Chapter 3 Flashcards
This mortgage option allows the borrower to repay the mortgage, in whole or in part, at any time without penalty or notice:
Select one:
a. Closed
b. Fully Open
c. Partially Open
d. Paused
Correct Answer: Fully Open
Rationale: The Fully Open option allows the borrower to repay the mortgage, in whole or in part, at any time without penalty or notice. This option is particularly beneficial to those borrowers who know that they may be coming into a cash windfall, such as from an inheritance or property sale.
Relevant section(s) of the textbook: 3.2 Mortgage Options
The correct answer is: Fully Open
This is a type of interest accruing mortgage that is typically provided to homeowners over the age of 55:
Select one:
a. The Partially Amortized, Blended Constant Payment Mortgage – Variable Rate
b. The Reverse Mortgage
c. The Straight-Line Principal Reduction Mortgage
d. The Interest Only Mortgage
Correct Answer: The Reverse Mortgage
Rationale: The Reverse Mortgage is a type of interest accruing mortgage that is typically provided to seniors. The major provider of reverse mortgages in Ontario today is Home Equity Bank. It provides the CHIP (once called the Canadian Home Income Plan) Reverse Mortgage. The bank provides homeowners who are 55 years of age or older up to 55% of the property value in a lump sum of cash, less any current debt secured by the property.
Relevant section(s) of the textbook: 3.1 Types of Mortgage Repayment Plans
The correct answer is: The Reverse Mortgage
The interest rate differential is the difference between:
Select one:
a. a borrower’s new mortgage rate and the lender’s new rate for a similar term.
b. a borrower’s current contracted mortgage rate and the lender’s current available rate for a similar term.
c. a borrower’s current contracted mortgage rate and the lender’s current available rate for the original term
d. a borrower’s current contracted mortgage rate and the lender’s current available rate for a similar term plus any discounts
Correct Answer: The interest rate differential is the difference between a borrower’s current contracted mortgage rate and the lender’s current available rate for a similar term.
Rationale: The interest rate differential is the difference between a borrower’s current contracted mortgage rate and the lender’s current available rate for a similar term. This difference is then multiplied by the outstanding balance and the amount of time remaining in the term to determine the exact dollar amount of the penalty. This penalty will normally be applicable when the borrower’s current mortgage rate is higher than the lender’s current rate for new mortgages. In prepaying the lender, the lender will now have to lend out that money at its current lower rate. The difference between what it would have earned from the higher rate mortgage being prepaid, and the amount it will earn from lending on a new, lower rate mortgage, is the amount of the penalty.
Relevant section(s) of the textbook: 3.2 Mortgage Features and Options
The correct answer is: a borrower’s current contracted mortgage rate and the lender’s current available rate for a similar term.
Which of the following is the calculation for the three months’ interest penalty?
Select one:
a. Outstanding balance x current rate / 4
b. Outstanding balance x new rate for a similar term x 3
c. Outstanding balance x current rate x 3
d. Original balance x current rate / 4
Correct Answer: Outstanding balance x current rate / 4
Rationale: We will divide the interest by 4 since there are 4 quarters in a year (3 months in a quarter).
Relevant section(s) of the textbook: 3.2 Mortgage Features and Options
The correct answer is: Outstanding balance x current rate / 4
In this type of mortgage, at the end of the term, the entire principal amount is repayable, including all of the interest:
Select one:
a. The Interest Accruing Mortgage
b. The Reverse Mortgage
c. The Interest Only Mortgage
d. The Partially Amortized, Blended Constant Payment Mortgage – Variable Rate
Correct Answer: The Interest Accruing Mortgage
Rationale: The Interest Accruing Mortgages are loans that have no repayment of principal or interest during their term. At the end of the term, the entire principal amount is repayable, including all of the accrued interest.
Relevant section(s) of the textbook: 3.1 Types of Mortgage Repayment Plans
The correct answer is: The Interest Accruing Mortgage
This is the most common repayment plan in Canada today:
Select one:
a. The Partially Amortized, Blended Variable Payment Mortgage – Variable Rate
b. The Partially Amortized, Blended Constant Payment Mortgage – Variable Rate
c. Interest Accruing Mortgage
d. The Partially Amortized, Blended Constant Payment Mortgage – Fixed Rate
Your answer is correct.
Correct Answer: The Partially Amortized, Blended Constant Payment Mortgage – Fixed Rate
Rationale: The Partially Amortized, Blended Constant Payment Mortgage – Fixed Rate is the most common repayment plan in Canada today.
Relevant section(s) of the textbook: 3.1 Types of Mortgage Repayment Plans
The correct answer is: The Partially Amortized, Blended Constant Payment Mortgage – Fixed Rate
This type of mortgage tends to offer the borrower the greatest savings possible since the rate of interest charged tends to be the lowest among mortgage products offered in the market today:
Select one:
a. The Interest Only Mortgage
b. The Partially Amortized, Blended Variable Payment Mortgage – Variable Rate
c. The Partially Amortized, Blended Constant Payment Mortgage – Variable Rate
d. The Partially Amortized, Blended Constant Payment Mortgage – Fixed Rate
Correct Answer: The Partially Amortized, Blended
Variable Payment Mortgage – Variable Rate
Rationale: The Partially Amortized, Blended Variable Payment Mortgage – Variable Rate tends to offer the borrower the greatest savings possible since the rate of interest charged tends to be the lowest among mortgage products offered in the market today. This type of variable rate mortgage is identical to the Variable Rate, Fixed Payment mortgage except that the payment will change each time that the lender’s prime rate, which is used to determine the variable rate, changes.
Relevant section(s) of the textbook: 3.1 Types of Mortgage Repayment Plans
The correct answer is: The Partially Amortized, Blended Variable Payment Mortgage – Variable Rate
For this type of Mortgage, the borrower takes out a lump sum of money and only repays the interest due each payment period:
Select one:
a. Interest Accruing Mortgage
b. The Partially Amortized, Blended Constant Payment Mortgage – Variable Rate
c. The Graduated Payment Mortgage
d. The Interest Only Mortgage
Correct Answer: The Interest Only Mortgage
Rationale: The borrower takes out a lump sum of money and only repays the interest due each payment period. This means that, throughout the life of the mortgage, the borrower will always owe the same amount of principal.
Relevant section(s) of the textbook: 3.1 Types of Mortgage Repayment Plans
The correct answer is: The Interest Only Mortgage
By extending an amortization the borrower will:
Select one:
a. have a reduced payment, but pay more in interest
b. have a reduced payment, and pay less in interest
c. have an increased payment, and pay less in interest
d. have an increased payment, but pay more in interest
Correct Answer: have a reduced payment, but pay more in interest
Rationale: This option allows the mortgage to be amortized for a period longer than 25 years. For example, in today’s market a borrower might qualify for an extended amortization of 30 years. Increasing the amortization has the effect of lowering the mortgage payment or allowing the borrower to borrow an increased amount of funds. However, having to make additional payments increases the amount of interest paid over time.
Relevant section(s) of the textbook: 3.2 Mortgage Features and Options
The correct answer is: have a reduced payment, but pay more in interest
An accelerated mortgage payment must be:
Select one:
a. bi-weekly
b. weekly
c. monthly
d. any frequency
Correct Answer: any frequency
Rationale: An accelerated mortgage payment option is simply an option that provides for an increased periodic mortgage payment.
Relevant section(s) of the textbook: 3.2 Mortgage Features and Options
The correct answer is: any frequency
