Chapter 5 Flashcards
Overdraft protection typically carries a high interest rate (up to___% + overdraft fee) and charges a fee per use.
21%
There are two common types of credit cards available: those issued by financial institutions and those issued by retailers. Which typically has a higher interest rate?
The CC issued by a retailer.
What does revolving credit mean?
It means that the borrower can re-borrow. Such as a credit card or line of credit.
This type of credit has strict, structured repayment requirements. It is a type of revolving credit. However, the balance owing must be repaid in full within a specified time, typically 30 days.
Charge Accounts
an open, revolving loan that allows clients to re-borrow funds (up to an available limit) without having to re-apply for the loan. Can either be secured or unsecured.
A personal line of credit
The personal line of credit interest rate is based on two factors:
Bank’s prime rate plus a number of basis points to account for borrowers risk
A _________ line of credit is guaranteed by an underlying asset of unchanging value that can be liquidated to reimburse the outstanding debt if the borrower defaults on repayment.
secured
A ________ loan is a type of instalment loan with a fixed term. Traditionally, a lien is taken over the asset purchased with the loan proceeds. (meaning that the lender could take control of the asset to recoup their money)
personal loan
A short-term loan granted with plenty of collateral. The interest rate is variable, and full repayment may be demanded by the lender at any time.
Demand Loan
A demand loan used for a down payment on a new property while the buyers wait for the sale of their existing property.
Bridge Financing
A __________mortgage is a contract between a lender and a borrower, in which the lender extends credit to help the borrower pay for a property.
residential
In a residential mortgage, the lender is called the __________ and the borrower is called the ____________.
The lender is called the Mortgagee
The borrower is the Mortgagor (borrowing makes me Gag)
In a residential mortgage, in return for lending the money, the borrower grants the lender a claim, called a ______, on the property as security for the debt.
lien
A borrowing facility linked to the available equity of an existing property.
home equity line of credit (HELOC)
it is an unsecured credit facility that allows a client to overdraw a chequing account up to a pre-determined limit
Overdraft
Clients’ success in obtaining credit depends on their financial situation and the way they present their situation to the lending institution. The primary method used for this assessment is the
Five Cs of credit approach
What are the Five Cs of credit?
- Character
- Capacity
- Credit
- Collateral
- Capital
an organization that supplies credit information for a fee
Credit Bureau
also known as a beacon score, that is a numerical value based on a statistical analysis of the borrower’s information
Credit score
It provides CMHC and Genworth with a range of specific powers and tools to address the housing
needs of Canadians and related needs, including housing finance, housing insurance, and assisted housing.
The National Housing Act (NHA)
The insurance provider for the National Housing Act (NHA) market
Canada Mortgage and Housing Corporation (CMHC)
Banks are regulated under the _______ act.
Compliance is monitored by the..
Bank Act
Office of the Superintendent of Financial Institutions (OSFI).
The Bank Act restricts mortgage loans to an ___% loan-to-value (LTV) ratio, which means that the loan can consist of no more than ____% of the property’s value
80%
80%
A higher LTV may be permitted if the loan proceeds above 80% are
NHA insured.
These institutions are regulated under the Loan and Trust Corporations Act of each province; however, OSFI is still the regulating body that oversees the financial institutions and ensures that they are compliant.
Trust Companies
CMHC normally provides coverage for borrowers with a down payment of less than ___% of the purchase price of a property.
20%
Mortgage insurance is insurance provided to a _______ to protect against default by the _________
lender (mortgagee)
Borrower (mortgagor)
The ___________ mortgage market is where existing mortgages and blocks of mortgages held by lenders are bought and sold.
secondary
pools of residential mortgages that have been securitized—that is, grouped together and resold to institutional and private investors.
Mortgage-backed securities (MBS)
Unlike most bonds, however, an MBS
carries the risk of
pre-payment.
With a __________ mortgage, the borrower provides a down payment of 20% or more of the property’s value. No mortgage insurance is normally required.
conventional
With a _________ mortgage (or insured mortgage), the borrower normally provides a down payment of less than 20% of the purchased price. This type of mortgage requires the borrower to purchase mortgage insurance to reduce the risk of the debt to the lending institution.
high-ratio
The beneficiary of the insurance policy in a high-ratio mortgage is the __________, rather than the _________.
Lender (mortgagee)
Borrower (mortgagor)
Mortgage amount up to $500,000, the minimum down payment required is ____%
5%
Portion of mortgage between $500,001 to $999,999, the minimum down payment required is ___%
10%
Mortgage amount over $1 million, minimum down payment is _____%
20%
If a property’s purchase price is $650,000. What is the minimum down payment?
$500,000 * 5% = $25,000
$150,000 * 10%= $15,000
Minimum down payment = $40,000
Mortgages over $___________ require a 20% down payment, which excuses them from the required insurance.
$1 million
Rental properties require a ___% down payment regardless of the price of the home.
