Mary Swaf eld

AMBA Fundamentals - M1 - Unit 1: Mortgage

Fundamentals

IN TR ODUCTION

Introduction

MOR TGAGE FUN DAMEN TALS

Mortgage Terms and De nitions

The Purpose of Mortgaging

Modern Mortgage History

CON CLUSION

Conclusion

R EFER EN CES

References
Lesson 1 of 6

Introduction
Mary Swaf eld

The mortgage industry is constantly evolving. Rates change, rules change, and property values
rise and fall every day. For some, there is no place more high-tempo or exhilarating than the
heart of a mortgage brokerage.

This course is likely one of your first steps toward joining the mortgage industry. In the
upcoming modules, we will walk through the fundamentals of the work and responsibilities of a
mortgage professional, the Canadian real estate and mortgage market, and building

relationships with your clients and other real estate professionals.

A career as a mortgage professional is filled with rewarding experiences. The housing market is
rich with opportunities to deliver good news. You will connect with happy new home buyers,
investors, and many others as you offer education about products and possibilities they never
knew were attainable.

When clients come to you with problems, you are the solution. The best solutions come with
knowledge and confidence.

In this unit, we begin with fundamental terms and concepts to build the foundation of your
mortgage industry knowledge. We will look at key industry terms, core benefits mortgage
professionals offer to their clients and an overview of the modern history of mortgages in
Canada.

By the end of this unit, you will be able to:

Define key terms used in the mortgage industry.

Identify the five Cs of credit analysis.

Describe the purpose of a mortgage.

Describe the services and benefits of a mortgage professional.

Outline major developments in the history of mortgages in Canada.

NE X T PA G E
Lesson 2 of 6

Mortgage Terms and Definitions

Mary Swaf eld

Like any industry, the mortgage industry comes with its' own language and vocabulary, which
you'll need to quickly become familiar with in order to succeed in this program, and later, to
succeed as a mortgage professional. At first, it may seem intimidating—terms like
“amortization” are not exactly intuitive. However, developing a comprehensive understanding of
these terms is an important first step toward becoming a licenced mortgage broker. It's also
important when it comes to educating your clients and working with various underwriters to
get your applications funded. Words that may seem unfamiliar to you now will quickly become
a part of your daily vocabulary.

C O NT I NU E

What is real property?

Real property is land (ground or soil), substances in or under the land other than mines or
minerals, and all buildings, fixtures, and structures attached to the land.

Real property also includes the rights and interests a person holds with respect to the land.

Examples of real property include:

Acreages. Driveways.

Hospitals. Fences.

Houses. Crops.

Garages. Trees.

Sheds. Landscaping.
Real property does not include personal property, which consists of unattached goods or any
item that can be moved or removed without injury to the property.

In the real estate and mortgage industry, personal property is often referred to as chat t els.
Chattels are tangible, movable items which are neither land nor permanently attached to the
property. Some examples of chat t els include:

Furniture.

Clothing.

Household goods.

Some appliances.

Window coverings.

Chattels are different from fixt ures. Fixtures have been installed in or fixed to the property,
therefore becoming part of the building. Some examples of fixt ures include:
 Boilers and radiators.

Built-in kitchen units.

Sinks, baths, toilets, and showers.

Built-in fireplaces.

Plug sockets.

What are the

characteristics of land?
According to the legal definition, land does not only refer to the earth but includes the
buildings on it; and it includes buildings separated from the earth, so that the owner of the top-
storey flat is still a landowner. ‘Land’ also includes intangible things such as rights of way; and
some rights that are not attached to physical land

There are three characteristics of land:

1. It is immobile (it cannot be moved).

2. It is industructable (it cannot be destroyed).

3. It is Unique (no land is identical).

C O NT I NU E
What is a mortgage?
A mortgage is generally defined as the pledging of real property to a lender as security for a
debt. It is an interest in land created by a contract (mortgage document) that is security for a
loan made by the lender to the borrower. Mortgages are a tool for a borrower to secure
property for use, whereas a lender views the mortgage as an investment to enable a return on
funds lent.

