Fixed Interest Rate Mortgage Loans: A Comedic Exploration
Welcome, dear readers, to the world of Fixed Interest Rate Mortgage Loans, where the only thing more fixed than the interest rate is my commitment to slipping in a joke or two. Join me as we dissect the ins and outs of mortgages, because who wouldn’t want to hear about large sums of money for thirty years straight in a way that’s less dry than a piece of toast?
Differences Between the Two Main Mortgages
First on our chopping block is the Constant Amortization Mortgage (CAM). Don’t let the fancy term frighten you; it’s essentially your accountant’s favorite mortgage. In a CAM, the capital repayment stays as steady as a tortoise in a marathon while the interest payments decrease over time. Think of it as the responsible adult of mortgages, steadily paying off its debts like you would pay off a delightful night out… if you’d kept track of your spending!
On the other hand, we have the Constant Payment Mortgage (CPM), a.k.a the traditional mortgage. This one is like your buddy who borrows money for a pizza but insists on paying you back with one slice per month; it just drags out the repayment. Each month, your payments stay the same, but at first, most of it is interest! So, if patience is a virtue, get ready to embrace the virtue while your lender enjoys their slice of interest pie.
Risks and Rewards
Now, let’s not sugarcoat it—every silver lining has a cloud, and every mortgage has its risks and rewards. For lenders, the risk with CAM is committing to a consistent repayment plan while hoping the borrower doesn’t flake out. CPM? Well, they know they’ll get their payments, but initially, they’re in for a hefty interest gain—at least that’s a bit easier to swallow over a pint.
For borrowers, the risk of opting for CAM is you need to be somewhat disciplined—kinda like trying to resist dessert after a healthy meal. But the reward? You pay that capital off more quickly, letting you kick your lender to the curb faster than a bad date. With CPM, yes, your payments feel like a consistent jog—at first—until you hit the wall of increased capital repayment, making you question all your life choices like a mid-life crisis.
Common Elements of Mortgages
Despite their differences, both CAM and CPM have something in common: they aim to completely amortize the debt by the end of the term. It’s like saying, “I’ll get you back for your birthday party—eventually.” As long as you make your payments, the outcome is clear: you’ll own that shiny slice of real estate one day.
What in the World is Amortization?
Now let’s tackle a pressing question—what’s amortization, you ask? It’s the sneaky way to describe how your debt shrinks over time; like that New Year’s resolution to lose weight, except this one actually takes shape—sorry, not sorry to my gym buddies! There are full amortizations, partial ones, unamortized or negative amortizations, all leading to one existential dread: “Will I ever finish paying this off?”
The Mystery of Monthly Payments
Why are those certain monthly payments a puzzle? Well, in a CPM, the interest portion starts heavier than a sumo wrestler at an all-you-can-eat buffet. As the principal decreases, so does the interest; I guess even interest knows how low it can go!
Origination Fees: Why Bother?
The sneaky origination fee is all part of the game—the lender’s insurance that you won’t bail on them after taking out a loan. It’s like buying insurance for your Netflix account to ensure you don’t just stop watching! They charge you upfront to buffer against early payoffs, so you can’t escape scot-free, just like the usual sequel to an utterly ridiculous action movie.
The Effective Cost of Borrowing
And now the pièce de résistance of our mortgage shenanigans: the effective cost of borrowing! Spoiler alert: it’s higher than the advertised rate! Remember that sneaky fine print? It includes all those extra bits like fees and possible early repayments. It’s like going to a buffet and thinking you’ll pay one price but then finding out the bottomless breadsticks were extra all along!
Final Thoughts
So, dear readers, as we navigate through the ups and downs of Fixed Interest Rate Mortgage Loans, it’s crucial to remember to laugh—especially when the numbers get a bit overwhelming. Whether you choose CAM or CPM, just ensure you’re making calculated decisions and, most importantly, never forget to check the fine print. Now, go forth and mortgage like you mean it—or at least giggle while you do!
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
