Chapter 3: Mortgage Repayment Plans and Options

Question 1

Partially Amortized, Blended constant payment morgage

Fixed Rate

(3)

Answer 1

Fixed rate interest rate does not change.
Advantage: Security
Disadvantage: lack of saving

Question 2

Partially Amortized, Blended constant payment morgage

Variabe Rate

(5)

Answer 2

Variable rate: interest rate fluctuates
Advantage: saving, ability to switch to a fix rate
Disadvantage: interest rate uncertainty, taking a step to prevent negative amortization, increase oustanding balance at end of term

Question 3

How to prevent a negative amortization in a variable rate

(3)

Answer 3

• increase amount of each regular payment
• reduce total amount by paying a lump sum
• convert mortgage to fix

Question 4

Partially Amortized, Blended variable payment morgage

Variable Rate

(3)

Answer 4

Advantage: saving, maintaining amortization
Disadvantage: interest rate uncertianty, payment fluctuation

Question 5

Interest Only Mortgage

(3)

Answer 5

Does not have an amortization since there is no repayment of principal. Take out lump sum of money and only pay interest.

Advantage: increase cash flow, increase purchasing power for investment
Disadvantage: no principal reduction

Question 6

Home Equity line of credit

(2)

Answer 6

Advantage: flexibility
Disadvantae: interest rate uncertainty

Question 7

Interest Accruing mortgage

(3)

Answer 7

No repayment of interest or principal. At the end of the mortgage, the entire principal and interest is repayable

Advantage: cash flow
Disadvantage: increasing debt, reduce equity

Question 8

Reverse mortgage

(3)

Answer 8

interest accuring mortgage typically reserved for 55 years of age

Advantage: cash flow
Disadvantage: reduce equity

Question 9

Vendor Take back for purchaser and vendor

(4)

Answer 9

Purchaser
Advantage: salabiity, capital gain
Disadvantage: additional expenses, loss part of investment

Vendor:
Advantage: little to no down payment to purchase
Disadvantage: borrower money they can’t afford, higher interest

Question 10

Prepayment option

Fully Open

(3)

Answer 10

Repay anytime without penalty
Advantage: flexibility, no penalty
Disadvantage: higher rate

Question 11

Prepayment option

Partially Open Advantage and Disadvantage

(3)

Answer 11

Repay the mortgae in whole with penalty of 3 months.
Advantage: Flexibility
Disadvantage: higher rate, penalties

Question 12

Prepayment option

Closed Advantage and Disadvantage

(2)

Answer 12

Advantage: rate
Disadvantage: lack of flexibility, penalties

Question 13

3 month interest penalties

(2)

Answer 13

charges the borrower three times an average amount of monthly interest.

Outstanding balance x current rate / 4

Question 14

Interest rate differential penalties

(2)

Answer 14

borrower current rate and lender current available rate for similar term

(Outstanding balance x (John current rate - North York current rate)) x number of years left

Question 15

Repayment Option

Periodic payment increase

(3

Answer 15

Payment during the term of the mortgage
Advantage: saving for substaintial amount over time
Disadvantage: decrease in cash flow

Question 16

Repayment Option

Accelerated mortgage payment

(3)

Answer 16

Increase payment requested once the mortgage has been advanced. Only way to pay a mortgage off faster is the increase amount of periodic payments.
Advantage: saving
Disadvantage: descrease in cash flow

Question 17

Repayment Option

Lump Sum

(1)

Answer 17

• apply directly to principal amount

Question 18

Repayment Option

Extended or shorten amortization

(2)

Answer 18

Increasing amortization: lowering mortgage payments or allowing the borrower to borrow an increase amount of funds

Shortening amortization: increase mortgage payment and reducing interest paid

Question 19

Repayment Option

Cash back

(3)

Answer 19

On closing, a percentage of mortgage loan is paid to the borrower by the lender
Advantage: cash on closing
Disadvantage: higher rate, repayment of cash back

Question 20

Formula for required to repay current lender

(1)

Answer 20

(cashback% x original mortgage amount x #months remaining)/ number of months in term

Question 21

Repayment Option

Combined / bundled option

(2)

Answer 21

Advantage: flexibility with line of credit
Disadvantage: registered debt against title

Question 22

Repayment Option

Portability Option

(3)

Answer 22

Allow the borrower to take the mortgage with him or her on their new home
Advantage: rate protection
Disadvantage: limited application

Question 23

Repayment Option

Assumable options

(1)

Answer 23

allow a purchaser to assume to take over current homeowner debt on the property being purchased

Advantage: lower rate
Disadvantage: limited application

Question 24

What mortgage option allows a borrower to pay off their mortgage during the term without penalty?

