Mortgage Notes
Module One:
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A mortgage is a legal method by which a borrow (mortgagor) can pledge property to the lender
(called the mortgagee) as security for a debt.
Equity of redemption: borrower has a right , for a limited period of time, to repay the loan and
retain possession of a property even if default had taken place.
Default: acknowledged that the borrower was the owner of the property, and the lender merely
held the right to obtain possession of the property if the borrower was unable to repay the
borrowed funds. This concept holds true today.
Maturity: when a loan reaches the end of its term
Principal: Amount that was borrowed
Interest Only Mortgages: The monthly interest is paid over the life of the loan. Once the loan
term ends, the principal amount is repaid or refinanced with another mortgage.
Principal Risk: In the 1930s during the great depression, lenders learned of Principal Risk since
the borrowers now had no job and their property was valued considerably less. During the end
of the loan term, the lender was faced with a property valued at less than the principal amount
remaining and a borrower that may refuse to pay back the principal amount since property was
valued less, they would let the lender take back the property.
Due to this the mortgage market created a more modern form of a mortgage which is a fully
amortized mortgage. In this type of mortgage each monthly payment made by a borrower, is
the same for the life of the mortgage and is comprised of interest due plus a partial repayment
of principal. At maturity, rather than the full amount of principal being due, the full amount of
principal has already been fully repaid during the term. This form of repayment was the rule in
mortgage lending, particularly in the residential sector, from the end of the depression to the
early 1970’s.
Canadian Mortgage and Housing Corporation (CMHC) helped administer an insurance for
lenders under the national Housing Act (NHA). Under this insurance plan, borrowers paid
insurance feeds into a fund established and managed by the CMHC (and later private insurers)
to compensate lenders when default occurred.
In todays mortgage market CMHC, Sagen and Canada Guaranty provide default insurance to
protect lenders from borrowers for the purchase of a new or existing homes for their primary
residence, and for the purchase of a second home.
Partially amortized mortgage- this form of repayment plan calculates periodic payments such as
monthly payments, of both the principal and interest over a long period of time (such as 20 or
25 years), at which point the balance would be 0.00. This is referred to as the amortization
period.
End of mortgage term referred to as maturity date.
In 1992 the federal government introduced the Home Buyers Plan in order to help individuals
buy a home. It allows most Canadians to borrow up to 25k from their RRSP’s on at ax-free basis
to purchase their first home; they are required to pay this loan over a 15-year period to
replenish their RRSP or pay tax on the amount not repaid.
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2019 The maximum withdrawal limit under the Home Buyers plan is increased to 35 k from 25k.
Loan-to-value (LTV) is an often used ratio in mortgage lending to determine the amount
necessary to put in a down-payment and whether a lender will extend credit to a borrower.
Most lenders offer mortgage and home-equity applicants the lowest possible interest rate when
the loan-to-value ratio is at or below 80%
A home equity line of credit, or HELOC, is a loan in which the lender agrees to lend a maximum
amount within an agreed period, where the collateral is the borrower's equity in their house.
Factors resulting in demand for housing: Demographic (age, income, sex, education , occupation
or other relevant characteristics of the population), Economics (broad economic forces affecting
interest rates and growth in the economy, or even COVID ), Consumer Choice (the types of
housing people prefer to occupy).
Liquidity : the ability of an asset to be converted into cash quickly and easily.
A mortgage-backed s ecurity represents an interest, or a share, of a pool of insured residential
first mortgages. Individual residential mortgages are grouped together into pools of several
million dollars each. Investors are able to purchase parts of this pool.
Mortgage Originator; refer to any mortgage professional engaged in the acceptance,
completion, and/or submission of mortgage loan applications to an underwriting lender.
Module Two:
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NWT, PEI, Nunavut, and Yukon are the only places with no legislation in place that requires
mortgage brokers to be licensed.
Ontario
Governing Act: Mortgage Brokerages, Lenders, and Administrators Act Regulations made under
the Mortgage Brokerages, Lenders and Administrators Act.
Governing Body: Financial Services Regulatory Authority of Ontario.
Licensing/Registration Requirements: All businesses and individuals who conduct mortgage
brokering and administration activates in Ontario must be licensed with FSCO.
Licensing/Registration Categories: Mortgage Brokerage (Sole proprietorship, partnership or
corporation), Mortgage Administrator (sole proprietorship, partnership or corporation),
Mortgage Broker (Individual), Mortgage Agent (Individual)
Education Requirements: Entry Level (Agent), Senior-Lever (Broker), Continuing education for
Renewal/Reinstatement
No single body that sees mortgage broker activity nationally, however in 2011 the Mortgage
Broker Regulators Council of Canada (MBRCC) was established in 2011 to engaged in a strategic
planning session that resulted in a mandate calling for a greater degree of coordination and
cooperation in the regulators efforts to serve the public interest across Canada.
