Chapter 3: Mortgage Repayment Plans & Options Flashcards
What mortgage option allows a borrower to pay off his or her mortgage during the term without penalty?
A fully open mortgage option
Discuss the difference between accelerating a mortgage and using the increased payment option to pay the mortgage off more quickly.
The difference between these two options revolves around how the payment is increased.
In an accelerated mortgage the payment is calculated by dividing 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.
Discuss the difference between an Open Mortgage and a Closed Mortgage
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.
Why might a consumer be confused as to the differences between an Open and Closed Mortgage?
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.
Under what circumstances would a Prepayment penalty be charged?
If the mortgage contract allows full prepayment of the mortgage with either a 3-month interest penalty or the interest rate differential penalty.
Describe a scenario under which a 3-month interest penalty would be charged.
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.
Describe a scenario under which an interest differential penalty would be charged.
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.
What is a bundled mortgage? Name and describe the Lenders that currently offer bundled mortgages in Ontario. This will require you to complete an outside investigation
A bundled mortgage is a mortgage that combines a line of credit and a standard mortgage. Scotiabank has its STEP mortgage and Manulife also offers a bundled mortgage.
What is the most common type of Mortgage Repayment Plan in Ontario today?
The partially amortized, blended constant payment mortgage with a fixed rate is the most common type of mortgage repayment plan in Ontario.
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.
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.
