Retail Banking
Retail Banking
This domain covers deposit products, interest calculations, mortgage and credit fundamentals, and day-to-day account features. The exam tests whether you can compare products on effective cost or yield and explain consumer credit and mortgage rules accurately.
Deposits and interest
- Chequing accounts serve transactions; savings accounts pay interest; GICs lock in a rate for a term. A cashable GIC trades yield for liquidity; a non-redeemable GIC usually pays more.
- Simple interest = principal × rate × time. Compound interest = principal × (1 + rate/n)^(n×t), where n is compounding periods per year.
- Nominal rate ignores compounding; effective annual rate (EAR) = (1 + rate/n)^n − 1. More frequent compounding raises the EAR.
- CDIC insures eligible deposits up to $100,000 per depositor, per insured category, per member institution. Joint accounts and registered accounts fall into separate categories.
Mortgages and credit
- Term is the length of the current rate commitment; amortization is the full repayment period. A longer amortization lowers payments but raises total interest.
- Minimum down payment is 5% on the first $500,000 of price and 10% on the portion above; 20% avoids mortgage default insurance.
- Lenders apply a stress test, qualifying borrowers at a higher rate than the contract rate. GDS and TDS ratios compare housing and total debt costs to income.
- Credit scores reward payment history, low utilization and length of file. Secured credit is backed by collateral; unsecured credit is not.
Worked example
A $25,000 GIC pays 3.5% compounded annually for three years. Value = $25,000 × (1.035)^3 = $25,000 × 1.108718 = $27,717.95. Interest = $2,717.95. If the same 3.5% were compounded monthly, EAR = (1 + 0.035/12)^12 − 1 = 3.557%, so the annual interest would be slightly higher. Comparing only the nominal 3.5% would miss that difference.
Traps
- Confusing nominal rate with effective annual rate.
- Mixing up mortgage term and amortization.
- Assuming CDIC covers all deposits in one category without limit.
- Forgetting that a longer amortization increases total interest.
- Treating a credit score as the only credit decision factor; income and debt ratios also matter.