In simple terms, a mortgage is collateral over property given to the lender for purposes of a

loan’s repayment.

In Alberta, the Real Estate Act is the primary legislation that governs all aspects of the real
estate and mortgage industries. S.1(q) of the Act notes that within the Act, “mortgage” refers
to a mortgage of real property, or of a lease of real property.
According to the Act, it can also refer to a charge on real property, on a lease of real property,
or on another mortgage for the purposes of securing the repayment of money or another
consideration (Real Estate Act, R.S.A. 2000, c. R-5).

 Tip: Although the true definition of a mortgage is a loan

secured by real property, in this course, we generally use
“mortgage” to refer to a financial product with certain
features and privileges.

Parties to a mortgage
The parties to the mortgage contract are referred to as the mo rt gagee and mo rt gago r. All
mortgage documents contain these legal terms.
The mortgagee , also known as the lender , is the individual or entity lending funds secured

by real property. They receive specified payments as stated in the mortgage contract. Lenders
include any person, group, or institution participating as a lender in a debt obligation secured
by a mortgage. In this course, we will generally use the term "lender" when referring to the
mortgagee.

The mortgagor , also known as the borrower , is the individual or entity borrowing the

funds secured by real property. They make specified payments according to the mortgage
contract. In this course, we will generally use the term “borrower” when referring to the
mortgagor.
What is the National
Housing Act?
The Parliament of Canada passed the National Housing Act (NHA) in 1938. It was intended to
promote the construction of new houses, the repair and modernization of existing houses, and
the improvement of housing and living conditions. It replaced and expanded the scope of the
Dominion Housing Act of 1935.

The purpose of the NHA is set out in section 3: In relation to financing for housing, the purpose
of the NHA is to promote housing affordability and choice, to facilitate access to, and
competition and efficiency in the provision of, housing finance, to protect the availability of
adequate funding for housing at low cost, and generally to contribute to the well-being of the
housing sector in the national economy.
 C O NT I NU E

What is a mortgage
term?
The mo rt gage t erm is the period of time the lender loans funds to the borrower, as specified
in the mortgage agreement.

The principal and unpaid interest are due to the lender at the end of the mortgage term. At
that time, the borrower may renew or refinance the mortgage. Most terms range from six
months to ten years; five years is a common mortgage term.

The term has a direct effect on the mortgage rate, with short-term rates historically being
lower than long-term rates. Private lenders typically deal in shorter terms—one to two years—
with higher rates than institutional lenders.

Mortgage terms are sometimes confused with amortization periods. The mortgage term is the
length of time that the mortgage agreement at the agreed interest rate is in effect. The
amortization period is the length of time it will take to fully pay off the amount of the
mortgage loan.
Over a 25-year amortization period, a borrower may have several different mortgage terms
(and therefore enter into several different mortgage contracts) before completely paying off
the debt obligation. Longer amortization periods typically reduce monthly payments, as the
loan is being paid off over a longer period of time. However, borrowers will pay more in interest
over the life of the mortgage.

The end of the term for the mortgage loan is referred to as maturity. Think of a term like a

'reset' button on a mortgage: At maturity, once the term is complete, the borrower has the
option to pay off the mortgage, renew the mortgage on the remaining principal at a new rate
with the existing lender, or transfer it to another lender.

A common mortgage in Canada has a 5-year term with a 25-year amortization period.

C O NT I NU E
What is a mortgage
payment?
Mortgage payments consist of the principal payment plus int erest .

The principal is the sum of money originally borrowed, or the portion still owing on a mortgage.
The interest is the amount charged by the lender for the use of borrowed funds and is
calculated as a percentage of the principal. This percentage is also referred to as the int erest
rat e. The interest portion is often referred to as the "cost of borrowing money". Mortgage
payments may also include property taxes and insurance.

Typically, in the early stage of a mortgage, the lender will apply a larger portion of the payment
toward the interest, with the remainder going toward the principal. Over time, an increased
portion will be applied toward the principal until it's paid off in full.

