Mortgage Products and Financing Mechanics
The product landscape
Candidates must distinguish open versus closed mortgages, fixed versus variable rates, and the mechanics of each. A closed mortgage limits prepayment and carries a penalty (often the greater of three months' interest or an interest-rate differential); an open mortgage permits full prepayment without penalty at a higher rate. Variable-rate mortgages tie payments or the interest portion to the prime rate; some are adjustable-payment, some fixed-payment. Also know HELOCs, second mortgages, reverse mortgages, bridge financing, and insured versus insurable loans under federal rules.
Underwriting fundamentals
Be fluent in gross debt service (GDS) and total debt service (TDS) ratios, loan-to-value (LTV) limits, amortization versus term, and the qualifying rate used for uninsured versus insured borrowers. Understand default insurance (CMHC, Sagen, Canada Guaranty) and why high-ratio loans require it. Know how a lender calculates the penalty on early payout and how portability and blend-and-extend work.
Traps
Questions love the interest-rate-differential penalty: candidates forget it applies only when current rates are lower than the contract rate. Another trap is confusing amortization with term, or assuming a variable rate is always cheaper. Watch for scenarios where the client's down payment source (gift, borrowed, sale proceeds) affects insurability.
Worked example
A borrower owes $300,000 at 5.0% with 30 months left; current comparable rate is 4.0%. The IRD is roughly the present value of the rate gap over the remaining term - approximately $300,000 × 1.0% × 2.5 years ≈ $7,500 - compared with three months' interest of about $3,750. The lender charges the greater: about $7,500.