20%
Financial institutions may use an automated valuation management tool (AVM) to conduct appraisals for loans of up to ____% of the property’s estimated value
95%
The maximum mortgage that a lending institution will allow a borrower to carry is based on two ratios:
Gross Debt Service Ratio (GDSR)
Total Debt Service Ratio (TDSR)
You can get the ____________________ ratio by adding up all of the debt directly associated with the property being purchased and dividing by the gross family income.
Gross Debt Service ratio (GDSR)
Ideally, the Gross Debt Service Ratio should not be above ____%
32%
You can get the ____________________ ratio by adding up all debts and dividing by the gross family income. You must also include the minimum payment (3%) on any open revolving credit facility, such as a line of credit or credit card, even if it has not been used. The calculation is based not on what is owing, but on the debt payments that would be charged if the available credit facility was used to its capacity.
Total Debt Service Ratio (TDSR)
Ideally, the Total Debt Service Ratio should not exceed ____%
40%
This test is used to ensure that borrowers are able to service their loans under interest pressure.
The mortgage stress test
All ____________mortgages must be mortgage stressed tested using the BoC’s posted 5-year rate.
High-ratio mortgages
OSFI requires that all conventional mortgages be stress tested using the higher of two rates:
- The 5-year rate posted by the BoC
- The contract rate of the financial institution plus 2%
The standard repayment term in Canada tends to be _____ years, and the government-authorized amortization period is ____ years
five years
25 years
The ___________ _______ refers to the amount of time the interest rate is locked in.
repayment term
The ____________ period is the time required to pay off the mortgage completely, which is the period on which the monthly mortgage payments are based.
amortization period
The Interest Act, a federal statute, requires that
For mortgages, the interest rate must be stated with semi annual compounding and not in advance
The Canadian Mortgage Housing Corporation (CMHC) insurance premium is a _________ fee that can either be paid in full when the loan is first made or included in the mortgage and amortized over the life of the loan.
one-time
One such option is an interest-only loan with no amortization period, also known as a
straight-line mortgage
An _______ mortgage is one that has no restrictions on prepayment (i.e., early repayment) of the principal.
open
A ______ mortgage is one where prepayment of the entire principal is not allowed during the term of the loan.
closed
Also called home equity conversion mortgages allows homeowners aged 55 and over to receive secured loans in tax-free money without having to sell their house. The income is derived from the equity of the home. Can receive anywhere from 10% to 55% of the home’s current appraised value.
Reverse Mortgage
The main provider of reverse mortgages is the _____________
Canadian Home Income Plan (CHIP)
To qualify for the Home Buyers Plan, you must be a first time home buyer. To be considered first-time home buyers if, in the____ year period, they did not occupy a home that was their principal place of residence.
four-year
The Home Buyers’ Plan is also extended to help Canadians maintain homeownership after the breakdown of a marriage or common-law partnership. To qualify, the client must have been living separate and apart from their spouse because of a breakdown of their marriage, for a period of at least _____ days
90
Considering the HBP is an interest free loan from your RRSP and not taxed as income, you must repay this loan within _____ years in annual instalments.
15
The repayment schedule for the HBP begins in the _______ calendar year following the year of the withdrawal or by the first ____ days of the third year.
Second
60 days
For example, if the withdrawal was made in 2016, the first instalment is due no later than the first 60 days of 2019
When paying back your HBP. The annual minimum payment for the HBP is $____________ for a $35,000 withdrawal
$2333
$2333 x 15 years = $35,000
This is where clients can use their existing RRSP as mortgage funds to buy a home. Clients may arrange with a trust company to advance funds from their RRSP for their own mortgage. In effect, the client becomes both lender and borrower.
Self Directed Mortgage
a securitized investment vehicle in which investors own a portion of a portfolio of commercial real
estate.
REIT
What is Caveat Emptor?
it means buyer beware
The advantage is that mortgages become open at the time of renewal, meaning they can pay off as much as they want without incurring __________
penalties.
Realtor fees are directly taken from the sale proceeds of the house and are payable by the ___________
Seller
When calculating Debt service ratios, what percent of condominium fees do you include?
50%
________ insurance is only available to approved lenders, including major banks, credit unions and life insurance companies.
CMHC (mortgage insurance)
The lump sum payment due at the end of the term of a mortgage is called
the balloon payment
Which one of the 5 C’s refers to a clients ability to repay the loan?
Capacity
Which one of the 5 C’s refers to the client’s honesty, reliability, repayment history, and intention to repay the credit.
Character
Which one of the 5 C’s refers to property that can be used to secure a loan?
Collateral
Which one of the 5 C’s refers to the client’s net worth?
Capital
What is a key characteristic of interest-only loans?
Unchanging principal balance
What does it not in advance mean in the interest act?
It means that interest is calculated on the decline in principle, where principal payments are deducted first and interest is calculated afterwards, based on the remaining balance.
