Mortgage Fundamentals
Core concepts
A mortgage is a loan secured by real property, documented by a promissory obligation and a charge/mortgage instrument. Candidates must understand principal, interest, amortization, term, payment frequency, and the difference between a mortgage's term (the contract period) and amortization (the full repayment schedule). Fixed vs. variable rates, open vs. closed mortgages, and the implications of prepayment privileges are fundamental.
Key terminology
- Charge/mortgage: the security registered against title.
- Conventional vs. high-ratio: high-ratio means loan-to-value above 80% and generally requires mortgage default insurance.
- Loan-to-value (LTV): loan amount divided by property value.
- Down payment: borrower equity; minimums vary by property type and price.
- Refinance vs. purchase: refinancing replaces an existing mortgage or extracts equity.
Traps
Questions often conflate term and amortization, or assume variable rates are always cheaper. Another trap: confusing an open mortgage (prepayable without penalty) with a closed mortgage (prepayment penalties apply). Also be careful with "high-ratio" - it is defined by LTV, not by borrower credit.
Worked example
A $400,000 home with a $320,000 mortgage has LTV of 80% ($320,000 ÷ $400,000). At exactly 80%, the loan is at the conventional threshold; above 80% it becomes high-ratio and default insurance is typically required. Rule of thumb: LTV = mortgage ÷ property value; compare against 80% to determine insurance need.