Chapter 04 – Fixed Interest Rate Mortgage Loans
Solutions to Questions – Chapter 4
Fixed Interest Rate Mortgage Loans
Question 4-1
What are the main differences between the two main mortgages studied in this chapter? What are the
risks and rewards of the lender and borrower? What are the common elements of these mortgages?
CAM – Constant Amortization Mortgage – Constant amortization mortgage:
Payments are calculated so that the capital repayment is constant at each maturity. The total amount including
the interest and the capital repayment at each maturity is therefore decreasing and the added interest portion decreases at
each period.
This mortgage is very conservative because it favors capital repayment which is made constantly.
CPM – Constant Payment Mortgage – Constant payment mortgage or traditional mortgage:
Calculated as a simple constant annuity, constant payment, at a constant rate for a given rate. Which means that the
part of the capital repayment will gradually increase while the interest part will decrease.
The capital repayment takes place more slowly, while the interest part is more important at the beginning.
In both cases, the debt is completely amortized at the end of the term.
Question 4-2
Define depreciation
Amortization is the rate at which the debt is repaid during the term of the mortgage
The different types of depreciation are: full, partial, unamortized, or negative
Question 4-3
Why the monthly payments of a constant payment mortgage are made up of an interest portion plus
important at the beginning of the term than at the end?
The lender earns interest on the unrepaid portion of the capital only. This decreasing with each payment, the interest
paid each month will decrease over the term.
Question 4-6
Why does the lender charge an origination fee, especially on discounted loans?
The lender charges fees to cover its risk of early repayment. Rather than charging a higher rate
to remunerate your risk, a fixed fee is paid upon opening. He hopes that this will cover the losses linked to the departure of
the borrower in the event of early repayment where only the capital is repaid.
Question 4-8
What is the effective cost of borrowing?
The actual cost of borrowing differs from the advertised rate because it includes the upfront fees, the possibility of early repayment and
capitalization rate (Canada)
4-1
