized Mortgage — are almost universally used for long term mortgage financing in Canada

Question 33

Market Value of the Mortgage
— an estimate of the amount that might be received if the existing mortgage was sold in an arms length transaction under current conditions

Question 34

Book Value of a mortgage

— equals the amount of principal outstanding at a particular point in time. The OSB.

Question 35

Prepayment Penalty if 3 months only.
If question says “ PENALTY IS WITH 12th month.

You need to find interest for OSB 13 then multiply by 3

Alternatively, you can do OSB12, then find periodic percent for nominal interest rate. I. E divide by 12 then hit % button. Multiply OSB 12 x this monthly periodic % and x 3.

Question 36

Borrower seeking NEW Additional Funds. This is not blend mortgage. Calculate straight new mortgage using current mortgage rates.

Find based on GDSR the new maximum monthly rate

Question 37

Prepayment IRD

Interest rate Conversion is required for the difference between contract rate and current rate. Ex. Contract J2 = 6. Current J2 =3.0 monthly payments

Have to do NPEPN for the 3% IRD difference. THEN MULTIPLY THE OSB12.

Question 38

Annual Percentage Rate (APR)
— mortgage lenders and brokers must satisfy the requirements of BPCPA by disclosing to the borrower the APR.
— the APR is the contractual interest rate plus any non-interest finance charges, and is calculated with a specific formula
— S disclosure statement must be given TWO DAYS PRIOR to borrower incurring obligation under a credit agreement
— The BPCPA does not prescribe the use of a specific form.

Question 39

APR FORMULA

APR = 100 X C
———-
T X P

C = Total Cost of Credit
T = Term in Years
P = Average O/S Principal

Question 40

Final Payment

1. Find PMT
2. Press N. round up and Re-enter this in N.
3. Press FV. Deduct this amount from Regular Payment Total and this is the amount left for Final PMT

Question 41

Interest Adjustment
— the period is from when funds are advanced to the beginning of the first payment

So April 11 funds advanced and May 1 is the beginning of the first Payment period.
April has 30 days. (30-11)+ 1 = 20 days adjustment.

Question 42

Variable Rate Mortgage
Ex Rate goes down @ 24 months.

Step 1 Find PMT as per contract
step 2 Calculate OSB24. 2#NFV
Step 3 Enter New N ( I.e. if 25 yrs before, Change to 23 23#N,
Change PV to what OSB24 and FV to 0. 
Do NPEPN ON new interest rate. 
Press PMT TO SEE NEW PMT.

Question 43

Balloon Payments
- any partial prepayment of Principal by lump sums or higher monthly payments, which help decrease the length of the amortization period.