MBRCC: Mandate; help improve and promote the harmonization of mortgage broker regulatory
practices to serve the public interest. Vision: effective regulation that supports consumer
protection and an open and fair marketplace. Mission: work cooperatively with mortgage
broker regulators and stakeholders to identify trends and develop solutions to common
regulatory issues
The key piece of federal regulation governing federally charted FI’s is the Bank Act.
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Bank Act regulates:
o Interpretation and application of the Bank Act
o Status and power held by banks.
o Incorporation and organization of operations
o Ownership Requirements
o Type of Investments allowed
o Adequacy of Capital and Liquidity
Important to note that mortgage specialists employed by federally chartered banks are
governed separately under the Bank Act. Mortgage Brokers and Agents are regulated
provincially meaning Mortgage Specialists in banks do not need to be licensed.
Sagen and Canadian Guaranty are two private sector firms who are suppliers of mortgage
insurance. Licensed to offer residential mortgage default insurance in each province and
territory in Canada.
Trust and Loan Companies act- regulates companies involved in mortgage lending.
Conventional Mortgage is one that is less than 80% market value of a property.
A High Ratio Mortgage is defined as any mortgage at or over this 80% threshold.
Life Insurance companies are also governed by various regulations depending on whether they
are federally or principally incorporated. The key federal legislation is the Insurance Companies
Act. They are regulated by the OSFI.
Module Three
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The Listing Agreement is a contract which sets out the relationship between the seller of the
property and the real estate agent. The agreement outlines how long the listing is in effect
and details about the property for sale. One promise of the agreement is that the real estate
agent gets paid a certain commission if the property is sold. The agreement also established
the legal obligation of the real estate agent to market the property.
 Agreements of purchase and sale usually contain many promises. I.E Vince agrees to sell
piece of real estate to Joanne for 100,000, Vince has promised to sell, and Joanne has
promised to pay. Both are promisors and promissees.
 Essential Elements of a contract:
o Offer
o Acceptance
o Consideration
o Legal Intent
o Capacity (or incapacity)
o Legal Object (or legality)
o Genuine Consent
Offer- a promise made by one party to another. Offer is made to one specific person meaning
only they can accept the offer.
Not to be confused with standing offers, which are open to the public and can be accepted by
anyone (i.e reward for a lost pet) or with invitation to treat, which is less than a legal offer and is
a formal invite to members of the public to submit their own offer.
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Option Agreement; the right, but not the obligation, to undertake an action.
Acceptance- must be given in clear terms, must also be a positive act. I.E cannot be like “if I do
not hear from you I will assume you have accepted my offer”. Doing nothing is not considered
legal acceptance.
Contracts accepted two ways: By instantaneous means (phone, email) and non-instantaneous
means (postal or courier delivery)
Consideration: the party trying to enforce the contract must pay something in return for the
promise.
Legal Intent: a person must have intended to create commitments in order to be bound by a
contract. Law believes there is serious intent to be apart of a commitment when the contract is
between strangers or a commercial contract however does that presume intention if the
commitment is between family members or close friends.
Capacity (or incapacity): parties entering commitment or agreement must have the capacity to
do so otherwise that inability leads to incapacity. Most common types of incapacity result from
minors and infants, cognitive impairment or intoxication, language barriers, and/or lack of
capacity of a corporation
Legal Object (or legality) : certain contracts cannot be honoured by courts as they are unlawful
(contract to kill or a contract breaching statutes) therefore all contracts must be observed to
ensure they are legal.
Genuine Consent: Both sides of the party must have a clear understanding of the substance of
the contract when they consent to be a party to it.
Void Contract: one that never existed legally speaking. Money paid during this contract must be
repaid.
Illegal Contract: one that is contrary to public policy or statute. These contracts are also void but
bring up differing results. I.E. someone who use money under an illegal contract may not be able
to get the money back.
Voidable Contract: One of the party has the right to cancel the contract. I.E Minor being sold a
car by an adult. Minor has the right to void contract.
Unenforceable contract: similar to void contract but this contract cannot be acted upon due to
a procedural reason. I.E. All land sale contracts must be written, so if there is an oral contract
made between two parties for the sale of land it cannot be enforced.
A Condition precedent: a condition in a contract that must be satisfied before the contract is to
be performed.
