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?

Q: What is the correct answer to: 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?

The correct answer is $60,000. Option A is correct because prepayment privileges are typically calculated on the original principal amount. With a $500,000 original mortgage and 15% annual prepayment privilege, the maximum annual prepayment is $75,000 (15% × $500,000). Since the client wants to make a $15,000 prepayment, the additional amount they can prepay is $60,000 ($75,000 - $15,000). This calculation method is standard across most Canadian mortgage products and aligns with typical lending practices under provincial mortgage regulations.

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

Mortgage prepayment privileges in Canada allow borrowers to make additional principal payments without penalty, typically ranging from 10-25% of the original principal annually. These privileges are governed by the mortgage contract terms and regulated under provincial legislation like Ontario's TRESA. The calculation is usually based on the original mortgage amount, not the current balance, providing consistency for borrowers. Some mortgages also allow increased payment amounts or lump-sum payments. Understanding these privileges is crucial for real estate professionals as they significantly impact mortgage affordability and client financial planning strategies.

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

Think of prepayment privileges like a recipe - you always use the 'original ingredients' (original mortgage amount) to calculate the percentage, not what's left in the pot (current balance). Just like a recipe for cookies that serves 10 people uses the original ingredient amounts regardless of how many cookies you've already eaten. When you see prepayment privilege questions, immediately identify the original mortgage amount and multiply by the percentage. Then subtract any planned payments to find the additional amount available. Always start with the 'original recipe' amount.

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

Identify the original mortgage amount and prepayment percentage first. Calculate the total annual privilege, then subtract any planned payments to find the additional amount available. Don't confuse current balance with original principal.

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

Sarah, a real estate agent, has clients who inherited $20,000 and want to put it toward their $400,000 mortgage with 20% prepayment privileges. Sarah calculates they can prepay up to $80,000 annually (20% × $400,000). Since they plan to use $20,000, she advises they could potentially prepay an additional $60,000 if they receive more funds later in the year, helping them understand their full prepayment capacity for strategic financial planning.

Question

Mortgage & Real Estate FinancePrepayment PrivilegesHARD

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?

Answer Options

A

$60,000

B

$75,000

C

$90,000

D

$105,000