The mortgage payment frequency will impact how fast or slow the borrower reduces the
principal of the loan, the amount of interest they pay, and when the mortgage will be paid off.
Choosing the payment frequency often depends on the borrower's other financial obligations
as well as their comfort level, and is one of many decisions that you will be looked to for advice
and guidance in your role as a mortgage professional.

C O NT I NU E
What are fixed,
variable, and
adjustable
mortgages?
Lenders typically offer mortgages in three different forms: fixed, variable, and adjustable. These
types differ in the way that the interest rate is set and applied for the term of the mortgage.

Fixed-rate mortgage
–
A fixed-rate mortgage is a loan with an interest rate that is fixed for
the full term of the mortgage. Payments are set in advance for the term.
This provides the borrower with the security of knowing the amount of
each mortgage payment allocated to paying the interest portion and
outstanding principal balance.

In the initial years, more of the payments go towards paying the interest
than the principal balance remaining. As the principal of the loan
reduces over time, a larger portion of the payment will go towards the
loan reduction (principal) than to interest. This is because the interest is
calculated on the declining balance of the mortgage loan, so as the
balance of the mortgage loan reduces, the set payment becomes more
principal than interest over time. This is the basis of mortgage
amortization, which will be described in more detail in the section
below.
Variable-rate mortgage (VRM)
–
A variable-rate mortgage is a loan with an interest rate that may
fluctuate during the mortgage term depending on changes in market
interest rates. The rate is typically based on the lender’s prime interest
rate. A prime interest rate, also known as the "prime rate", is the interest
rate that banks use as a basis to set rates for different types of loans,
credit cards, and lines of credit. It is the baseline rate upon which all
floating rate loans are negotiated (i.e. prime + 3%).

Banks and lenders often adjust their prime interest rate in response to
the Bank of Canada's overnight interest rate. The Bank of Canada adjusts
the target for the overnight rate eight times each year on fixed
dates. Click here to view the Bank of Canada's policy interest rate data.

When a rate change occurs, a borrower’s payment may be affected in

the following manner:
 The mortgage payments will increase or decrease. The lender will
send out a notification to the borrower advising them of the
adjusted mortgage payment required in order to maintain the
original amortization period.

The mortgage payments remain fixed, but the portion of that

payment that is applied towards principal vs. interest changes. When
interest rates decrease, more of the payment goes towards paying
the principal balance remaining. When interest rates increase, more
of the payment goes towards paying the interest rather than the
principal.

With a variable-rate mortgage, within the set payment amount, interest

goes up or down, which affects the amount going toward the principal.
Total payment amounts do not change when the prime rate changes.

Adjustable-rate mortgage (ARM)

–
An adjustable-rate mortgage fluctuates based on the lender's prime
rate, and therefore the scheduled payment amount varies from month
to month. Similar to a variable-rate mortgage, the interest rate also
fluctuates.

The interest rate fluctuations may be linked to the lender’s prime rate or
another pre-selected economic index such as the federal government’s
treasury bill rate.

Unlike a variable-rate mortgage, where interest rates are increased or

decreased in real-time as the lender’s prime rate changes, with an
adjustable-rate mortgage, the interest rate is usually adjusted at
predetermined intervals (e.g. monthly, quarterly, semi-annually) based
on a rate market review conducted by the lender.

Payments under an adjustable-rate mortgage are typically calculated on

the lender’s three- or five-year fixed-rate mortgage and remain constant
until the rate review, when the mortgage payment may be adjusted.

With an adjustable-rate mortgage, the interest amount changes, and the

principal amount paid stays on track, but the payment amount may
change when the prime rate changes.
The most obvious difference between a variable-rate mortgage and an adjustable-rate
mortgage is that with a VRM, the mortgage payment amount always remains the same - it
does not go up and down with changes in the prime lending rate. With an ARM, the mortgage
amount of the payment WILL go up or down based on changes to the prime lending rate. We
will dive deeper into the various forms of mortgages later in the course.

