BC Real Estate Trading Services Course Mortgage Finance Fundamentals Questions and Answers — Questions and Answers
Question 1: A couple in Burnaby, BC, has a combined gross monthly income of $10,000. Their estimated monthly mortgage payment (P+I+T) is $3,200, and their monthly heating cost is $150. They also have a monthly car loan payment of $550 and a student loan payment of $200. What is their Total Debt Service (TDS) ratio?
- 33.5%
- 41.0% (Correct answer)
- 38.5%
- 46.5%
Correct answer: 41.0%
The Total Debt Service (TDS) ratio is calculated by taking all housing costs (Principal, Interest, Taxes, Heat) plus all other monthly debt obligations, dividing by the gross monthly income, and multiplying by 100. The calculation is: (($3,200 PITH + $150 Heat) + ($550 Car Loan + $200 Student Loan)) / $10,000 = ($3,350 + $750) / $10,000 = $4,100 / $10,000 = 0.41 or 41.0%.
Question 2: In Canada, under which circumstance is a lender required to ensure a mortgage is covered by mortgage loan insurance from an organization like CMHC or Sagen?
- When the property is a condominium.
- When the amortization period is longer than 20 years.
- When the borrower's down payment is less than 20% of the purchase price. (Correct answer)
- When the purchase price of the home exceeds $1,000,000.
Correct answer: When the borrower's down payment is less than 20% of the purchase price.
Mortgage loan insurance (or mortgage default insurance) is mandatory in Canada for all high-ratio mortgages, which are defined as mortgages where the borrower has made a down payment of less than 20% of the property's purchase price. This insurance protects the lender in case of borrower default. Mortgages on properties over a certain threshold (currently over $1 million, though this can change) are not eligible for this insurance.
Question 3: A homeowner has a 5-year fixed-rate closed mortgage with a balance of $400,000 at an interest rate of 5.0%. With two years remaining, they wish to break the mortgage to take advantage of new, lower rates. The lender's current rate for a 2-year fixed term is 3.5%. What prepayment penalty will the lender most likely charge?
- A flat administrative fee only.
- The Interest Rate Differential (IRD) only.
- Exactly three months' interest.
- The greater of three months' interest or the Interest Rate Differential (IRD). (Correct answer)
Correct answer: The greater of three months' interest or the Interest Rate Differential (IRD).
For fixed-rate closed mortgages in Canada, the prepayment penalty is typically the greater of two calculations: three months' interest or the Interest Rate Differential (IRD). The IRD compensates the lender for the loss of interest income for the remainder of the term when rates have fallen. Since the current rate (3.5%) is lower than the borrower's rate (5.0%), the IRD is likely to be a significant amount, and almost certainly more than three months' interest, so the lender will charge the higher of the two.
Question 4: What is the primary purpose of the mandatory mortgage stress test applied to borrowers at all federally regulated financial institutions in Canada?
- To ensure the borrower can afford their mortgage payments if interest rates increase in the future. (Correct answer)
- To confirm the property's appraised value is accurate.
- To calculate the amount of the property transfer tax owed.
- To determine the premium for mortgage loan insurance.
Correct answer: To ensure the borrower can afford their mortgage payments if interest rates increase in the future.
The federal mortgage stress test requires borrowers to qualify at a higher interest rate than their actual contract rate. This qualifying rate is the higher of either 5.25% or the contract rate plus 2%. Its main purpose is to build a safety buffer into the lending process, ensuring that borrowers will still be able to manage their mortgage payments if interest rates rise during their term or upon renewal.
Question 5: Which of the following statements most accurately distinguishes between a mortgage 'term' and an 'amortization period'?
- The term is the total time required to pay off the mortgage, while the amortization is the time before the first payment is due.
- The amortization period applies only to high-ratio mortgages, while the term applies to conventional mortgages.
- The amortization period is the total length of time it will take to repay the entire mortgage loan, while the term is the shorter duration of the current mortgage contract. (Correct answer)
- The term and amortization period are identical for all open mortgages.
Correct answer: The amortization period is the total length of time it will take to repay the entire mortgage loan, while the term is the shorter duration of the current mortgage contract.
The amortization period is the total lifespan of the mortgage loan, representing the time it would take to pay it off completely (e.g., 25 years). The term is the much shorter period for which the specific contract with the lender—including the interest rate and conditions—is in effect (e.g., 3, 5, or 10 years). At the end of the term, the borrower must renew the mortgage for another term until the loan is fully paid off over the amortization period.
Question 6: A buyer in Nanaimo, BC, knows they will be receiving a large inheritance in about 10 months and wants to use it to pay off their mortgage in full at that time. To avoid a substantial prepayment penalty, which type of mortgage should they seek?
- A 5-year closed variable-rate mortgage.
- A conventional mortgage with a 25-year amortization.
- An open mortgage. (Correct answer)
- A closed fixed-rate mortgage with maximum prepayment privileges.
Correct answer: An open mortgage.
An open mortgage is specifically designed to allow the borrower to pay back any amount of the loan, including paying it off in full, at any time without incurring a prepayment penalty. While closed mortgages may offer some prepayment privileges (e.g., 15% per year), they do not allow for full repayment without a significant penalty, which is typically three months' interest or the IRD. An open mortgage is the ideal product for someone anticipating a large lump sum to pay off the loan early.
BC Real Estate Trading Services Course Mortgage Finance Fundamentals Questions and Answers
A couple in Burnaby, BC, has a combined gross monthly income of $10,000.
Their estimated monthly mortgage payment (P+I+T) is $3,200, and their monthly heating cost is $150.
They also have a monthly car loan payment of $550 and a student loan payment of $200.
What is their Total Debt Service (TDS) ratio?