Week 2 Mortgage Concepts

Question 1

Borrower

Answer 1

is the homebuyer or the person borrowing money

Question 2

Lender

Answer 2

is the banks that lend money

Question 3

Down Payment

Answer 3

Upfront payments of house price

Question 4

Home Purchase price =

Answer 4

Down payment + mortgage amount

Question 5

Minimum Down Payments Required

Answer 5

<= 500,000 =5%p
500,001 – 1,499,999 = 5% of first 500,000 + 10% of
(p-500,000), or
>=1,500,000 = 20%p

Question 6

Principal

Answer 6

Initial amount borrowed from lender

Question 7

Amortization Period

Answer 7

the Period in which it takes to retire then entire loan of the mortgage (usually 25 years or 300 months)

Question 8

Term

Answer 8

Usually 6months-5 years, borrowers are free to switch bank or change deal after term is payed for/ done

Question 9

Fixed Rate Mortgage (FRM)

Answer 9

interest rate does not change for a specific term (six months- 5years)

Question 10

Variable rate Mortgage (VRM)

Answer 10

The interest rate has the possibility of being floating during the term (depending on the bank of Canada and their bench mark rate)

Question 11

Simple Interest =

Answer 11

I= Pin the simple interest is calcualte based on the original principle only

Question 12

I =

Answer 12

simple interest to pay ($ amount)

Question 13

P =

Answer 13

Principal Amount (loan amount)

Question 14

i =

Answer 14

annual interest rate

Question 15

n =

Answer 15

time period

Question 16

Compund interest = interest earns interest

Answer 16

is calculated based of interest from the original principal + all interests earned from past periods

Question 17

Compound interest example:

Answer 17

Interests for the first six months: 50,0000.12(6/12)=3,000
Interests for the second six months: (50,000+3,000)0.12(6/12)=3,180
Total interests for one year: 6,180

Question 18

Compound Interest Formula =

Answer 18

Fvn= P(1+i)^n
Fvn= Future value of loan after n periods

Question 19

What does higher frequency compounding interest tell you

Answer 19

since compounding interest earns interest on interest the more frequent compounding the higher the interest loan amount is for the borrower

Question 20

Fixed-rate mortgages must…

Answer 20

must be compounded semi-annually

Question 21

Variable rate mortgages:

Answer 21

have no regualtions, but most lenders choose compounded monthly except for scotia bank that choose semi annually

Question 22

Effective interest Rate=

Answer 22

i%= [(1+ jm/m)^k/m -1]*100

Question 23

i% =

Answer 23

effective interest rate

Question 24

m=

Answer 24

compounding frequency (how many times interest is compounded per year) - decided by lender

Question 25

Jm=

Answer 25

nominal interest rate

Question 26

k =

Answer 26

payment frequency (number of mortgage payments per year) - decided by the borrower

Question 27

when should an effective interest rate be used

Answer 27

to compare which loan is cheaper

Question 28

How to calculate mortgage payments?

Answer 28

1. Calculate effetive. interest rate 2. calculate PMT after solving effective interest rate

Question 29

How to calculate Outstanding balance

Answer 29

1.Calcualte effective interest rate if not already done 2. Calculate PMT 3. Find out if payments are made in order annuity or order annuity 4. Calcualte FV with given values and effective interest rate