Debt Management Basics

Question 1

Amortization Period

Answer 1

Number of years it will take to repay a mortgage loan in full

• Commonly 15-25 years

Note: The longer (shorter) the amortization period, the lower (higher) the mortgage payment, but the total interest paid over the life of the mortgage will be higher (lower)

Question 2

Conventional mortgage

Answer 2

A mortgage loan that does not exceed 80% LTV

Question 3

High ratio mortgage

Answer 3

A mortgage which the borrower has a down payment between 5% - 20%. These mortgage require default insurance

Question 4

Equity

Answer 4

Difference between the price for which the property can be sold and the total debt registered against it.

Question 5

Down payment

Answer 5

Money put forward by the purchaser

Question 6

LTV ratio

Answer 6

The ratio of the loan to the appraised value or purchase price of the property.

Lower LTV is better

Question 7

Mortgagee

Answer 7

Lender

Question 8

Mortgagor

Answer 8

Borrower

Question 9

Term

Answer 9

The length of time in which the mortgage agreement covers

Question 10

Closed mortgage

Answer 10

• Remains unchanged for the term agreed to
• Penalty will apply if loan is paid out, refinance or renegotiate before the end of the term.

Benefits:
1) Lower rates
2) Small annual prepayment of up to 10%-15% of original mortgage amount

Question 11

Open mortgage

Answer 11

May be repaid, in part or in full, at any time during the term, without penalty

Benefits:
1) Flexibility until ready to lock into a closed term
2) Allows you to pay off any or all the mortgage without penalty

Question 12

Convertible mortgage

Answer 12

• Offers same security as a closed mortgage, but can be converted to a longer, closed mortgage at any time without penalty.
• Associated with fixed mortgages

Benefits:
1) Provides security and flexibility allowing to convert into a longer closed term mortgage without penalty, if interest rates are expected to rise
2) Allows to make annual prepayment of up 1tp 10% of original mortgage amount

Question 13

Fixed rate

Answer 13

Interest rate does not change during the entire mortgage term

Benefits:
1) Can take advantage of same low interest rate for the entire term and same payment set up front.
2) Security knowing exactly how much payments are and how much of the mortgage will be paid off at the end of the

Question 14

Variable rate

Answer 14

Interest rate will fluctuate in accordance with the prevailing market prime rate during mortgage term

Benefits:
1) Variable rates are lower than fixed rates
2) If rates go down, a larger portion of the payment will go towards the principal, allowing the mortgage to be paid off faster
3) Regular payment stays the same, even if rates chnage

Question 15

Capacity to repay a loan (GDSR and TDSR)

Answer 15

GDSR= (mortgage payments + property taxes + heating costs+ 50% of condo fees) / (Gross family income)

Ideal GDSR should not exceed 32%-35%

TDSR= (mortgage payments + property taxes + heating costs+ 50% of condo fees+ other debt payments) / (Gross family income)

Ideal TDSR should not exceed 40%-42%

Question 16

Buying vs. leasing an asset

Answer 16

• Leasing an asset would result in lower monthly payments compared to borrowing (consider down payment amount, residual value and monthly payment)