BC Real Estate Trading Services Course Mortgage Financing 2 — Questions and Answers
Question 1: What is a 'second mortgage' and what are the risks for borrowers in BC?
- A mortgage on a second property
- A mortgage that ranks behind the first mortgage in priority, typically carrying a higher interest rate and being the first to lose in a foreclosure (Correct answer)
- A renewal of the original mortgage
- A mortgage shared between two borrowers
Correct answer: A mortgage that ranks behind the first mortgage in priority, typically carrying a higher interest rate and being the first to lose in a foreclosure
A second mortgage is a loan secured against a property that already has a first mortgage. It ranks behind the first mortgage in priority, meaning in a foreclosure, the first mortgage is paid first. Due to higher risk, second mortgages carry higher interest rates. Borrowers risk losing their home if they default on either mortgage.
Question 2: What is the BC 'Home Buyer Rescission Period' and how does it affect mortgage financing?
- A 30-day period to shop for the best mortgage rate
- A mandatory 3-business-day cooling-off period for residential property purchases, during which the buyer can rescind the contract by paying a 0.25% rescission fee (Correct answer)
- A period during which the bank can cancel the mortgage approval
- A waiting period before the first mortgage payment is due
Correct answer: A mandatory 3-business-day cooling-off period for residential property purchases, during which the buyer can rescind the contract by paying a 0.25% rescission fee
Since January 2023, BC's Home Buyer Rescission Period provides buyers with 3 business days to rescind a residential purchase contract for any reason, subject to a rescission fee of 0.25% of the purchase price. This gives buyers time to arrange financing, conduct inspections, or reconsider without losing their full deposit.
Question 3: What is the role of CMHC (Canada Mortgage and Housing Corporation) in the Canadian mortgage market?
- CMHC directly lends mortgages to homebuyers
- CMHC provides mortgage default insurance, sets housing policy, conducts housing research, and supports affordable housing development across Canada (Correct answer)
- CMHC only manages social housing projects
- CMHC sets interest rates for all Canadian mortgages
Correct answer: CMHC provides mortgage default insurance, sets housing policy, conducts housing research, and supports affordable housing development across Canada
CMHC is a federal Crown corporation that serves multiple roles: providing mortgage default insurance (the largest provider in Canada), conducting housing market research and analysis, setting housing policy, supporting affordable housing development, and administering various government housing programs. It does not lend directly to homebuyers.
Question 4: What is a 'collateral charge' mortgage versus a 'standard charge' mortgage in Canada?
- A collateral charge is for commercial properties only
- A collateral charge registers the mortgage for an amount higher than the actual loan (up to the property value), allowing additional borrowing without re-registration, while a standard charge registers only the actual loan amount (Correct answer)
- A standard charge has a higher interest rate
- There is no difference — they are the same thing
Correct answer: A collateral charge registers the mortgage for an amount higher than the actual loan (up to the property value), allowing additional borrowing without re-registration, while a standard charge registers only the actual loan amount
A collateral charge registers the mortgage for more than the actual loan amount (often up to 125% of the property value), allowing the borrower to access additional funds later without paying for new registration. A standard charge registers only the actual loan amount. Collateral charges make it harder to switch lenders at renewal since they cannot be simply transferred — they must be discharged and re-registered.
Question 5: What are the tax implications of the First Home Savings Account (FHSA) for BC homebuyers?
- Contributions are not tax-deductible
- Contributions are tax-deductible, growth is tax-free, and qualifying withdrawals for a first home purchase are tax-free — combining benefits of an RRSP and TFSA (Correct answer)
- Only the interest earned is tax-free
- It is only available to BC residents
Correct answer: Contributions are tax-deductible, growth is tax-free, and qualifying withdrawals for a first home purchase are tax-free — combining benefits of an RRSP and TFSA
The FHSA, available since April 2023, allows first-time homebuyers to save up to $8,000 per year (lifetime maximum $40,000) with tax-deductible contributions, tax-free investment growth, and tax-free withdrawals for a qualifying first home purchase. It uniquely combines the tax benefits of both an RRSP (deductible contributions) and TFSA (tax-free withdrawals).
Question 6: What is 'portability' in a Canadian mortgage and why is it important for BC homebuyers?
- The ability to take your mortgage laptop to different properties for virtual viewings
- The ability to transfer your existing mortgage terms and rate to a new property when you sell and buy, avoiding prepayment penalties (Correct answer)
- The ability to make extra payments on your mortgage
- The ability to change your mortgage from fixed to variable rate
Correct answer: The ability to transfer your existing mortgage terms and rate to a new property when you sell and buy, avoiding prepayment penalties
Mortgage portability allows a borrower to transfer their existing mortgage (including the current rate and terms) to a new property when they sell one home and buy another. This is valuable when the existing rate is lower than current market rates, as it avoids prepayment penalties and the need to qualify at a higher rate. Not all mortgages are portable, so this should be considered when choosing a mortgage product.
BC Real Estate Trading Services Course Mortgage Financing 2
What is a 'second mortgage' and what are the risks for borrowers in BC?