Lending Flashcards
How much can a collateral mortgage be for
125%of closing value
- backed by promissory note
- not registered on provincial titles but under provinces Personal Property Securities Act
Are collateral loans transferable
No, only conventional are
How to calculate 3 months interest
Outstanding mortgage x current interest Rate x 3 / 12
How to calculate IRD
Outstanding mortgage x differential rate x time remaining
Are conventional and collateral loans transferable
Conventional yes you can transfer to another institution, collateral no
Penalty for breaking variable and fixed mortgages
Variable - three months interest
Fixed - higher of three months interest and IRD
Three month interest calculation
Outstanding mortgage x existing interest rate x 3 / 12
IRD Calculation
Outstanding mortgage x differential rate x time remaining
How are rates set for fixed rate loans / mortgages
Based on overnight lending rate
How are rates set for variable loan products
Fluctuate with prime rate and changes according to market conditions
Typical time frame of open mortgage
6 months to 5 years
Typical timeframe of closed mortgage
6 months to10 years
What is approval based on for variable rate mortgages
Clients ability to qualify for 5 year posted fixed rate by BOC
How are interest rates set for revolving LOC
Prime rate plus basis points depending on risk
How are rates set for unsecured LOC
Usually prime plus 3 - 7%
Minimum payment for unsecured LOC
3% on outstanding balance at end of 30 day period
The value of GIC and bonds for secured LOC
100%
Value of equity for secured LOC
50-75%
Max limit of HELOC
80% of property appraisal
- LOC can not exceed 65% - imposed by lenders to protect property drop in value
How are rates determined for secured LOCs
Prime lending rate plus 2% - several hundred in legal costs
What is the grace period on a credit card
Starts first day of billing cycle and ends 21 - 25 days later
How is interest charged on credit cards
Calculated on daily balance from transaction date
- cash advances payable from date of access and may have additional fees
What happens if you don’t pay credit cards
- can cancel with no notice
- balance due immediately
- debit offset with funds on deposit in other accounts
Nominal interest rate
Aka annualized percentage
- rate of interest, multiplied by# of periods per year
I.e. annual interest rate of 12% is 1%interest per month compounded
Effective annual percentage rate
Rate of interest the client pays, when fees, admin costs, and compounding are included
**Bank Act - this must be stated if it differs from the annual interest rate along with an explanation
How do look at compounded interest on calculator
Compute payment
AMRT 1 ENTER
⬇️ length of term in months
⬇️ (gives balance at end of term. I.e. $0)
⬇️ (gives portion of payment that goes to principal)
⬇️ gives portion of payment that goes to interest)
Requirements to be able to deduct annual interest costs
- must be an expectation to earn income from dividends and interest ( not capital gains)
- not deductible if used for RRSP
- entire investment must remain intact
- if a portion is redeemed for personal or RSP, then proportional amount of interest is not tax deductible
Calculation for before tax rate of return
= after tax rate of return (loan rate) / (1 - marginal tax rate)
If borrowing to invest, factors to consider
- should only borrow half eligible for
- investment time horizon of at least 10 years
Smith manoeuvre steps
1 - set up mortgage with mortgage/HELOC
2 - as mortgage gets paid, LOC increases allowing client to borrow
3 - client invests borrowed funds in portfolio to earn interest
4 - client can deduct interest on borrowed money and therefore get tax savings
5 - client uses tax savings and income earned on portfolio to pay down mortgage
6 - repeating until mortgage is fully paid, client left with portfolio and tax deductible interest loan
2 main ways to lower costs on loan or mortgage
- increase frequency of payment
- shorten amortization
Calculate biweekly figures
Monthly payment x 12 / 26
How to calculate accelerated biweekly payment
Monthly payment / 2 - this payment is made 26 times
How to calculate weekly payment
Regular monthly payment x 12, this is divided by 52
How to calculate accelerated weekly payment
Monthly payment/ 4, 52 payments are made
How amortization affects interest amount
Shorter amortization reduces total interest paid on debt
Longer amortization increases total interest paid on debt
mortgage preapproval guarantee limit
- usual time is 60 - 120 days
- completion build (new construction) up to 2 years by builder
Portable mortgage facts
- issued by CMHC are usually portable
- subject to appraisal of new property
- if more $ needed for new - blend and extend
What is a convertible mortgage
Usually after 1st year, you can convert from variable to fixed
What are cash back mortgages
Provide mortgagors with cash amount (1 - 7%) of mortgage amount at closing
- based on mortgage term, larger term has larger cash back
- higher interest rate
Most common interest capitalization program for mortgage
Skip a payment, waive a months mortgage (I.e. 4 weekly) once every 12 months- interest owing is added to principal
What contribution to RRSP cannot be used for HBP
Made less than 90 days prior
Mortgage insurance premiums
Under 20% down, 2.4 - 4% premium that can be paid or added to mortgage, provincial sales tax cannot be added
- premium based on LTV ratio
Other mortgage fees
- appraisal fees
- land transfer tax
- closing costs- legal, real estate, moving, surveyGST, home inspection
3 - 5%
How is land transfer tax calculated
First $55k. 0.5%
$55k to $250k. 1.0%
$250k to $400k. 1.5%
$400k +. 2.0%
4 property conditions to qualify for lending
Property type - I.e. vacation homes can require insurance
Location- I.e. near railroad, isolated rural
Construction- I.e. clapboard not acceptable
Property condition- I.e. older homes may need shorter amortization
