OREA Mortgage Financing 2 — Questions and Answers
Question 1: A 'high-ratio mortgage' in Canada is defined as a mortgage where:
- The borrower's down payment is less than 20% of the purchase price (Correct answer)
- The interest rate is above the Bank of Canada prime rate
- The mortgage amount exceeds $1 million
- The amortization period exceeds 25 years
Correct answer: The borrower's down payment is less than 20% of the purchase price
A high-ratio mortgage occurs when the down payment is less than 20% of the purchase price, requiring mandatory mortgage default insurance under federal regulations.
Question 2: Which of the following best describes a vendor take-back (VTB) mortgage?
- The seller provides financing directly to the buyer as part of the property transaction (Correct answer)
- The buyer assumes the seller's existing mortgage
- A government agency provides subsidized mortgage financing to the buyer
- The buyer obtains financing from a third-party chartered bank
Correct answer: The seller provides financing directly to the buyer as part of the property transaction
In a vendor take-back mortgage, the seller acts as the lender, providing some or all of the financing to the buyer, which is recorded as a mortgage on the property.
Question 3: The Gross Debt Service (GDS) ratio measures:
- Monthly housing costs as a percentage of gross monthly income (Correct answer)
- Total monthly debt obligations as a percentage of net income
- The loan-to-value ratio of the mortgage
- The spread between the mortgage rate and the prime rate
Correct answer: Monthly housing costs as a percentage of gross monthly income
The GDS ratio measures housing costs—principal, interest, property taxes, and heating—as a percentage of gross monthly income, with most lenders capping it at 32%.
Question 4: What is the standard maximum GDS ratio accepted by most institutional lenders in Canada?
- 32% (Correct answer)
- 40%
- 44%
- 28%
Correct answer: 32%
Most institutional lenders in Canada apply a maximum GDS ratio of 32%, meaning housing costs should not exceed 32% of gross monthly income.
Question 5: In mortgage financing, a 'blended payment' refers to:
- A regular payment that combines both principal repayment and interest (Correct answer)
- A payment structure combining two separate mortgage loans
- A payment amount that changes with fluctuations in the prime rate
- A payment applied solely toward the outstanding interest balance
Correct answer: A regular payment that combines both principal repayment and interest
A blended payment combines principal repayment and interest into one consistent payment amount, which remains constant throughout the term of a fixed-rate mortgage.
Question 6: A second mortgage is best described as:
- An additional mortgage registered on the same property after the first mortgage (Correct answer)
- A mortgage taken on a second property owned by the same borrower
- A mortgage renewed for a second term with the same lender
- A mortgage obtained from a secondary market lender
Correct answer: An additional mortgage registered on the same property after the first mortgage
A second mortgage is an additional mortgage registered on the same property as an existing first mortgage, with a subordinate priority claim against the property if the borrower defaults.
Question 7: What is the maximum loan-to-value (LTV) ratio for a conventional (uninsured) mortgage in Canada?
- 80% (Correct answer)
- 85%
- 90%
- 95%
Correct answer: 80%
A conventional mortgage requires a minimum down payment of 20%, resulting in a maximum loan-to-value ratio of 80% and no requirement for mortgage default insurance.
OREA Mortgage Financing 2
A 'high-ratio mortgage' in Canada is defined as a mortgage where: