Chapter 2: Basic Mortgage Concepts

Question 1

Define Shelter to Income

(1)

Answer 1

Percentage of income that is used to pay shelter or housing cost

Question 2

Define Average Debt to Income Ratio

(1)

Answer 2

Amount of debt compared to income, expressed as a percentage

Question 3

Define downpayment

(1)

Answer 3

amount of money that a purchaser will be providing from his or her proceeds.

5% minimum down payment for insured mortgage remained for property up to $500,000

Question 4

Define Loan

(1)

Answer 4

amount of money advanced to a borrower

Question 5

Define Secured

(1)

Answer 5

Legal document that outlines the loan is registered on title of the property to secure the loan. If the borrower defaults on the loan, the lender has the right to exercise its interest in the security through several methods

Question 6

Define collateral mortgage

(3)

Answer 6

• re-advancing of principal as the borrower pays down their mortgage or if their property value increases (usually a line of credit)

• won’t be able to take out a second mortgage
• High LTV 120%

Question 7

Define discharging a mortgage

(1)

Answer 7

removing the charge from title, cancelling the lender’s security in the property

Require additional fees to be transferred or renewed to another lender.

Question 8

Advantage of collateral mortgage

(1)

Answer 8

Refinancing: the lender does not have to discharge the current charrge (the security) and register a new one

Question 9

Disadvantage of collateral mortgage

(2)

Answer 9

• Additional financing: will not be able to get a second mortgage
• **Switch/Transfer: **at the end of the term a transfer or switch to another lender is more costly than with a standard mortgage since the new lender will need to discharge the current mortgage and register a new one

Question 10

Difference between a pre-approval and pre-qialification

(2)

Answer 10

**Pre-Approval: **borrower is shopping for a property. but has not yet made an offer, they can find out how much they can borrow by obtaining a pre-approval from a lender
- borrower’s income, lendr’s interest rate and amortization
- rate hold for 45- 120 days
- credit check required

**Pre-Qualification: **curious about how much they qualify for
- no credit check required

Question 11

Goverment of Canada Support for Homebuyers

(5)

Answer 11

1. **First Time Home Buyer Incentive **
   - eligible to borrow 5% or 10% of purchase price
   - payback same percentage when they sell or within 25 year window
2. **Home buyer program **
   - use up to $35,000 of their RRSP as downpayment without paying tsx o the withdrawal
   - repaid in 15 years
3. **Home buyer amount **
4. **GST/HST new housing rebate **
5. **Canada Greener Homes **
   - improve the energy efficiency and reduce energy bill
   - receie up to $5,600

Question 12

Define Equity Take out

ETO (1)

Answer 12

borrower increase the size of their mortgsage or take out a second mortgage or another debt against the property, such as line of credit

Question 13

Define bridge financing

(1)

Answer 13

a person is selling their current home and buying a new one

Question 14

How is construction mortgage moving in stages

(5)

Answer 14

Provides cash in stages:
1. First Draw: 15% to pay to land, excavation, and foundation
2. Second Draw: 25% to pay for roof and watertight
3. Third Draw: 25% to pay for installation of plumbing and electrical wire with heating and drywall in place
4. Fourth Draw: 20% for installation of cabinet, bedroom, washroom ,and kitchen
5. Fifth Draw: 15% for interior and exterior in landscaping

Question 15

Formula for cost to buy down rate

(1)

Answer 15

(current rate - new rate) x FV x term

cost the agenet to buydown a percentage

Question 16

Define balloon payment

(1)

Answer 16

amount repayable at the end of the term

Question 17

Define compound interest and what does J represent?

(1)

Answer 17

Rate is charged more than once per a year with the effecting of charging interest on interest. Two interest rate are said to be equivalent if, the same amount borrowed over the same period of time, the same amount is owed at the end of the period.

J: annual interest rate

Question 18

Give an example with $100,000 at J2 = 6%. What is the outstanding + accrued interest?

Answer 18

$100,000 at J2 = 6%
$100,000 x 3% = $3,000
Accrued interest of $100,000 + $3,000 = $103,000
$103,000 x 3% = $3,090
Outstanding balance + accrued interest = $103,000 + $3,090 = $106,090

Question 19

Give an exmaple with borrowed $100,000 and owes $6090, at J1. What is the percentage?