Answer 24

A fully open mortgage option.

Question 25

Discuss the difference between accelerating a mortgage and using the increase payment option to pay the mortgage more quickly

(3)

Answer 25

The difference between these two options revolves around how the payment is increased.

In an accelerated mortgage the payment is calculated by divided the regular monthly mortgage payment by the required payment frequency and this is typically done prior to closing.

Conversely, the Increased Payment Option allows the Borrower to increase his or her payment, in many cases up to 100% of the original payment amount, during the term of the mortgage. Both options offer the Borrower savings over the life of his or her mortgage.

Question 26

Discuss the difference between an open mortgage and a closed mortgage

Answer 26

An open mortgage can be repaid at any time while a closed mortgage may only be fully repaid at the end of the term or if the homeowner sells the property.

Question 27

Why might a consumer be confused as to the difference between an open and closed mortgage

Answer 27

The terminology used in the mortgage industry regarding these options is not standard. Many lenders refer to an open mortgage with prepayment penalties as a fixed rate mortgage instead of an open mortgage, while others refer to this type of mortgage as a closed mortgage. Consumers and Mortgage agents must be aware of how each Lender describes its prepayment options.

Question 28

Under what circumstances would a prepayment penalty be charged?

Answer 28

If the mortgage contract allows full prepayment of the mortgage with either a 3 month interest penalty or the interest rate differential penalty.

Question 29

Describe a scenario which 3 month interest penalty would be charged

Answer 29

Typically, if the Borrower is prepaying the entire outstanding balance of the mortgage and the current rate charged by the Lender is more than what the Borrower is paying.

Question 30

Describe a scenario under which an interest penalty would be charged

Answer 30

Typically, if the Borrower is prepaying the entire outstanding balance of the mortgage and the current rate charged by the Lender is less than what the Borrower is paying.

Question 31

What is a bundled mortgage?

Answer 31

A bundled mortgage is a mortgage that combines a line of credit and a standard mortgage

Question 32

What is the most common type of mortgage repayment plan in Ontario

Answer 32

The partially amortized, blended constant payment mortgage with a fixed rate is the most common type of mortgage repayment plan in Ontario.

Question 33

A borrower has asked you for options regarding repaying his mortgage more quickly. Explain the options available to him and under what circumstances you would advise him to use these options.

(4)

Answer 33

• Obtain a fully open mortgage. This will allow the Borrower to repay all or part of his or her mortgage at any time without penalty or notice.
• Accelerate the mortgage. This will save considerable amounts over the life of the mortgage, as long as the Borrower can afford the larger payment.
• Increase the payment. If the Borrower’s cash flow increases he or she may decide to increase the size of the mortgage payment, thereby reducing the amount paid in interest over time.
• Make lump sum payments. If the Borrower can save money during the term he or she can apply this amount directly to the principal. This would be beneficial if the Borrower has paid down other higher interest debt, such as credit cards.

Question 34

What is a vendor take back?

Answer 34

A mortgage provided by the vendor to the purchaser of the vendor’s property

Question 35

How do you blend two mortgage rate?

Answer 35

Blended mortgage rate = (current mortgage/total new mortgage x rate) + (new mortgage/total new mortgage x rate)

Question 36

What is the benefit of an assumable mortgage?

Answer 36

Lower Rate, If market interest rates are currently higher than the rate of the existing, assumable mortgage, it may be beneficial for the purchaser to assume the current mortgage.

Question 37

What is the benefit of a portable mortgage?

Answer 37

Rate Protection, If rates are currently higher than the borrower’s contracted interest rate on the mortgage, they can benefit by keeping the lower rate and porting it to the new home

Question 38

What happens to the amount of interest if an amortization is:

Shorten?
Extended?

Answer 38

Shorten: it decrease
Extended: it increases