Chapter 3 - Mortgages Flashcards
When may a second mortgage be granted?
If there is an existing first mortgage and enough equity in the property to borrow more against it.
Why do second mortgages generally carry higher interest rates?
To compensate the lender for the higher risk since a second mortgage is only paid after the first if a property is sold or the mortgage is in default.
List the different types of mortgage issuers (7).
- Chartered banks
- Trust companies
- Credit unions/caisses populaires
- Life insurance companies
- Pension fund mortgages
- Canadian Mortgage Investment Companies
- CMHC
When must a mortgage be insured?
If the loan-to-value ratio is more than 80%.
How do trust companies differ from banks?
Have the power to conduct fiduciary business as executors, trustees, and administrators of wills and estates.
What is the secondary mortgage market?
Refers to the buying and selling of existing mortgages or blocks of mortgages held by lenders.
What is a conventional mortgage? What is a high-ratio mortgage?
Conventional mortgage is a mortgage for no more than 80% of a home’s purchase price or appraised value (whichever is less). A high-ratio mortgage allows clients to borrow up to 95% of a home’s purchase price up to $500K, but the mortgage must be insured.
How much does an individual have to have down for a mortgage of varying amounts?
5% up to $500K, then 10% from $500K to $1M, then 20% for amounts over $1M.
What is the amount of mortgage insurance for high-ratio mortgages?
Between 2.8% and 4%
What is the mortgage stress test?
High-ratio mortgages must be qualified using the BoC posted 5-year mortgage rate.
Conventional mortgages must be stress tested either using the BoC 5-year rate or the financial institution’s rate plus 2%, whichever is higher.
Is the mortgage stress test applicable to renewals?
Not unless the borrower is changing financial institutions. However, borrowers may be subject to unfavourable rates with their current lender if they are unable to qualify with the new rules.
How does an open mortgage differ from a closed mortgage?
An open mortgage often has a term from 6-12 months and allows for prepayment of the mortgage without penalty, often with higher interest rates. A closed mortgage does not allow for prepayment beyond prescribed limits without penalty.
What is a split-term mortgage?
Lender allows the mortgage terms to be split into 3-5 parts to minimize the borrower’s interest rate risk at renewal.
What does it mean when interest is calculated on a declining principal basis? (How most residential mortgages are calculated)
Principal payments are deducted when they are made and before interest is calculated.
What is the maximum allowable penalty for a personal mortgage prepaid after 5 years?
Maximum penalty equivalent to 3 months’ interest.
