Types of Mortgages

Question 1

Interest Accruing Loan

Answer 1

• Always a short term loan
• Interest accrues on principal
• Most risky type of loan

Question 2

Interest Only Loan

Answer 2

• Only pay interest on the loan (PV=FV)
• Principal at risk, only receive interest

Question 3

Amortized Loans
Constant Payment Loans
Blended Payment Loans

Answer 3

Constant Payment Loan: Every month you pay the same amount
Blended Payment Loan: Payment includes interest and principal

Question 4

Full Amort and Partially Amort

Answer 4

Full Amort: Term is full part of amortization period
Partially Amort: Term is smaller than amortization period

Question 5

Straight Line Principal Reduction Loan

Answer 5

• Payment declines over time
• Most used by people who expect lower income in future

Question 6

Graduated Payment Loan

Answer 6

• Opposite of straight line
• Payment gradually increase

Question 7

Interest free loans are not given because?

Answer 7

1. Banks need profit
2. Need interest to compensate for risk
3. Interest covers overhead costs

Question 8

Interest is not universal because?

Answer 8

1. Credit rating of borrower
2. Property type used for security
3. Higher the income, lower your rate
4. Higher interest rates as admin work increases

Question 9

Prime Lenders in Canada

Answer 9

Chartered Banks
EG: RBC, CIBC

Question 10

Subprime Lenders

Answer 10

• Credit Unions
• Mortgage Corps.
• Trust Companies

Note: Subprime lenders responsible for 2008 US housing crisis.
- Must buy insurance if you have less than 20% Down Payment

Question 11

Primary Mortgage Market

Answer 11

• Lender and borrower deal directly with each other
• Benefit of selling

Question 12

Secondary Mortgage Market

Answer 12

• Where existing mortgages are sold and bought
• Very weak market
• Mortgage bonds and mortgage backed securities strengthen secondary market

Question 13

Mortgage Default Insurance

Answer 13

1. Lender may apply higher loan value to insured loan
2. Insurance premium paid on insured mortgage can be added to loan amount
   - Mortgage default insurance is to protect the lender

NOTE: Created post WW2.

Question 14

Start a Mortgage as a Business (Investment)

Answer 14

1. Initial high outlay of funds
2. Lots of admin work
3. Money becomes illiquid (Difficult to trade)
4. Each mortgage is a unique investment
5. Long repayment terms