C O NT I NU E

What is amortization?
Amo rt izat io n is the gradual retirement of a debt by means of installment payments, which
typically include principal and interest.

The amo rt izat io n perio d is the time required to repay a mortgage by way of equal
installments of periodic, constant payments based on a set interest rate. The payments are a
combination of principal and interest in “blended” amounts. Amortization periods for
mortgages are most commonly 25 to 30 years.

When the full value of a mortgage loan (interest and principal) is amortized over a set period,
the loan is described as fully amo rt ized.

Partially amortized mortgages have also been a tool of mortgage regulators.

If only a partial value of the mortgage loan is amortized over the set period, and a balloon

payment is required at the end of the amortization period, the loan is described as partially

amortized.

A balloon payment is a lump-sum payment that is substantially larger than previous payment
installments, made against a loan at the end of a term.

For borrowers, at the mortgage term’s maturity, the remaining balance of the loan must either
be paid out, renewed with the existing lender, or transferred to another lender.
The amortization schedule determines the monthly mortgage payments, including principal
and interest, over the term and amortization period.

Amortization summary

The following tables represent a summary of an amortization schedule for a mortgage of

$4 00,000, with an interest rate of 4 .50%, and a 25-year amortization period divided into 60-
month (five-year) terms.

Amortization Summary

Mortgage Amount: $400,000.00

Interest Rate: 4.500%

 Amortization Summary

Amortization: 25 Years 0 Months

Term: 60 Months (5 Years)

Disclosure Rate1 : 4.500%

Payment
Monthly
Frequency:

Compounded2: Semi-Annually

Monthly Payment: $2,213.89

1 Disclosure rate is the actual interest rate a borrower must pay when accounting for all the
costs of obtaining a mortgage, which includes lender fees.

2 Compounded refers to the frequency that the interest being applied is compounded. In
Canada, fixed-rate mortgages are compounded semi-annually.

Amortization Schedule

Payment
Interest Principal Balance
Date

1st month $1,486.13 $727.76 $399,272.24

 Amortization Schedule

2nd month $1,483.42 $730.47 $398,541.77

3rd month $1,480.71 $733.18 $397,808.59

4th month $1,477.99 $735.90 $397,072.69

5th-59th
- - -
month

60th month $ 1,311.48 $ 902.41 $ 351,185.67

C O NT I NU E

How do multiple
mortgages work?
There are many reasons why a borrower might consider second or multiple mortgages. A
second mortgage can be used to pay off high-interest debt, fund a renovation, pay for post-
secondary education, or finance an investment property. It's important that borrowers - and
mortgage professionals - fully understand how second or multiple mortgages work.

A first mortgage is the first debt registered against a property.

The priority of subsequent mortgages, such as second or third mortgages, are registered
against the equity in the property and distinguished by the date of title registration.

In the event a borrower defaults on their mortgage, the lender under the first mortgage has
priority on the property to recover the outstanding principal, interest costs, and any other
amounts owed before any subsequent mortgages can make a claim.

Each mortgage is a claim against the property, and should the property be sold or foreclosed,
each claim must be satisfied in the order that it was registered.

It is theoretically possible to register any number of mortgages against a property title.

Consequently, the lower the mortgage ranks in terms of priority, the less security is afforded to
the lender. Higher interest rates are charged to the borrower on each subsequent mortgage to
compensate the lender for this added risk.

Despite this added risk, second and third mortgages on real property are common occurrences
in the mortgage market and provide investment opportunities to lenders.
 C O NT I NU E

What is a down
payment?
A do wn payment is an initial lump sum of money a buyer puts towards purchasing a property.

Canada Mortgage and Housing Corporation (CMHC) guidelines require a minimum 5% down
payment to purchase an owner-occupied property up to $500,000, and 10% for the remaining
portion up to a maximum purchase price of $1 million.

For example, a $600,000 purchase would require a down payment equal to 5% of $500,000
and 10% of $100,000, for a total of $35,000.

A purchase price over $1 million requires a minimum down payment of 20%.

