A borrower has a $300,000 mortgage at 5% annual interest, amortized over 25 years. What is their approximate monthly payment?

Q: What is the correct answer to: A borrower has a $300,000 mortgage at 5% annual interest, amortized over 25 years. What is their approximate monthly payment?

The correct answer is $1,744. Option A ($1,744) is correct because it accurately applies the mortgage payment formula: M = P[r(1+r)^n]/[(1+r)^n-1], where P=$300,000, r=0.05/12=0.004167 monthly, and n=300 payments (25 years × 12 months). This calculation method is standard across Canadian financial institutions and aligns with mortgage qualification procedures under federal banking regulations and provincial real estate practice standards.

Q: What background knowledge is needed for this Mortgage & Real Estate Finance question?

Mortgage payment calculations use the compound interest formula to determine fixed monthly payments over the amortization period. Key components include principal amount, annual interest rate (converted to monthly), and total number of payments. Canadian mortgages typically use semi-annual compounding for posted rates but monthly payment calculations. Real estate professionals must understand these calculations to assist with pre-qualification, affordability assessments, and accurate cost representations. Federal regulations govern mortgage qualification criteria, while provincial legislation like TRESA requires accurate disclosure of financial information. Understanding payment calculations also supports compliance with FINTRAC requirements when large cash transactions occur.

Q: What is a good way to remember the answer to this Mortgage & Real Estate Finance question?

Remember 'PiRN' - Principal, interest Rate (monthly), Number of payments. Think of a 'PIRN' (like a spinning wheel) where all three components must work together smoothly. The monthly rate is annual rate divided by 12, and number of payments is years times 12. Just like a wheel needs all spokes to function, mortgage calculations need all three variables correctly calculated. When you see mortgage payment questions, immediately identify your PiRN components: write down the Principal, convert annual Rate to monthly (÷12), and calculate Number of payments (years × 12). This systematic approach prevents common calculation errors.

Q: What exam tip applies to this Mortgage & Real Estate Finance question?

For mortgage payment questions, quickly convert annual rate to monthly (÷12) and years to total payments (×12). Use the standard formula or financial calculator. Double-check that your answer seems reasonable - $300K mortgage should be under $2000/month at normal rates.

Q: How does this Mortgage & Real Estate Finance concept apply in real world practice?

A real estate agent meets with first-time buyers who found a $450,000 home and have $50,000 down payment. They need to calculate monthly payments on a $400,000 mortgage at 4.5% over 25 years to determine if the buyers qualify based on their $8,000 monthly income. Using the payment formula, the agent calculates approximately $2,224 monthly, which with property taxes and insurance totals about $2,800. This represents 35% of gross income, within acceptable debt service ratios, allowing the agent to confidently proceed with showing properties in this price range.

Question

Mortgage & Real Estate FinanceInterest CalculationsMEDIUM

A borrower has a $300,000 mortgage at 5% annual interest, amortized over 25 years. What is their approximate monthly payment?

Answer Options

A

$1,744

B

$1,894

C

$2,044

D

$2,194