A client with a $500,000 mortgage at 3.5% interest wants to make an annual prepayment of $15,000. If their mortgage allows 15% annual prepayment privileges, what is the maximum additional amount they can prepay this year?
Correct Answer
A) $60,000
Most mortgage prepayment privileges are calculated as a percentage of the original principal amount, not the current balance. With a 15% annual prepayment privilege on a $500,000 mortgage, the maximum annual prepayment is $75,000. Since they want to pay $15,000, they can prepay an additional $60,000 ($75,000 - $15,000) this year.
Why This Is the Correct Answer
Most mortgage prepayment privileges are calculated as a percentage of the original principal amount, not the current balance. With a 15% annual prepayment privilege on a $500,000 mortgage, the maximum annual prepayment is $75,000. Since they want to pay $15,000, they can prepay an additional $60,000 ($75,000 - $15,000) this year.
Deep Dive: Understanding the Answer
Most mortgage prepayment privileges are calculated as a percentage of the original principal amount, not the current balance. With a 15% annual prepayment privilege on a $500,000 mortgage, the maximum annual prepayment is $75,000. Since they want to pay $15,000, they can prepay an additional $60,000 ($75,000 - $15,000) this year.
This question tests your understanding of Mortgage & Real Estate Finance concepts that are commonly assessed on Canadian real estate licensing exams. The correct answer, “$60,000”, reflects a fundamental principle that real estate professionals in Canada must understand.
Specifically, this falls under the sub-topic of Prepayment Privileges, 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.
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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?
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- → 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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