Mortgage Finance Fundamentals Flashcards
6 cards from real BC Real Estate Trading Services Course practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Mortgage Finance Fundamentals flashcards as text
What is the 'Interest Rate Differential' (IRD) as it applies to mortgage prepayment penalties in Canada?
Answer: The penalty calculated as the difference between the contracted mortgage rate and today's rate for the remaining term, applied to the outstanding balance
The IRD penalty compensates the lender for the interest income they will forgo if a borrower repays a fixed-rate mortgage early — it equals the difference between the original rate and today's equivalent-term rate, multiplied by the outstanding balance and remaining term.
A mortgage with a 'floating rate' that moves with the lender's prime rate is called a:
Answer: Variable rate mortgage (VRM)
A Variable Rate Mortgage (VRM) has an interest rate that fluctuates with the lender's prime rate. In Canada, VRMs often keep the payment constant but change how much goes to principal vs. interest as rates move.
In a BC real estate transaction, which party typically pays the CMHC mortgage insurance premium?
Answer: The buyer (borrower), with the premium typically added to the mortgage principal
CMHC mortgage default insurance premiums are paid by the borrower (buyer). The premium, which ranges from 0.6% to 4.0% of the insured mortgage amount, is typically added to the mortgage principal rather than paid in cash.
A mortgage where the borrower pays only interest with no reduction of principal over the term is called a(n):
Answer: Interest-only mortgage
An interest-only mortgage requires the borrower to pay only the interest portion each period, with no principal reduction. The full original principal remains owing at the end of the interest-only period.
What does 'LTV' stand for in mortgage financing, and why is it important?
Answer: Loan-to-Value ratio — the mortgage amount as a percentage of the property's appraised value, used to assess lending risk
LTV (Loan-to-Value) measures the mortgage amount relative to the property's appraised value. A higher LTV means the lender has more at risk, which is why mortgages above 80% LTV require default insurance in Canada.
Under BC's Mortgage Brokers Act, a person who arranges mortgage financing between lenders and borrowers for compensation must be licensed as a:
Answer: Mortgage broker or submortgage broker under the Mortgage Brokers Act
Arranging mortgages for compensation in BC requires a license under the Mortgage Brokers Act, administered by BC's Financial Services Authority (BCFSA). Real estate licensees are NOT permitted to arrange financing without a separate mortgage broker license.