Mortgage Products and Lending: Matching Terms to Borrower Circumstances
Product knowledge as a suitability tool
Lending questions test whether you can match a borrower's circumstances to a product and explain the trade-offs. You should be comfortable with the main axes: open versus closed terms, fixed versus variable rates, term versus amortization, high-ratio versus conventional lending, and residential versus alternative or private lending.
Concepts you must understand
- Term and amortization: the term is the contract length; the amortization is the schedule to pay off the balance. A longer amortization lowers payments but raises total interest.
- Fixed vs. variable: fixed gives payment certainty; variable exposes the borrower to rate movement and may carry conversion or penalty differences.
- Open vs. closed: open mortgages allow prepayment without penalty but cost more; closed mortgages restrict prepayment.
- Prepayment privileges: annual lump-sum percentages and payment increase options materially affect a borrower's plan.
- Penalties: an early payout can trigger an interest-rate differential penalty on fixed terms; borrowers frequently underestimate this.
- High-ratio lending: when the loan exceeds the standard loan-to-value threshold, default insurance is required and the premium is typically added to the balance.
- Qualifying stress test: borrowers must generally qualify at a higher rate than the contract rate, which reduces purchasing power.
Traps that appear in questions
- Choosing the lowest rate only. The cheapest rate with restrictive privileges may be unsuitable.
- Ignoring the penalty. A borrower planning to sell in two years should not take a long fixed term without understanding the penalty.
- Mixing up term and amortization. Questions often swap these deliberately.
- Forgetting insurance on high-ratio files. The premium increases the effective loan amount.
Worked example
A borrower expects to relocate in about eighteen months and wants maximum flexibility. A short open or convertible term, or a product with generous prepayment privileges, fits better than a five-year closed fixed term, even if the latter advertises a lower rate. Rule of thumb: choose the product whose exit cost the borrower can tolerate.