Introduction to the Canadian Mortgage Industry Module 4 Workbook Answer Key

Transcription

1 Introduction to the Canadian Mortgage Industry Answer Key Copyright

2 Reminder: Key Formulas Simple Interest The principal balance (the amount borrowed) (P) The interest rate (i) The number of years, or simply time (n) P + (P i n) Remember! It is more important to understand the CONCEPTS rather than the actual mathematical formulas. The formulas simply illustrate the concepts using numbers. Compound Interest (Annual) P = The principal balance (the amount borrowed) i = The interest rate n = The number of years (total agreement) P (1 + i) n Compound Interest (multiple compounding periods per year) P = The principal balance (the amount borrowed) i = The interest rate n = The number of years (total agreement) m = The number of compounding periods per year P (1 + i m) mn Effective Interest Rate i = The interest rate m = The number of compounding periods per year [1 + ( i m)] m 1 Copyright

3 Determining Payments Practice Question Use Mortgage Professionals Canada s online payment calculator as a group (or on your own at home) to determine the mortgage payment amounts below. > Consumers > Mortgage Calculators > Mortgage Analyzer Calculator Mortgage Amount Term Interest Rate Amortization Frequency Payment $ 1. $325,000 5 years 5.75% 20 years Weekly $ Payment = $ total interest over 20 years = $185, Reducing amortization to 15 years increases payment to $ (an increase of $ per week). - With a $ weekly payment, total interest over 15 years = $137, (approx. $48, less in interest) Mortgage Amount Term Interest Rate Amortization Frequency Payment $ 2. $665,000 3 years 3.25% 25 years Bi-Weekly $1, Payment = $1, total interest over 25 years = $266, Increase rate to 3.75% increases payment to $1, To pay off in 20 years at 3.75% need payment of $1, Even though interest rate is higher, amortization is lower, therefore less total interest paid over life = $244, (difference of $21,653.51) Mortgage Amount Term Interest Rate Amortization Frequency Payment $ 3. $295,000 2 years 2.99% 20 years Monthly $1, Payment = $1, total interest over 20 years = $96, Increase amortization to 25 years reduces payment to $1, years interest total = $123, (an additional $26, in interest for those 5 years!) Copyright

4 Converting Payments Practice Questions Frequencies Monthly = 12 Semi-Monthly = 24 Bi-Weekly = 26 *Accelerated Bi-Weekly = 26 Weekly = 52 *Accelerated Weekly = 52 Conversions Monthly to Semi-Monthly: Monthly 2 Monthly to Bi-Weekly: Monthly Monthly to Accel. Bi-Weekly: Monthly 2 Monthly to Weekly: Monthly Monthly to Accel. Weekly: Monthly 4 Use the monthly payments listed below to calculate the different payment frequencies. Monthly Semi- Monthly Bi-Weekly Accelerated Bi-Weekly Weekly Accelerated Weekly 1. $1, $ $ $ $ $ $4, $2, $1, $2, $ $1, $3, $1, $1, $1, $ $ $4, $2, $2, $2, $1, $1, $1, $ $ $ $332,50 $ Copyright

5 Mortgage Averaging Rates are not the whole picture! In some cases, a second mortgage (even at a high interest rate) may make more financial sense than refinancing. In some cases, penalties can be blended into new rates Step 1 Calculate the total financing required. Step 2 Mortgage A x Interest Rate of Mortgage A = Total Financing a Step 3 Mortgage B x Interest Rate of Mortgage B = Total Financing b Step 4 a + b = Weighted Average Copyright