These guidelines are subject to change based on the federal government’s regulations. It is the
responsibility of every mortgage professional to stay up-to-date with current federal
regulations.

There are rules and regulations governing allowable sources of down payments. Down payments
must come from the borrower's personal savings, gifted funds from direct family members like
parents or grandparents, or from an inheritance. Borrowers will be required to provide
documentation proving the source of the down payment.
In some cases, it may be possible to borrow a portion of the down payment as long as the
borrower can service the debt (make principal and interest payments on time) of the borrowed
funds.

Rental, multi-unit, and commercial properties have different guidelines as they require larger
down payments and have revenue-generating potential. You will learn more about these
guidelines in future Modules.

C O NT I NU E

What are gross debt

servicing (GDS) and
total debt servicing
(TDS) ratios?
Lenders use the gro ss debt service rat io (G DS) and t o t al debt service rat io (T DS) to
assess an applicant's ability to afford their mortgage.

Gross debt service ratio (GDS)

The GDS examines the ratio of housing debt compared to the applicant’s income stream
(Hayes 2021). In other words, it's the percentage of a borrower's monthly household income
that covers their housing costs.

Housing costs include mortgage payments of principal and int erest , pro pert y t axes and
heat ing expenses (PIT H). If the property is a condominium, the GDS ratio must include 50% of
the condominium fees.
For chattel or leasehold loans, 100% of site or ground rents (the cost paid to lease/rent the

land) must be included in the GDS calculation. A chattel loan is different from a traditional

mortgage, because it is aimed at other types of property, like a car or a business, and you must
put up property as collateral. If a borrower has bad credit, a chattel mortgage is easier to
obtain than a traditional mortgage, because the borrower must put up property, such as a car,
land, a business, or jewellery, as collateral.

A leasehold loan applies to property that is situated on leased land. This means that the

borrower only owns the structure/property on the land, not the actual land beneath it.
Common examples of this include properties situated on land owned by the city, corporations,
universities, and First Nations

If the loan is a high-rat io mo rt gage, the insurance fee, if not paid upfront by the borrower, is
added to the total loan amount and included in the GDS calculation. A loan is considered high-
ratio if the mortgage loan is higher than 80% of the lending value of the property. High-ratio
residential loans typically require mortgage loan insurance.
 (Mortgage payment + property taxes + heat +
Start
50% of condo fees)

Divide
(monthly gross income)
(÷)

Equals
=GDS
(=)

Total debt service ratio (TDS)

Lenders also calculate a borrower’s total monthly debt load by including other contractual
debts such as car loans, bank loans, credit card payments and other financial commitments to
determine the total debt service (T DS) ratio.

(Mortgage payment + property taxes + heat +

Start
50% of condo fees + other debt payments)

Divide
(monthly gross income)
(÷)

Equals
=TDS
(=)

C O NT I NU E
What is the loan-to-
value ratio (LTV)?
The lo an-t o -value rat io (LT V) is a major risk assessment tool used in mortgage lending.

The loan-to-value ratio expresses the amount of the mortgage as a percentage of the
appraised value of the property. It is a key ratio used by lenders when they are determining
whether to qualify a borrower. To calculate, simply divide the mortgage amount by the home
purchase price (which should equal its appraised value).

For example, if a borrower purchases a property with a 5% down payment, the loan-to-value
ratio is 95%, as they are borrowing 95% of the property value.

Generally, the lower the loan-to-value, the better. It means that the risk to the lender is lowered,
as the borrower is contributing more equity to the home purchase.
 C O NT I NU E

The 5 Cs of credit
analysis
To maximize the possibility of a borrower meeting the repayment of the debt obligation, lenders
evaluate the borrower’s qualifications by assessing basic components of credit analysis. The key
elements analyzed by lenders to determine a borrower’s overall credit risk are referred to as
“t he five Cs o f credit .” The system weighs five characteristics of the borrower and conditions
of the loan in an attempt to estimate the risk of financial loss for the lender.