Condition: a promise in a contract that is fundamental to the contract.
Warranty: a promise that is not fundamental to the contract. I.E. Master bedroom must be
painted before possession.
Vicarious Performance: the subcontracting or delegating of a contractual obligation to a third
party.
Mortgage professionals should be familiar with three main real estate documents:
o The Listing Agreement
o The Agreement of Purchase and Sale
o The Transfer/Deed of Land
Listing Agreement: is the contract that establishes the relationship between the seller and the
real estate agent.
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Agreement of Purchase and Sale: Is a written contract between a seller and a buyer for the
purchase and sale of a property. The agreement begins as an offer by the purchaser and
becomes a legally binding agreement if the seller accepts the offer.
A Transfer/Deed of Land is a doc prepared by a lawyer containing a detailed description of the
property that transfers ownership from the vendor to the purchaser. This document is then
registered against the title of the property as evidence of ownership.
The Borrower has five financial obligations:
o To repay the loan amount
o TO pay the property taxes
o To pay the property insurance
o To maintain the property
o To pay common element fees (if the property is a condo)
The mortgage lender is obligated to do two things:
o To discharge the mortgage upon repayment in full
o To leave the mortgagors, or borrowers, in “quiet possession” of the property, and to not
interfere with their use and enjoyment of the mortgaged property.
Module Four
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The Main point behind Time Value of Money is that a sum of money in the future is worth less
than the same sum today-or vice versa; a sum of money today is worth more than the same sum
of money at some point in the future.
Interest: Cost of borrowing money
Interest Rate: the cost stated as a percentage of the amount borrowed per period of time.
Simple Interest is calculated on the borrowed amount of money (loan), which is also known as
the principal.
Simple Interest is written in this formula:
o P – the principal amount borrowed
o I- the interest rate
o N- The number of periods, or time
o Simple Interest= P + (P x I x N)
Compound Interest: calculates the interest on the principal amount and adds the interest from
the previous period.
o Compound Interest Formula
o P – Principal Amount
o I – Interest
o N Number of years in the term
o P X (1 + I)n
Future Value- the amount owing at the end of the loan or investment period.
Future Value/ Compounding Interest = P x (1 + (1/m)^mn
o P – the principal amount
o I – the annual nominal interest rate
o M – the number of times interest is compounded within a year (12 for monthly, 4 for
quarterly, 2 for semi-annually)
o N – the number of years until the investment matures or the loan is due
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The effective interest rate: aka the true rate of interest, describes the actual interest rate that a
borrower pays on a loan (or that an investor earns on an investment) after the effects of
compounding are considered.
Effective Annual interest rate = (1 + (i/m) ) ^ m -1
Equivalent rates : the same amount borrowed over the same period of time, the same amount is
owed at the end of that period
Payment Conversions:
o Monthly to semi-monthly: Monthly / 2
o Monthly to Bi-Weekly: Monthly x 12 / 26
o Monthly to accelerated bi-weekly: Monthly / 2
o Monthly to weekly : Monthly X 12 / 52
o Monthly to accelerated weekly: Monthly / 4
Module Five
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Three parties involved in the mortgage application process: the borrower, the lender, and the
mortgage originator
In Ontario record retention for mortgage applications should be kept at least six years after the
expiry of mortgage loan or renewal.
Underwriting: the process of analyzing the investment merits of the mortgage loan by assessing
the value of both the property and the borrowers.
Debt service rations determine whether borrowers can afford the mortgage loan they are
seeking. There are two types of DSR’s ;
o The Gross Debt Service (GDS) ration is the percentage of a borrowers annual income
required to handle payments associated with housing such as mortgage payments.
o The Total Debt Service (TDS) ratio is the percentage of annual income required to cover
housing costs as calculated for the GDS plus any other loan or debt payments an
individual has such as credit card payments, loans, and car payments.
o Maximum used by most lenders is 32% GDS and 40% TDS.
Five Steps in the mortgage application process
o 1- Meet with the client and obtain preliminary information about the property, the
mortgage loan that is being sought, and information as to the creditworthiness of the
borrower.
o 2 – Evaluate the security (the property) and the borrowers ability to repay the
mortgage loan.
o 3 – Assemble the mortgage documentation and present the package to the lender.
o 4 – Negotiate the mortgage rate and obtain a written commitment from the lender.
o 5 – Act as a liaison during the closing process
Module Six
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Before the application is submitted borrowers should be checked for verification of
employment, income, and references if required by vendor
Three Major software platforms today used for applications of mortgages are
o Filogix Expert
o MortgageBoss
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o Newton
Completing a mortgage application includes completing the Mortgage Application Form,
verifying income, including copies of the Agreement of Purchase and Sale, the listing, mortgage
insurance information, the appraisal, and any notes or explanations that are necessary.
