Mortgage Financing and Financial Calculations
Core Concepts
Candidates must understand mortgage financing, including the types of mortgages (conventional, high-ratio, open, closed, fixed, variable), amortization, and the mortgage qualification process (stress test, GDS/TDS ratios). You should be able to calculate mortgage payments, loan-to-value ratios, and closing costs. Also, know the role of mortgage brokers and the rules under the Interest Act and the Bank Act. Understand the implications of the mortgage stress test and the requirements for mortgage default insurance.
Traps in Questions
A common trap is the difference between amortization period and term. Amortization is the total time to pay off the mortgage; term is the length of the current mortgage agreement. Another trap is the calculation of the Gross Debt Service (GDS) ratio, which includes principal, interest, taxes, and heating costs (and 50% of condo fees), but not other debts. Total Debt Service (TDS) includes all debt payments. Also, watch for questions about the down payment requirements for high-ratio mortgages.
Worked Example / Rule of Thumb
Rule: To calculate GDS, add monthly mortgage payment (principal + interest), property taxes, heating costs, and 50% of condo fees, then divide by gross monthly income. For example, if those costs total $2,000 and gross monthly income is $8,000, GDS is 25%. Lenders typically require GDS ≤ 32% and TDS ≤ 40% (subject to stress test).
Additional Concepts
Understand the mortgage stress test: borrowers must qualify at the greater of the contract rate plus 2% or the Bank of Canada's five-year benchmark rate. Also, know the closing costs: land transfer tax (in Nova Scotia, it's the Municipal Land Transfer Tax in Halifax only), legal fees, title insurance, and adjustments.