A borrower with a variable rate mortgage sees the Bank of Canada raise interest rates by 0.50%. Their lender uses a 'rate trigger' system. What happens when the monthly payment can no longer cover the interest portion?
Correct Answer
B) The borrower must increase their payment or make a lump sum payment
When a variable rate mortgage hits its trigger rate, the monthly payment no longer covers the interest portion, creating negative amortization. The borrower must either increase their monthly payment to cover the interest or make a lump sum payment to reduce the principal and bring the mortgage back into positive amortization territory.
Why This Is the Correct Answer
When a variable rate mortgage hits its trigger rate, the monthly payment no longer covers the interest portion, creating negative amortization. The borrower must either increase their monthly payment to cover the interest or make a lump sum payment to reduce the principal and bring the mortgage back into positive amortization territory.
Deep Dive: Understanding the Answer
When a variable rate mortgage hits its trigger rate, the monthly payment no longer covers the interest portion, creating negative amortization. The borrower must either increase their monthly payment to cover the interest or make a lump sum payment to reduce the principal and bring the mortgage back into positive amortization territory.
This question tests your understanding of Mortgage & Real Estate Finance concepts that are commonly assessed on Canadian real estate licensing exams. The correct answer, “The borrower must increase their payment or make a lump sum payment”, reflects a fundamental principle that real estate professionals in Canada must understand.
Specifically, this falls under the sub-topic of Variable Rate Mortgages, which is an important area within Mortgage & Real Estate Finance that appears regularly on provincial licensing exams across Canada.
About Mortgage & Real Estate Finance
Mortgage types, qualification, amortization, interest calculations, and lending regulations.
Mortgage & Real Estate Finance is one of the core areas covered on Canadian real estate licensing exams, including RECO (Ontario), BCFSA (British Columbia), and RECA (Alberta). Understanding these concepts is essential for anyone pursuing a career in Canadian real estate.
Study Tips for Mortgage & Real Estate Finance
- •Master the Canadian amortization calculation method (semi-annual compounding).
- •Understand the difference between conventional and high-ratio mortgages.
- •Know CMHC insurance requirements and qualification rules.
- •Review the impact of the Bank of Canada rate on mortgage products.
More Mortgage & Real Estate Finance Questions
What is the maximum amortization period for an insured mortgage in Canada?
What is the minimum down payment required for a home purchase of $400,000 in Canada?
Which mortgage default insurer is government-backed in Canada?
Under the B-20 stress test guidelines, what interest rate must borrowers qualify at for uninsured mortgages?
A client has a gross annual income of $80,000 and monthly debt payments of $600. What is their maximum allowable monthly housing costs using the GDS ratio?
- → What happens to mortgage payments when a borrower chooses a variable rate mortgage and interest rates increase?
- → A borrower has a $300,000 mortgage at 4% interest, compounded semi-annually, with a 25-year amortization. What is the approximate monthly payment?
- → Which of the following best describes a conventional mortgage in Canada?
- → A self-employed borrower with irregular income wants to qualify for a mortgage. Which documentation would be most critical for their application?
- → A borrower's mortgage reaches the trigger rate on their variable rate mortgage. What does this mean?
- → A client is purchasing a $750,000 home. What is the minimum down payment required?
- → What is the maximum amortization period allowed for insured mortgages in Canada?
- → Which organization provides mortgage default insurance for high-ratio mortgages in Canada?
- → What is the minimum down payment required for a home purchase of $400,000 in Canada?
- → Under the B-20 stress test guidelines, what interest rate must borrowers qualify at for uninsured mortgages?
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A borrower with a variable rate mortgage experiences a significant rate increase. Their payment remains the same but now only covers interest. What has occurred?
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A borrower's mortgage payment increases beyond their ability to pay due to interest rate changes. The lender agrees to extend the amortization period to reduce monthly payments. What risk does this create for the borrower?