Module Seven
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Five C’s of Credit
o Capacity – the ability of borrowers to repay the loan.
o Capital – the amount of money that borrowers have invested in the property. This
capital is often referred to as a ‘down payment.’
o Character – the general impression of how trustworthy borrowers are to repay loans.
Length of employment of the borrower helps confirm job security, which is a key
commitment of their borrowing character.
o Collateral – the guarantee in the form of security that can be provided to the lender. For
mortgage loans this is the property itself.
o Credit – asks about the credit history of the borrowers, and more particularly, their
repayment history.
Types of eligible income: permanent full-time employment, or part time and secondary
employment, pension income, investment income, rental income
Types of ineligible income: social security, E.I.
A guarantor is a person who assists the applicant in obtaining a loan by agreeing to guarantee
repayment of the loan in full if the borrower defaults.
The three different forms of business ownership are
o Sole proprietorship: a business owned by one person.
o Partnership: a business where two or more people co-own a business.
o Corporation: a separate legal entity which exists apart from a person.
Sole Proprietorship:
o Advantage: is easy to form, can be established quickly without any documentation,
individual control, business owner free to make any business decisions.
o Disadvantage: unlimited liability, individual is personally liable for al the debts incurred
by the business. No difference in debt of the business owner and of the business, they
are one. Can be troublesome for lender if there are concerns of the borrower’s stability
of his/her business.
Partnership: one or more general partner, one or more limited partner in partnerships. General
has unlimited liability and carries on the day to day business of the partnership. Limited partner
contributes capital to a business but is not active in the daily affairs of the business. The limited
partners liability is there limited to the amount of money personally paid into the partnership.
Corporation: Is its own separate entity with most rights of a real person. This overcomes a basic
disadvantage of the other forms of business: unlimited liability. Many individuals incorporate
their business to limit their liability. Shareholders of the corp are only liable for the amount they
put in to buy shares. They do not share directly in the income of the company. Their gains either
rise from capital gains on the resale of shares, from dividends (a distribution of profits), or from
participation in the surplus in the event the company is wound up.
Typically Financial Statements have five parts:
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1. Balance Sheet- is a snapshot of the company’s financial position at a specific moment
in time. It shows the relationship between a company’s assets, liabilities, and owners’
equity.
 Assets are the resources that a business i.e cash, buildings, equipment, and
inventory.
 Liabilities are the business’s debts and obligations.
 Owners’ equity is what would be left for the firms’ owners if the company’s
assets were used to pay off its liabilities.
Assets – current assets can be turned into cash within one year, i.e cash on hand or in
the bank, accounts receivable, inventories, work-in-progress, prepaid expenses. Fixed
assets are typically long term in nature including items such as real estate, equipment,
furniture, and fixtures. Their value lies in producing goods rather than in their sale
value. Fixed assets lose their value/usefulness over time and this is known as
depreciation. The accumulative amount of depreciation is shown on the balance sheet
and reduces the value of a fixed asset
 Two other assets appear on a balance sheet: Long term investments are like
fixed assets except that their connection to the business is more remote and
they are generally not depreciated. These include investors in stocks or bonds,
or real estate. Intangible assets are those that do not physically exist but have
value to a business based on legal rights or market position. This includes
goodwill (company reputation0, patents, and trademarks.
Liabilities -obligations of the business. Classified as either current or long term.
 Current liabilities are debts incurred in the ordinary course of business that
must be paid within one year, e.g., accounts payable, short-term notes payable
to FI’s, accrued expenses, and accrued taxes.
 Long Term Liabilities are company obligations that are expected to be repaid
over a longer period (more than one year), e.g., mortgages, bonds, long-term
notes payable, and operating bank loans.
2. Income Statement – summarizes the results of the business’s revenues and expenses
during a specific period. An income statement is divided into the follow sections:
 Revenue or sale - the amount of money that comes from the day-to-day
operations of a business.
 Costs of goods sold – represents the direct manufacturing or production costs.
 Gross profit – is equal to sales, or revenue, minus the cost of goods sold.
 Operating Expenses – aka general expenses, are the balance of expenses
incurred by the business in its day-to-day running of the operation.
 Net Income From Operations are calculated as the sales from a business minus
all expenses and taxes.