Character
–
Lenders primarily care about an applicant’s stability and reliability,
because a person possessing these traits will likely make regular debt
payments, and is therefore a lower risk.

Character considers the applicant’s attitudes toward money and credit.

For example, are they a habitual credit seeker, saver, spender, or
investor? Some indicators evaluated include age, education, occupation,
work experience, and current residence. People who demonstrate a
high degree of stability tend to be reliable payers. Lenders must
attempt to assess whether a borrower is trustworthy, credible, and
responsible with their finances.
Credit
–
Lenders see credit as another indicator of stability and reliability.

Credit considers an applicant’s history with debt and credit. Lenders

use credit bureau details to evaluate borrowers' ability to meet their
debt obligations. National credit reporting agencies measure credit
information. The two credit reporting agencies that keep credit history
data in Canada are Equifax Canada and TransUnion of Canada. All
lenders refer to the credit score when considering the so-called
creditworthiness of the borrower.

Capacity
–
Lenders also evaluate the ability of an applicant to make payments.

Capacity describes the ability to repay all current obligations plus the
new mortgage request. Capacity is determined using GDS and TDS
ratios that consider personal income, existing debt load and the
mortgage applied for. These guidelines exist to ensure a borrower’s
income is sufficient to manage the debt obligations.

An evaluation of capacity considers age, employment status, income

level, job stability and prospects, debt load, assets versus liabilities, etc.

Capital
–
Lenders also evaluate risk based on how much of a stake the borrower
has in the transaction.
Capital refers to the amount of funds personally invested in the
property. A borrower who invests their own capital in a property
represents less risk to the lender. The amount of capital also reflects the
borrower’s ability and willingness to save money and accumulate assets.

Collateral
–
Lastly, lenders care about how they may recover their money if the
borrower defaults.

Collateral is the security a borrower provides to a lender. In a mortgage

transaction, collateral is generally the property itself. The lender will
want to ensure that the security property is marketable. The lender
typically requests a full property appraisal assessing its value, condition
and type.

C O NT I NU E

What is equity?
Equit y is the difference between the property's market value, less the mortgage's outstanding
balance, less any other financial obligation registered against the property. The following
example details equity and valuation over time.
Scenario:

Armando and Sandra own a home with a market value of

$425,000. They now have an outstanding mortgage balance
of $300,000, and a builder’s lien for unpaid construction
costs of $25,000. Therefore their equity in the property is
$100,000.

Equity also grows when the market changes and property

values increase. If Armando and Sandra purchased their
home 10 years ago for $425,000, and the home is now valued
at $650,000, their outstanding mortgage remains $300,000.
Their mortgage is based on the amount they initially
borrowed, not the current value of the property,

However, the equity in the property has now increased to

$325,000 as the property value increases. If Armando and
Sandra sell their home for $650,000, that $325,000 in equity
would be their profit.
C O NT I NU E
Knowledge Check-In: Terms
1

Keyboard Instructions:
–

Tab to the first answer choice in the left column, then use the up
and down arrow keys to cycle through the choices until the one
you want is selected.

Press the spacebar to activate the selected choice. It’ll turn gray,
which means it’s ready to be linked to a match in the right column.
If you want to deactivate the selected choice, press the spacebar
again or press the Esc key.

When a choice is active (gray), use the right arrow key to switch to
the column of matches on the right side of the question, then use
the up and down arrow keys to cycle through the matches until
the one you want is selected.
 Press the spacebar to link the active choice on the left to the
selected match on the right.

Use the left arrow key to switch back to the column of choices on
the left side of the question and continue linking choices and
matches.

After linking all choices on the left with matches on the right, press
Enter to submit your answer.

We have introduced many key terms relating to the mortgage industry

in this section. In the exercise below, match the term to its definition.

Land and all buildings, fixtures,

Real property and structures attached to the
land.

A contract that gives security for

Mortgage a loan made by the lender to
the borrower.

The gradual retirement of a debt

Amortization by means of installment
payments.

A property's market value less

 A property s market value, less
Equity any financial obligation owed on
the property.

