Mortgages, Financing and Financial Calculations
What this domain tests
This domain tests mortgage law and the arithmetic a registrant must do: qualifying ratios, down payment rules, payment and amortization calculations, and the effect of rate changes. Expect calculation questions plus conceptual ones on priority, default, and discharge.
Core rules and concepts
- Mortgage as security. A mortgage charges land as security for a debt. The mortgagor (borrower) retains title; the mortgagee (lender) holds a charge that can be enforced on default.
- Priority generally follows registration order. A construction mortgage or a mortgage with a priority agreement may rank differently; subordinate interests can be postponed by agreement.
- Qualifying ratios. Lenders compute gross debt service (GDS) as housing costs (principal, interest, taxes, heating, and half of condo fees where applicable) divided by gross income, and total debt service (TDS) as housing plus all other debt payments divided by gross income. Typical benchmarks are around 32% GDS and 40% TDS, with stress-testing at a higher qualifying rate.
- Down payment rules scale with price; high-ratio mortgages require default insurance.
- Amortization and payment math. Monthly payment on a fixed-rate mortgage: P = L × i / (1 − (1+i)^−n), where L is loan amount, i is the periodic rate (annual rate divided by 12), and n is the number of payments.
- Prepayment and penalties. Closed mortgages limit extra payments; breaking a fixed term can trigger an interest rate differential penalty.
- Default and remedies. Lenders may sue on the covenant, sell under power of sale, or foreclose. Discharge removes the charge once paid.
Worked example
A buyer borrows $400,000 at 6% per year, amortized over 25 years with monthly payments. Estimate the monthly payment.
Reasoning: i = 0.06/12 = 0.005; n = 25 × 12 = 300. Compute (1.005)^300 ≈ 4.4650, so (1+i)^−n ≈ 0.22396. Then P = 400,000 × 0.005 / (1 − 0.22396) = 2,000 / 0.77604 ≈ $2,577. The payment is about $2,577 per month. To test affordability, add taxes, heating, and half of condo fees, divide by gross income, and compare to the GDS benchmark. Note that a higher qualifying rate raises the payment used in the affordability test even though the contract payment is lower.
Traps that cost marks
- Using an annual rate where a monthly rate is required, or forgetting n is months.
- Omitting property taxes and heating from GDS.
- Assuming a shorter amortization lowers the interest rate; it raises the payment.
- Assuming registration order always determines priority, ignoring postponements and construction liens.
- Forgetting that a high-ratio mortgage requires insurance.