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Flashcards in PROP 1023 / CHAPTER 9 Deck (17):
1

A loan with interest charged during the life of the loan which is added to the principal amount and, in turn, earns interest over the remainder of the contract is called an __________.

A loan with interest charged during the life of the loan which is added to the principal amount and, in turn, earns interest over the remainder of the contract is called an accrual loan.

2

With this type of mortgage initial payments are lower, and the later payments higher, than the payments that would exist on a constant payment loan of similar amount and terms.

ANSWER:  GRADUATED PAYMENT MORTGAGE

3

Interest accrual loans are commonly used in _ _ _ _ _ _

Interest accrual loans are commonly used in development finance

4

Under this option, the biweekly payment will be set as one-half of the monthly payment. 

ANSWER:  ACCELERATED BI-WEEKLY PAYMENTS

5

What is a FULLY AMORTIZED MORTGAGE?

A constant payment loan is fully amortized if the payments fully repay the principal owing over its term, which equals the amortization period. 

6

Today, the _ _ _ _ _ _ _ _  loan is the most common form of repayment scheme in Canada.

Today, the partially amortized constant blended payment loan is the most common form of repayment scheme in Canada.

7

TRUE OR FALSE?  The rates on closed VRMs tend to be 1%-3% lower than the equivalent term fixed rate mortgage.

ANSWER: TRUE

8

NOTE ONLY / VARIABLE MORTGAGES

 

A borrower who undertakes a VRM is undertaking a risk by exposing them­selves to potential increases in the underlying rate, thus reducing the stability offered by fixed payment mortgages. Borrowers that are willing to undertake more risk may choose a VRM to take advantage of this lower interest rate spread or with the expectation that rates will drop.

NOTE ONLY / VARIABLE MORTGAGES

 

A borrower who undertakes a VRM is undertaking a risk by exposing them­selves to potential increases in the underlying rate, thus reducing the stability offered by fixed payment mortgages. Borrowers that are willing to undertake more risk may choose a VRM to take advantage of this lower interest rate spread or with the expectation that rates will drop. 

9

What is a participation mortgage?

A participation mortgage is a type of mortgage that allows the lender to share in part of the income or resale proceeds.

The lender participates in the income of the mortgaged property beyond a fixed return, or receives a yield on the loan in addition to the straight interest rate.

10

NOTE ONLY / VARIABLE RATE MORTGAGES

 

The primary advantage to lenders with VRMs is reducing risk by better matching interest rates on their asset and liability portfolios. VRMs reduce the likelihood of lenders being caught in a position where decreases in the spread between the rates attached to assets (mortgages, loans, etc.) and deposit liabil­ities (GICs, term deposits, variable rate deposits, etc.) compromise their profit position. Reducing mismatching risk lessens lenders' interest rate risk and should lead to reduced overall mortgage interest rates over time. The level of borrower uncertainty increases with the use of VRMs while the lender's risk of mismatching decreases.

NOTE ONLY / VARIABLE RATE MORTGAGES

 

The primary advantage to lenders with VRMs is reducing risk by better matching interest rates on their asset and liability portfolios. VRMs reduce the likelihood of lenders being caught in a position where decreases in the spread between the rates attached to assets (mortgages, loans, etc.) and deposit liabil­ities (GICs, term deposits, variable rate deposits, etc.) compromise their profit position. Reducing mismatching risk lessens lenders' interest rate risk and should lead to reduced overall mortgage interest rates over time. The level of borrower uncertainty increases with the use of VRMs while the lender's risk of mismatching decreases.

11

_ _ _ _ _ _ _ _ _ _ have payments that increase over some, or all, of the life of the loan.

Graduated payment mortgages have payments that increase over some, or all, of the life of the loan.

12

With this type of mortgage the borrower is advanced an amount that is less than the full face value of the loan, setting the difference aside in an account that is used to draw down initial payments.

The funds set aside are typically placed in an interest-bearing account, with an amount withdrawn each payment period as a subsidy to reduce the mortgage payments. The withdrawals continue until the account balance is zero.

ANSWER:  SINKING FUND ASSISTED MORTGAGES (SFAMs)

13

What is an advantage of a graduated payment mortgage?

The advantage of the graduated payment loan is that it can be used to help prospective purchasers buy real estate who otherwise might not be able to qualify for a conventional loan. For organizations that want to promote affordable home ownership, this loan type may be an attractive option.

14

What are the risks to the borrower and to the lender of a graduated payment mortgage?

Risk to borrower: low initial payments improve loan qualification, but may not be able to afford in the long term.

 

Risk to lender: initial payments add to debt raising loan-to-value; protected from default losses if property values are increasing, but high risk of loss if property values are dropping.

15

What is a disadvantage of a variable rate mortgage?

One of the biggest risks for a homebuyer with a variable-rate mortgage is payment shock, which happens with interest rate increases.

 

If interest rates increase rapidly, homebuyers may experience sudden and sizable increases in monthly mortgage payments, which they may have difficulty paying. 

16

With this type of re-payment plan initial payments do not even cover the interest portion of the constant payments.

ANSWER:  GRADUATED PAYMENT MORTGAGES

17

To avoid the income risk with interest accrual loans, most lenders require the interest earned be paid periodically rather than permitting it to accumulate as added debt. One form of such a mortgage loan is the ____________, where the borrower contracts to make regular payments of only interest to the lender. 

To avoid the income risk with interest accrual loans, most lenders require the interest earned be paid periodically rather than permitting it to accumulate as added debt. One form of such a mortgage loan is the interest only loan, where the borrower contracts to make regular payments of only interest to the lender.