The sum of money originally

Principal borrowed or the portion still
owing on a mortgage.

The amount charged by a lender

Interest for the use of borrowed funds
calculated as a percentage.

The individual or entity

Mortgagor borrowing funds secured by real
property: the borrower.

The individual or entity lending

Mortgagee funds secured by real property:
the lender.

A calculation of housing debt

Gross debt service ratio
compared to a borrower’s
(GDS)
income stream.

A calculation of a borrower’s
Total debt service ratio
overall monthly debt load
(T DS)
compared to their income.
 SUBMIT

Complete the content above before moving on.

NE X T PA G E
Lesson 3 of 6

The Purpose of Mortgaging

Mary Swaf eld

The average buyer doesn’t generally have access to the hundreds of thousands of dollars it
costs to purchase a home outright. The time it would take the average person to save the total
sum to purchase property would be unfeasible.

Mortgages give consumers immediate access to homeownership while they pay the cost down
over time.

C O NT I NU E

Refinancing
Refinances and second mortgages allow owners to access the equity in their property for
purposes such as investment opportunities, paying off existing debts, or renovations and
upgrades.

Borrowers may consider leveraging the equity in their property to further their retirement
portfolios, boost their RRSP contributions, increase their net worth by purchasing a second
property, or even fund post-secondary education for themselves or their children.
The options and opportunities available in the marketplace of mortgages extend beyond just
purchasing a home.

C O NT I NU E

The benefits of using a

mortgage professional
Consumers demand variety, flexibility, and quality service when seeking out a mortgage. In
response, a wider selection of mortgage products and services are available every year.
Obtaining a mortgage is a major financial commitment. With so many choices and competing
options, some may find it difficult to determine which product best meets their needs. Many
consumers seek help from a mortgage broker to assist them in making an informed and
educated decision and assist in the mortgage transaction process.

While previous generations opted to finance their mortgage directly from their financial
institution, there has been a definite shift to working with a mortgage professional.

Borrowers experience many benefits when they choose to use the services of a mortgage
professional. The following table illustrates some of these benefits.

Mortgage Professional Financial Institution Specialist

Mortgage Professional Financial Institution Specialist

Generally has access to different

lending sources but may Unable to access other lenders,
choose to work primarily with is therefore limited to offering
one lender. Has a greater their institution's products
opportunity to seek out a variety which may not meet their
of mortgage products to suit borrower’s needs.
the borrower’s needs.

Can provide objective and

Partial to their own institution’s
impartial professional services to
financial products.
both borrowers and lenders.

Uses their experience and

Leaves the negotiating in the
knowledge to facilitate the
hands of the consumer.
mortgage application project.

Provides flexibility in scheduling

Scheduling availability may be
unconventional appointments
limited to business hours.
at the consumer’s convenience.

C O NT I NU E
What are common
client needs and
concerns?
When consumers come to a mortgage professional, they are looking for a reliable source of
information and a trustworthy guide to the complex process of mortgage transactions.

The following are some of the most common client questions and concerns for mortgage
professionals:

What is the best rate you can offer?

What is the penalty for breaking the terms of the mortgage?

What is the difference between a fixed-rate and a variable-rate?

What terms are available?

What are the fees associated with this mortgage transaction?

What is a private lender?

How do I improve my credit score?

Do I need an appraisal? And if so, who pays for it?

Can I get a copy of my appraisal report?

Being able to navigate these questions confidently and accurately will distinguish you as a
trustworthy professional in the mortgage industry.

C O NT I NU E
Knowledge Check-In: Mortgage
Professionals
1

In the following exercise, identify the differences between a mortgage broker and a professional
working with an institutional lender. Each card briefly describes a characteristic that could
belong to either type of professional. Sort the cards into either the mo rt gage pro fessio nal or
inst it ut io nal specialist category.

Keyboard Instructions
–

Use Tab or the left and right keys to select a category (drop target).

Select the category that matches the current item displayed, then
press Enter or Spacebar to move the item to the selected
category.