6 Mortgage Averaging Practice Question Janine currently owns a home that was recently appraised at a value of $499,000. She has an outstanding mortgage of $272,000 with a rate of 3.25% compounded semi-annually not in advance. Janine has decided she needs to tap into the equity of her home and clean up some of her finances. She wants to pay off all her credit cards and lines of credit, repair the roof, and make an investment into her RRSP. She has determined that she will need a total of $183,000 to make this happen. Janine is faced with two options: Option 1: Refinance her existing mortgage, and get a new mortgage for the total amount ($272,000 + $183,000 = $455,000) at today s current rates. - Janine s lender will refinance the mortgage, and offer her a new rate of 3.99% compounded semi-annually, not in advance. Option 2: Keep her current mortgage as is, and get a second mortgage for just the additional funds needed. - Janine s mortgage broker can get her a second mortgage for a rate of 4.49% compounded semi-annually, not in advance. Without considering penalties and/or fees, and focusing just on the interest amounts, which option will effectively provide Janine a lower overall interest rate? Step 1 Calculate the total financing required. $272,000 + $183,000 = $455,000 $455,000 Step 2 272, , = 1.943% Step 3 183, , = 1.806% Step = 3.749% * is it likely that a traditional lender will be able to offer Janine that new mortgage of $455,000? Why? / Why Not? * The new total mortgage is $455,000 vs, the property value of $499,000. The LTV would therefore be $455,000/499,000 = % -- Federal Government changes limited refinances to a maximum of 80%. Copyright

7 Module 4 Mini-Quiz 1. According to the federal Interest Act, blended payment loans can only compound interest: a) Yearly only b) Half-yearly only c) Yearly or half-yearly, not in advance d) Yearly or half-yearly, in advance 2. A $225,000 loan has an interest rate of 4.95% with a term of three years. Using simple interest, what is the annual interest amount? a) $11, b) $22, c) $33, d) $191, A $600,000 loan has an interest rate of 7.95% with a term of three years. Using simple interest, what is the annual interest amount? a) $42,000 b) $477,000 c) $420,000 d) $47, A $232,000 loan has an interest rate of 5% compounding annually, with a term of four years. What is the interest amount in the first year? a) $11,600 b) $1,600 c) $116,000 d) $46, Interest rates with this compounding frequency are known as effective rates, because, in effect, they express how much a borrower will pay in interest over one year. a) Monthly compounding b) Semi-Annual compounding c) Annual compounding d) Quarterly compounding Copyright

8 6. Steven has a mortgage commitment with a rate of 6.5% compounded semiannually, not in advance. Oleg has a mortgage commitment with a rate of 6.5% compounded annually, not in advance. They are both for $250,000 loans for one year terms. Based on the information provided, choose the correct statement below. a) Both loans contravene the federal Interest Act. b) Steven s loan at 6.5% interest compounded semi-annually will cost more in interest over 1 year. c) Oleg s loan at 6% compounded annually will cost more in interest over one year. d) Both loans will cost the same amount in interest over one year. 7. John has a mortgage commitment with a rate of 7% compounded semi-annually, not in advance. George has a mortgage commitment with a rate of 6.75% compounded annually, not in advance. They are both for $150,000 loans for one year terms. Based on the information provided, choose the correct statement below. a) Both loans contravene the federal Interest Act. b) John s loan at 7% interest compounded semi-annually will cost more in interest over one year. c) George s loan at 6.75% compounded annually will cost more in interest over one year. d) Both loans will cost the same amount in interest over one year. 8. Sherrie would like to purchase a $450,000 property. She has $67,500 saved up for a down payment. She is looking to amortize for 25 years, and the current posted rate for her preferred term of 5 years is 6.125%. Sherrie would like to make monthly payments. In order to determine Sherrie s monthly mortgage payment amount, what additional important variable do you need to complete the calculation? a) Interest Rate b) Payment Frequency c) Present Value d) Compounding Frequency 9. Which of the following is TRUE? a) Accelerated bi-weekly payments are made 48 times per year. b) Accelerated bi-weekly payments are made 26 times per year. c) Accelerated bi-weekly payments are made 24 times per year. Copyright

9 Module 4 Mini-Quiz: Answer Key 1. C 2. A 3. D 4. A 5. C 6. B 7. B 8. D 9. B Copyright