How much is allowed for a reverse mortgage
10 - 55% of appraisal
Varies with age, location and type of home
** lawyer is required
What is a completion mortgage
Builder does not expect payment before completion of home
- funds are advanced in stages over year
What is due during the construction period of a completion mortgage
Typically only interest
- once completed mortgage becomes conventional
How do construction mortgages protect against over budget costs
10% hold back
- funds are distributed through lawyer
Extra costs for construction mortgage 4
Appraisal
Legal fees
Interest charges
Loss of interest income if used for construction
How are advances and interest treated during construction mortgage
Interest on advances are deducted from future advances, unless billed separately
After final advance, accrued interest collected
Particulars about RRSP instalment loans 2
Usually over 1 year
First payment can be deferred to return 3 months
Requirement for deductibility of student loan interest. 3
- must be from Canada student loans, not foreign bank or personal LOC
- cannot be combine with other
- can carry forward 5 years
You can apply for assistance every 6 months
Debit forgiveness for doc and nurses going to remote areas
Term of bridge loan
Typically less than 60 days and rates fluctuate
Requirements for bridge loan
- firm sale
- equity in sold home pays out loan in full including real estate and legal costs
Costs associated with bridge loan 3
- interest usually prime + percentage, variable
- set up fee, several hundred
- legal fee
Details of what has to be done for bridge loan
- borrowing gives copy of all firm sales
- worksheet to show enough equity
- letter from borrower for bank to register a mortgage against existing in case it’s sale falls through
- LOD to lawyer showing bridge is repaid
Are employed loans for cars or shares a taxable benefit
Yes the amount under the government prescribed rate
Calculated each quarter for vehicle or share purchase
Amount over prescribed x loan amount x days in quarter / 365
Rate for employer loan for relocation
Prime rate at time, does not change quarterly
Are home relocation loans from employer tax deductible
Yes
Deduct the lower of
- taxable benefit of loan
- interest of $25k at prescribed
- total of all taxable employee loan benefits extended
Process of leasing a vehicle
- dealer sells car to leasing company , who rents it to client
- client uses it over set term
Net capital value NCV in lease
Purchase price that dealer sells car to leasing company
Capital cost reduction in car leases. CCR
Down payment that reduces NCV and monthly lease payments
Residual or buy back value for lease
Estimate value at end of lease, set to determine monthly payments
Differ for open end and closed end lease
Depreciation in leasing
Different between NCV And residual
Money factor in leases
Based on interest rate and monthly depreciation over term
- calculated by dividing interest by factor of 24
How long is a lease term
Said in months, 24 - 60 months
Monthly lease payment
Monthly lease payment includes depreciation, interest charge and sales tax
How to calculate the principle paid down during lease
NCV - CCR - residual
How to calculate monthly depreciation fee for lease vehicle
NCV - CCR - residual / term of lease in months
Calculate monthly finance cost of lease
(NCV - CCR + residual) x monthly interest rate
Calculate monthly lease payment
Monthly depreciation fee + monthly finance charge
Calculate total monthly lease payments (including tax) over the term
Monthly lease payment x tax x lease term
Calculate interest paid over the term of the lease
Total monthly lease payments (including tax) over the term - principal paid down over term - total sales tax on monthly lease paid over term
Calculate average monthly interest cost
Total interest paid / term of lease
Name the 2 main type of leases
Capital and operating
Capital lease
Contract that provides the lease with temporary use of an asset
- same characteristic of owning
- often long term
- in the end lease owns it, but not before
Operating lease
More like a rental
- short term
- no ownership change
- lease payment is considered operating expense
- lease has exclusive rights, but no ownership
- lessor still owns and most risk
- this is most vehicle leases
Tax treatment of capital leases
Assets appear on balance sheet and depreciates
Tax treatment of operating lease
Asset is off balance sheet and payment is expenses
Best to lease a car if…
Only plan to drive limited number of kilometres for 3 - 4 years
Best to borrow for a car if…
Using longer than 5 years and lots of kilometres
Who regulates payday loan
Provinces
Ontario recent limit to payday loan charge
$15 for every $100
What is charge for payday loan if someone takes out $500 for 14 days
$575 = $15 x 5
Annual percentage rate = turn $75 into percentage of $500; multiply by 365 then divide by days
Types of business loans. 4
Term
Operating
Commercial mortgages
Letters of credit
What is a business term loan
Fixed credit facility that extends over a long period, usually more than 10 year
- helps with building supplies and increasing a new business
What is a business operating loan
Short term, flexible revolving credit or LOC with preset amount
- help bridge gap between payables and receivables
- business makes monthly income payments
- inventory is security
- can be demanded back anytime
How are operating loans recorded on business financial statements
Liabilities
What is a business commercial mortgage
Long term (20+) loan secured by property
What is a business letter of credit
Mainly for international business, reliability of buyer to pay seller
3 keys purposes of business loans
Supply funds
Ready when needed
Match maturity and payment with cash flow
6 keys components for effective business loan structure
Clients needs Credit facility Repayment schedule Price Collateral Support, conditions
