Mortgage Products and Terms Practice Questions

Question 1 of 5

A buyer's pre-approval includes a condition that the property must be 'acceptable to the lender.' What types of properties might a lender refuse to finance, even if the buyer qualifies financially?

• ALenders finance all property types without restriction, and as the applicable regulatory framework and industry practices establish the standards and procedures that govern how this type of matter is addressed in Ontario real estate
• BOnly commercial properties are subject to lender restrictions, as the applicable regulatory framework and industry practices establish the standards and procedures that govern how this type of matter is addressed in Ontario real estate
• CProperties that lenders may refuse or restrict include: (1) properties with known environmental contamination (former gas stations, dry cleaners), (2) grow-op properties without professional remediation certification, (3) properties with UFFI insulation or aluminum wiring (some lenders restrict), (4) rural properties without municipal services, (5) properties with structural deficiencies or illegal additions, (6) properties under power of sale with title issues, (7) mobile homes or manufactured homes on leased land, and (8) properties with non-conforming zoning — the buyer's pre-approval does not guarantee approval for a specific property
• DThe buyer's financial qualification overrides property concerns

Question 2 of 5

A client has a variable rate mortgage at prime minus 0.90% and is considering locking in to a fixed rate because they are worried about further rate increases. What factors should the client consider before locking in?

• AThe client should consider: (1) the fixed rate they would lock into is typically higher than their current variable rate, meaning they pay more immediately; (2) their variable rate discount (prime minus 0.90%) is likely better than what is currently available and would be lost if they lock in and later want to go variable again; (3) the penalty to break a fixed rate mortgage (IRD) is typically much higher than breaking a variable rate (3 months' interest); (4) the historical performance of variable vs. fixed; and (5) their personal financial ability to handle further rate increases
• BLock in immediately to avoid any further rate risk, based on the mortgage qualification criteria that assess the borrower's income, credit history, debt ratios, and the property's appraised value relative to the loan amount
• CStay variable because rates always come back down eventually, under the standard mortgage lending guidelines that apply to this type of property and financing arrangement, including applicable stress test requirements, and based on the mortgage qualification criteria that assess the borrower's income, credit history, debt ratios, and the property's appraised value relative to the loan amount
• DThe decision has no long-term financial impact, based on the mortgage qualification criteria that assess the borrower's income, credit history, debt ratios, and the property's appraised value relative to the loan amount, and under the standard mortgage lending guidelines that apply to this type of property and financing arrangement, including applicable stress test requirements

Question 3 of 5

A buyer client asks the registrant: 'My friend told me I should lie about planning to live in the property so I can get the lower owner-occupied rate, even though I plan to rent it out.' How should the registrant respond?

• AAgree that this is a common and acceptable strategy
• BThis is a minor detail that lenders do not verify
• CThe registrant should stay neutral and not comment on the buyer's financing decisions real estate
• DThe registrant must clearly advise against this — misrepresenting the intended use of a property on a mortgage application constitutes mortgage fraud, which is a criminal offence in Canada; consequences include: (1) the lender can demand immediate repayment of the full mortgage (call the loan), (2) criminal charges for fraud, (3) CMHC insurance may be voided, exposing the borrower to the insurer's losses, (4) the registrant who facilitates or encourages the misrepresentation faces disciplinary action from RECO and potential criminal liability, (5) the registrant should explain the legitimate financing options for investment properties, including the higher down payment and rate requirements

Question 4 of 5

A client asks about the Smith Manoeuvre — a strategy they heard about for making their principal residence mortgage interest tax-deductible. What is this strategy, and what are the risks?

• AThe Smith Manoeuvre is a government program that makes all mortgage interest deductible, based on the mortgage qualification criteria that assess the borrower's income, credit history, debt ratios, and the property's appraised value relative to the loan amount, and under the standard mortgage lending guidelines that apply to this type of property and financing arrangement, including applicable stress test requirements
• BIt only works for borrowers with variable-rate mortgages, under the standard mortgage lending guidelines that apply to this type of property and financing arrangement, including applicable stress test requirements
• CThe strategy is illegal in Canada and carries criminal penalties, based on the mortgage qualification criteria that assess the borrower's income, credit history, debt ratios, and the property's appraised value relative to the loan amount
• DThe Smith Manoeuvre is a private financial strategy that involves: (1) setting up a readvanceable mortgage (HELOC that grows as the mortgage shrinks), (2) as each mortgage payment reduces the principal, the freed-up HELOC room is immediately borrowed and invested in income-producing assets (stocks, rental property, etc.), (3) the interest on the borrowed investment funds is tax-deductible under CRA rules because the purpose of the borrowing is investment; risks include: (4) investment losses could exceed tax benefits, (5) increased leverage and exposure, (6) discipline required to maintain the strategy over decades, and (7) CRA scrutiny if not properly structured

Question 5 of 5

During a rapidly rising rate environment, a client's adjustable rate variable mortgage (where payments adjust with rate changes) sees their monthly payment increase from $2,800 to $3,400 in 12 months. The client is struggling with affordability. What options can the registrant discuss?

• AThe client has no options and must sell their home immediately, under the standard mortgage lending guidelines that apply to this type of property and financing arrangement, including applicable stress test requirements
• BThe registrant should arrange a refinancing for the client, under the standard mortgage lending guidelines that apply to this type of property and financing arrangement, including applicable stress test requirements
• CThe registrant can discuss general options including: consulting their mortgage professional about converting to a fixed rate, extending the amortization to reduce payments, making lump sum prepayments when possible to reduce the principal, reviewing their budget for areas to reduce expenses, and understanding their mortgage's prepayment privileges — while emphasizing that specific mortgage restructuring advice should come from their lender or mortgage broker
• DPayment increases of this magnitude are impossible under Canadian mortgage regulations, based on the mortgage qualification criteria that assess the borrower's income, credit history, debt ratios, and the property's appraised value relative to the loan amount