mortgage financing

Mortgage Overview

  • Description of mortgage types: open and closed mortgages.

  • Interest rate options: fixed vs variable.

Types of Mortgages

  • Fixed vs Variable Interest Rates

    • Fixed Interest Rates:

    • Definition: The interest rate remains constant throughout the term of the loan.

    • Example: A fixed mortgage rate of 5% over five years means consistent interest payments.

    • Variable Interest Rates:

    • Definition: The interest rate can fluctuate during the mortgage term, impacting the payment distribution between principal and interest.

    • Example: If the rate changes, the portion of the payment applied to the principal may vary, despite the overall payment amount remaining the same.

Monthly Mortgage Payment Calculation

  • Importance of calculating your own monthly mortgage.

  • Connection to case study: Students will choose a property, calculate monthly payments, and evaluate affordability.

Affordability Considerations

  • Primary question: "Can you afford it?"

    • Understanding costs involved in home buying, including mortgage payment and additional expenses.

  • Mortgage stress tests:

    • Definition: Assessing ability to afford mortgage payments in case of interest rate increases.

Case Study: Jane's Scenario

  • Introduction of fictional character Jane.

  • Jane's financial situation:

    • Bank balance: $400,000.

    • Looking at a property for $1,000,000 in Toronto (Guantee Avenue).

  • Down payment requirement for a $1,000,000 house:

    • Explanation of the down payment structure:

    • 5% for homes up to $500,000.

    • 5% for the first $500,000, 10% for the remainder for homes between $500,000 and $1,500,000.

    • 20% minimum down payment for homes over $1,500,000.

Mortgage Loan Insurance

  • Definition: A condition requiring mortgage loan insurance if the down payment is less than 20%.

  • Purpose: Protects the lender, not the borrower, in case of mortgage default.

  • Premium range: 0.6% to 4.5%, depending on lender policies.

  • Important Notes:

    • Mortgage loan insurance is not required for transactions over $1,500,000.

    • Must understand when such insurance is mandatory.

Amortization vs Mortgage Term

  • Definitions:

    • Amortization Period: The total time to repay the entire mortgage.

    • Mortgage Term: A short-term agreement detailing the interest rate and conditions typically between one month to ten years.

  • Example of Jane's mortgage calculation (borrowing $800,000):

    • Standard amortization period: 25 years.

    • Exceptions for first-time homebuyers may allow for a 30-year amortization.

Mortgage Types Explained

  • Conventional Mortgages vs High-Ratio Mortgages:

    • Define:

    • Conventional Mortgage: Loan-to-value (LTV) ratio ≤ 80% (No mortgage insurance required).

    • High-Ratio Mortgage: LTV ratio > 80% (Mortgage insurance required).

    • Calculation Example for Jane: Loan of $800,000 on $1,000,000 home means Conventional Mortgage since LTV = 80%.

Market Conditions and Calculations

  • Discuss the potential impact of fluctuating interest rates on housing affordability and market supply/demand.

  • Current Interest Rate Trends (as of 2026):

    • Bank of Canada key rate at 2.5%.

Interest Rates in Depth

  • Explanation of fixed interest rates and adherence to the posted rate.

  • Description of variable interest rates and associated risks.

Example Calculation for Monthly Payments

  1. Calculate Effective Annual Interest Rate

    • Interest rate example of 5%: Convert to decimal (0.05) and then divide by 2 (for semiannual compounding).

  2. Apply the interest rate to the mortgage payment formula:

    • Formula Steps:

      • Step 1: PV = Loan Amount
        to be repaid (bottom part of the formula should reflect total months).

      • Step 2: Use Effective Interest Rate in monthly calculation.

Example Mortgage Payment Calculation: Jane

  • Example Calculation:

    • Down Payment: 20% of $1,000,000 = $200,000.

    • Amount Borrowed: $800,000.

    • Monthly Payment Estimate: Approximately $4,652/month.

  • Conclusion on affordability based on Jane's income versus expenses (Gross Debt Service Ratio - GDS).

Gross Debt Service Ratio (GDS)

  • Defined: Measures housing-related monthly expenses as a percentage of gross monthly income.

  • Calculation: Add monthly mortgage payment, property taxes, heating costs, and other debts, then divide by gross monthly income.

  • Lender guidelines: Ideally, GDS should not exceed 39% for approval.

Stress Testing & Qualifications

  • Introduction of stress tests implemented in June 2021:

    • Criteria based on mortgage contract rate plus additional 2%.

    • Purpose: To ensure buyers can withstand potential interest rate increases, helping banks mitigate risk.

Illustrative Case: Monty Property

  • Overview of situation where a property resold at a significantly higher price after renovations (from $900,000 to $2,060,000).

  • Discussion of rental opportunities and potential return on investment via Airbnb.

Conclusion:

  • Recap of essential mortgage concepts, calculations, and affordability assessments.

  • Encourage practical application and understanding for personal financial situations.

  • Reminder of upcoming midterm and its requirements.