Introduction to the Canadian Mortgage Industry

Reminder: Key Formulas Simple Interest The principal balance (the amount borrowed) (P) The interest rate ( ) The number of years, or simply time (n) Remember! It is more important to understand the CONCEPTS rather than the actual mathematical formulas. The formulas simply illustrate the concepts using numbers. Compound Interest (Annual) P = The principal balance (the amount borrowed) = The interest rate n = The number of years (total agreement) Compound Interest (multiple compounding periods per year) P = The principal balance (the amount borrowed) = The interest rate n = The number of years (total agreement) m = The number of compounding periods per year Effective Interest Rate = The interest rate m = The number of compounding periods per year Copyright 2012 2

Determining Payments Practice Question Use the CAAMP online payment calculator as a group (or on your own at home) to determine the mortgage payment amounts below. www.caamp.org > Mortgage Industry > Resources > Mortgage Calculators > Prepayment Calculator Mortgage Amount Term Interest Rate Amortizati on Frequency Payment $ 1. $325,000 5 year 5.75% 20 years Weekly - Click on Compute to see the payment amount. - Click on Complete Amortization Schedule to see exactly how each payment is allocated to principal and interest. (View Full Schedule) Mortgage Amount Term Interest Rate Amortizati on Frequency Payment $ 2. $665,000 3 year 3.25% 25 year Bi Weekly - Click on Compute to see the payment amount. - Click on Complete Amortization Schedule to see exactly how each payment is allocated to principal and interest. (View Full Schedule) Mortgage Amount Term Interest Rate Amortizati on Frequency Payment $ 3. $295,000 2 year 2.99% 20 year Monthly - Click on Compute to see the payment amount. - Click on Complete Amortization Schedule to see exactly how each payment is allocated to principal and interest. (View Full Schedule) Copyright 2012 3

Converting Payments Practice Questions Frequencies Monthly = 12 Semi Monthly = 24 Bi Weekly = 26 *Accelerated Bi Weekly = 26 Weekly = 52 *Accelerated Weekly = 52 Conversions Monthly to Semi Monthly: Monthly Monthly to Bi Weekly: Monthly Monthly to Accel. Bi Weekly: Monthly Monthly to Weekly: Monthly Monthly to Accel. Weekly: Monthly Use the monthly payments listed below to calculate the different payment frequencies. Monthly Semi Monthly Bi Weekly *Accelerated Bi Weekly Weekly *Accelerated Weekly 1. $1,727.81 2. $4,319.26 3. $3,488.22 4. $4,466.26 5. $1,440.82 Copyright 2012 4

Mortgage Averaging Rates are not the whole picture! In some cases, a second mortgage (even at a high interest rate) may make more financial sense than refinancing. In some cases, penalties can be blended into new rates Step 1 Calculate total financing required Step 2 Interest Rate of Mortgage A Financing a Step 3 Interest Rate of Mortgage B Financing b Step 4 a b Weighted Average Copyright 2012 5

Mortgage Averaging Practice Question Janine currently owns a home that was recently appraised at a value of $499,000. She has an outstanding mortgage of $272,000 with a rate of 3.25% compounded semi annually not in advance. Janine has decided she needs to tap into the equity of her home and clean up some of her finances. She wants to pay off all her credit cards and lines of credit, repair the roof and make an investment into her RRSP. She has determined that she will need a total of $183,000 to make this happen. Janine is faced with 2 options: Option 1: Option 2: Refinance her existing mortgage. Get a new mortgage for the total amount ($272,000 + $183,000 = $455,000) at today s current rates. - Janine s lender will refinance the mortgage and offer her a new rate of 3.99% compounded semi annually, not in advance. Keep her current mortgage as is, and get a second mortgage for just the additional funds needed. - Janine s mortgage broker can get her a second mortgage for a rate of 4.49% compounded semi annually, not in advance. Without considering penalties and/or fees, and focusing just on the interest amounts, which option will effectively provide Janine a lower overall interest rate? Step 1 Calculate total financing required Step 2 Step 3 Step 4 * is it likely that a traditional lender will be able to offer Janine that new mortgage of $455,000? Why? / Why Not? Copyright 2012 6

Module 4 Mini Quiz 1. When no other factors are changed, the more often you compound interest, the expensive the loan is for the borrower. a) Less b) More c) Same d) None of the above 2. According to the federal interest act, blended payment loans can only compound interest: a) Yearly only b) Half yearly only c) Yearly or half yearly, not in advance d) Yearly or half yearly, in advance 3. Laurel wants to buy a property with a first mortgage of $626,000 at 5% compounded semi annually, not in advance, and a second mortgage of $130,000 at 6.5% interest compounded semi annually, not in advance. What is the average mortgage rate for the two mortgages (rounded to one decimal place)? a) 5.0% b) 5.3% c) 5.5% d) 5.7% 4. Gail wants to buy a property with a first mortgage of $395,000 at 7.25% compounded semi annually not in advance, and a second mortgage of $200,000 at 3.95% interest compounded semi annually, not in advance. What is the average mortgage rate for the two mortgages (rounded to one decimal place)? a) 5.9% b) 6.1% c) 6.3% d) 6.5% Copyright 2012 7