Answer 19

Borrowed $100,000 and owes $6,090 at J1
$100,000 x ?% = $6,090
?% = $6,090 / $100,000
?% = 6.09%

Question 20

Define blended mortgage payments?

(3)

Answer 20

consist of interest and principal

Principal portion: repayment of principle borrowed (increase over time)
Interest portion: paid to compensate lender for the loan (decrease over time)

Question 21

Name and describe six of the main borrower obligation under a mortgage contract

borrower covenant (6)

Answer 21

1. Repay the loan
2. Insure the property: protect lender from losing their security due to fire or other covered risk
3. Maintain the property
4. Not to commit waste
5. Pay Property tax
6. Follow the terms of the standard charge terms

Question 22

Lender Covenant (3)

Answer 22

1. **Discharge of charge: **proof that the amount borrower has been paid in full
2. Assignment of mortgage: borrower right to assign the mortgage to a new lender
3. Provide quiet possession: free from interference on possession date

Question 23

Define High ratio mortgage

(3)

Answer 23

• mortgage that exceeds 80% LTV (80.1% or higher)
• has less than 20% down payment
• obtain mortgage default insurance provided by federal bank

Question 24

Define self insured mortgage

(1)

Answer 24

does not use default insurance, but charges a lender fee and pool this money in a reserve fund to help offset risk associated with lending high ratio mortgage without protection

Question 25

Define conventional mortgage

(2)

Answer 25

• mortgage is 80% LTV
• has more than 20% down payment

Question 26

Difference between mortgagee and mortgagor

(2)

Answer 26

**Mortgagee: **the lender
Mortgagor: the borrower

Question 27

Discuss the difference between a mortgage and a car loan

(2)

Answer 27

Mortgage is a loan secured by real property while car laon is secured by registering s loan against a car

Mortgage: Payment after (not in advance)
Car loan: Payment before (in advance)

Question 28

There are two mortgages registered against the title of Barbara’s property. One was registered on May 20, 2022 and the other was registered on March 17, 2021. Which is the 1st mortgage and which is the 2nd?

Answer 28

Mortgage registered on March 17, 2021

Question 29

Jonathan owns a house valued at $250,000 with a current 1st mortgage that has a balance of $190,000.Jonathan has credit card debts of $12,500 that he wishes to consolidate by increasing his first mortgage. Would Jonathan require a conventional or high ratio mortgage?

Answer 29

($190,000 + $12,500) / $250,000 = 0.81
Therefore it is a high ratio mortgage. Putting less than 20 percent down

Question 30

Every mortgage comes with a set of standard charge terms. Discuss the purpose of this document and its importance in the mortgage transaction.

Answer 30

The Standard Charge Terms is a document that is created by the lender and contains all the terms and conditions regarding borrowing and repaying money when real property is used as collateral. It contains detailed information on the lender’s and borrower’s obligations, referred to as covenants, as well as the remedies available to the lender if the borrower does not meet these obligations

Question 31

What is the difference between a collateral mortgage and standard mortgage?

Answer 31

A charge that is typically registered for an amount and rate higher than what is borrowed, allowing the lender to re-advance or lend additional principal when certain conditions are met without the need to discharge the current mortgage and register a new one.

Question 32

What is the difference between an equity take out and a refinance?

(2)

Answer 32

An equity take-out (ETO) is typically a new mortgage used to access equity in the property. A refinance, while serving the same purpose, is typically the renegotiation of a current mortgage to meet that goal.

Question 33

What is the differnce between a switch and a transfer?

Answer 33

They are the same thing; when a borrower moves their mortgage to another lender on maturity without increasing the amount borrowed.

Question 34

How much is owing at the end of the amortizatino period?

Answer 34

zero dollars

Question 35

Describe a construction loan

Answer 35

This is a loan to build a structure, such as a residential home, high-rise condominium, etc.

Question 36

Why is a borrower required to maintain property insurance?

Answer 36

To ensure that the lender’s security is protected

Question 37

Why must a borrower pay their property tax?

Answer 37

To ensure that the municipality does not register a lien against the property for unpaid taxes, which would take precedence over any other mortgages registered on title