Mortgage Mathematics, Payment Structures, and Amortization
Core Mathematics
Know how to compute loan-to-value, GDS and TDS, and how to convert a nominal annual rate to the effective rate per payment period. In Canada, fixed-rate mortgages are compounded semi-annually, not in advance; variable-rate mortgages are typically compounded monthly. Understand amortization schedules, the split between principal and interest in early versus late payments, and how accelerated bi-weekly payments work - they are not simply half of a monthly payment but a monthly payment divided by two, producing one extra monthly payment per year.
Payment Structures
Understand fixed, variable, adjustable, interest-only, and payment-option structures. Know prepayment privileges, penalties for breaking a closed mortgage (three months' interest on variable, interest rate differential on fixed), and how a blend-and-extend works. Understand that increasing payment frequency or making lump-sum prepayments shortens amortization without changing the rate.
Traps in Exam Questions
Common traps: using simple division by 12 for a semi-annual compounding rate, confusing amortization with term, and assuming accelerated bi-weekly equals standard bi-weekly. Also watch for penalty calculations that compare posted versus discounted rates.
Rule of Thumb
Accelerated bi-weekly = monthly payment ÷ 2, paid 26 times a year; standard bi-weekly = monthly × 12 ÷ 26.
Worked example: Monthly payment $2,000. Standard bi-weekly is $923.08; accelerated bi-weekly is $1,000. The accelerated option adds roughly one extra monthly payment annually and shortens amortization.