5. A $225,000 loan has an interest rate of 4.95% with a term of 3 years. Using simple interest, what is the annual interest amount? a) $11,137.50 b) $22,275.00 c) $33,412.50 d) $191,587.50 6. A $600,000 loan has an interest rate of 7.95% with a term of 3 years. Using simple interest, what is the annual interest amount? a) $42,000 b) $477,000 c) $47,700 d) $420,000 7. A $138,000 loan has an interest rate of 5% compounding annually, with a term of 3 years. What is the interest amount in the first year? a) $20,700.00 b) $7,607.25 c) $7,245.00 d) $6,900.00 8. A $232,000 loan has an interest rate of 5% compounding annually, with a term of 4 years. What is the interest amount in the first year? a) $11,600 b) $1,600 c) $116,000 d) $46,400 Copyright 2012 8

9. Which of the following terms can be defined by saying for the same amount borrowed, over the same period of time, the same amount is owed at the end of that period. a) Interest Rates b) Effective Interest Rates c) Stated Interest Rates d) Equivalent Interest Rates 10. Interest rates with this compounding frequency are known as effective rates, as, in effect, they express how much a borrower will pay in interest over one year. a) Monthly compounding b) Semi Annual compounding c) Annual compounding d) Quarterly compounding 11. Which of the following formulas would you use to determine the total amount owing on a loan of $100,000 at 3% compounding semi annually for a term of 3 years? a) P x i x N b) P x (1 + i) n c) P x (1 + i/m) mn d) [1 + (i/m)] m 1 12. Steven has a mortgage commitment with a rate of 6.5% compounded semiannually, not in advance. Oleg has a mortgage commitment with a rate of 6.5% compounded annually, not in advance. They are both for $250,000 loans for 1 year terms. Based on the information provided, choose the correct statement below. a) Both loans contravene the federal interest act. b) Steven s loan at 6.5% interest compounded semi annually will cost more in interest over 1 year. c) Oleg s loan at 6% compounded annually will cost more in interest over 1 year. d) Both loans will cost the same amount in interest over 1 year. Copyright 2012 9

13. John has a mortgage commitment with a rate of 7% compounded semi annually, not in advance. George has a mortgage commitment with a rate of 6.75% compounded annually, not in advance. They are both for $150,000 loans for 1 year terms. Based on the information provided, choose the correct statement below. a) Both loans contravene the federal interest act. b) John s loan at 7% interest compounded semi annually will cost more in interest over 1 year. c) George s loan at 6.75% compounded annually will cost more in interest over 1 year. d) Both loans will cost the same amount in interest over 1 year. 14. Jamie would like to purchase a $750,000 property. She has $150,000 saved up for a down payment. The current posted rate for her preferred term is 6.125% compounded semi annually. Jaime would like to make monthly payments. In order to determine Jamie s monthly mortgage payment amount, what additional important variable do you need to complete the calculation? a) Interest Rate b) Payment Frequency c) Time (N) d) Present Value 15. Sherrie would like to purchase a $450,000 property. She has $67,500 saved up for a down payment. She is looking to amortize for 30 years, and the current posted rate for her preferred term of 5 years is 6.125%. Sherrie would like to make monthly payments. In order to determine Sherrie s monthly mortgage payment amount, what additional important variable do you need to complete the calculation? a) Interest Rate b) Payment Frequency c) Compounding Frequency d) Present Value 16. If Sherrie s monthly P&I payment is $2,305.17, what is her accelerated weekly payment? a) $576.29 b) $531.96 c) $1,152.59 d) $2,305.17 Copyright 2012 10

17. Raj would like to purchase a $350,000 property and put 5% down for a down payment. He is looking to amortize for 35 years, and the current posted rate for his preferred term of 10 years is 7.375% compounded semi annually. In order to determine Raj s mortgage payment amount, what additional important variable do you need to complete the calculation? a) Interest Rate b) Payment Frequency c) Compounding Frequency d) Present Value 18. If Raj s monthly P&I payment is $2,246.21, what is Raj s (regular) bi weekly payment? a) $561.55 b) $748.74 c) $1,036.71 d) $1,123.11 19. Which of the following is TRUE? a) Accelerated bi weekly payments are made 48 times per year. b) Accelerated bi weekly payments are made 26 times per year. c) Accelerated bi weekly payments are made 24 times per year. d) None of the above. 20. TRUE or FALSE? It is more important to understand the CONCEPTS rather than the specific mathematical formulas. Copyright 2012 11