3. Statement of Retained Earnings – indicates the amount of earnings that have been
kept in the business, in the form of cash equity or invested in new assets, over and
above all dividends paid out to the shareholders.
4. Statement of Changes in Financial Position – illustrates how a company otainsa nd
uses its cash. Outlines all income and outgoing cash for the reporting period.
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5. Notes to Financial Statements – has two components, first the account or auditor
opinion will report on any potential problems in the financial statements and states
whether the statement adhere to generally accepted accounting principles. Second any
relevant notes will disclose any changes in accounting procedures, the terms of long
term debt and other commitments, any extraordinary items included in Net Income and
any other relevant matters.
Credit Reports: used when evaluating a potential mortgage loan to determine the borrower’s
ability and willingness to repay their debt obligations. The purpose is to provide info on the
applicant’s past payment behaviour and the likelihood that this behaviour will continue in the
future through complying with terms for the proposed mortgage.
One factor a lender considers when evaluating a potential mortgage loan is the amount of the
mortgage loan compared to the value of the property itself known as the Loan to Value Ratio.
The Higher the LTV the greater the risk to the lender since the borrower has less of his own
money invested. As well, there is a better chance the value of the home will drop below the
amount owing on the loan.
Debt Service Ratios – compare borrowers debt payments to their incomes. There are two ratios
that check to see if borrowers have enough income to service their debts.
o Gross Debt Service Ratio is the % of annual qualifying income required to handle all of
the payments that are associated with housing. Four costs referred to as PITH
 Principal Payment on mortgage loans
 Interest Payments on mortgage loans
 Property Taxes
 An estimate of Heat (utilities)
o GDS is calculated using PITH + ½ condo fees (where applicable) over Total Gross
Qualifying Income. Generally lenders use a GDS ration of between 35% to 39% to help
with their decision. Meaning, a borrower can spend 35-39% of their gross income for
PITH.
o Total Debt Service Ratio - all of the payments that an individual makes to service all of
their debt. I..E Bank and other loans, Credit Card payments, car payments, personal
loans, other commitments such as alimony or child support. TDS is calculated using PITH
+ ½ condo fees + All Other Debt Payments over Total Gross Qualifying Income.
o Generally, lenders use a TDS ratio of 40% to 44% to qualify perspective borrowers.
Meaning a borrower can spend no more than 40-44% of his or her gross qualifying
income for PITH payments and all other debt payments to qualify for a mortgage loan.
The Loan to Value Ratio is calculated as Mortgage Loan Amount over Property Lending Value.
In general, the maximum mortgage loan to value ration is 80% for regulated lenders such as
deposit taking institutions and other lenders regulated under the Bank Act.
T4s, Financial Statements for self-employed, notices of assessment are some ways to verify
income.
Module Eight
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Mortgage products
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o Conventional or High Ratio Mortgages
o Closed or open mortgages
o Fixed or variable rate mortgages
o Special Mortgage Features
A conventional mortgage is usually when a borrower provides a down payment equal to 20% or
more of the property value leaving a LTV ratio of 80% or less. A conventional mortgage does not
normally require mortgage default insurance.
A high ratio mortgage is one where the borrower is contributing less than 20% of the value of
the property as down payment. If the loan to value ratio is 80% or great than the mortgage is
considered high ration. If considered high ration, and if provided by a federally chartered
institution or an approved NHA lender, it must be insured against default. Currently, high ratio
mortgages must be insured through Canada Mortgage and Housing Corporation, Sagen, or
Canada Guaranty.
A fully closed mortgage is a mortgage that does not allow any permanent or early repayment of
the mortgage, except on the sale of the property and then incurring a large penalty. In other
words, a closed mortgage does not permit the borrower to make any principal payments before
the end of the mortgage’s term, other than on the regular scheduled payment dates (i.e only
allowing monthly payments on a mortgage with a monthly payment schedule).
Open mortgages allow principal payments to be made in any amount, at any time, in addition to
the regular mortgage payments. They usually have short terms of six months to one year.
A fixed rate mortgage is when the interest rate is determined and stats the same for the term of
the mortgage. Was once the standard because when interest rates were low people would want
to lock in their term for the mortgage before the rates go back up. (Think of during covid)
Variable rate mortgage/Adjustable rate mortgage is when the interest rate charged on the
mortgage loan will fluctuate as market interest rates move. The initial interest rate will be set as
a variance from prime. I.E, if the current prime set by the lender is 3.25% and the
variable/adjustable rate is set at P -.5% then the initial rate will be 2.75% (3.25% - .5%). If the
market interest rate changes so will the interest charged on the mortgage.