If the answer is correct, the item will move briefly to the category
and then disappear. If the answer is wrong, the item will shake
briefly, then you can select a different category and try again.

Mortgage professional
Has access to many lending Objective and impartial
sources and products. advice on products.

Helps facilitate the mortgage

Flexible availability.
process for both parties.

Institutional specialist

Can offer bundles and

Leaves the borrower to lead
incentives with other
on negotiation.
nancial products.

Mainly available during May already have a nancial

business hours. relationship with the buyer.
Complete the content above before moving on.

NE X T PA G E
Lesson 4 of 6

Modern Mortgage History

Mary Swaf eld

Although the concept of mortgages and property ownership has a long history, the modern
framework for mortgages in Canada has been shaped by post-World War 2 governmental policy
and general economic forces. Alberta’s mortgage environment is guided by overall Canadian
policy while responding to local economic shifts, especially those caused by the boom-and-bust
cycles of a province’s resource industries.

The following timeline tracks the major events that impacted the Canadian mortgage industry
since the 194 0s and some of the resulting changes in regulation and the market.

Click the icon for each decade to learn more. You can also use the arrows at the top of each
box to move between the decades.

Keyboard Instructions:
–

Use Tab and Shift+Tab to move from one icon to another.

Press Enter or the Spacebar to open the text box with more
information.

Use the up and down arrow keys to scroll through the contents of
a text box.
Use the left and right arrows to move from one open text box to
another.

Press Esc to close a text box.

       


 

1940s

194 4 : Changes to the National Housing Act (NHA) were made to deal with the low level of
construction as a result of World War II. The maximum mortgage term was set at 20 years with a
prepayment privilege after three years. Interest rates were to be determined by periodic agreements
between the lenders and the government.

194 6: The Central Mortgage and Housing Corporation (later Canada Mortgage and Housing
Corporation), or CMHC, was established as a Crown Corporation to administer the federal government’s
participation in housing under the NHA.

CMHC was authorized to make direct loans to residential property owners, builders, or developers where
joint loans were not made available by approved lenders. This shift was significant in rural areas and
smaller communities since approved lenders were reluctant to invest.

Further changes included extending mortgage terms from 20 to 25 years, changing the loan-to-value
formula, and adopting a new method for determining the interest rate.
 

1950s

1954 : The NHA was again changed to increase the supply of mortgage money available from
institutional lenders to free up government funds. Joint financing had been provided by the government
and selected lenders, but these sources could not keep pace with the demand for mortgage funds in
the postwar boom.

Three amendments were made to increase the funds available from approved lenders. These included:

1. Replacing government joint lending with government-insured loans, where the full financing
amount was provided by the lender.

2. Granting permission to Canada’s chartered banks to lend money for mortgages insured under the
NHA and to make personal loans secured by chattel mortgages on personal property.

3. Establishing a secondary market for insured loans (e.g. resale market). The sale of insured loans to
investors other than approved lenders would increase both the supply of mortgage funds and the
liquidity of the insured loans.
 

1960s

1967 : The Bank Act, which is the law that regulates Canada’s chartered banks, was amended,
changing the way institutional lenders could take part in the residential mortgage market.

The 6% interest rate cap charged on bank loans was removed. As market interest rates had moved
above 6% in the mid-1960s, this maximum had effectively forced banks out of residential mortgage
lending.
 

1970s

197 4 : Inflation was a headline issue in Canada as a result of a dramatic increase in oil prices. This
influenced the entire economy, including the mortgage market. Mortgage rates also increased
dramatically, and lenders realized that they were locked into loaning funds for mortgages with long
terms at below-market rates.

In response, many mortgage agreements were revised to alter the repayment scheme from a fully
amortized mortgage to a partially amortized one. This gave both borrowers and lenders increased
protection from the unexpected fluctuations in interest rates.

The federal government continued to assist the housing market by insuring mortgages and providing
direct loans to borrowers in smaller communities that were otherwise underserviced by other lenders. In
addition, legislative amendments were passed that permitted institutional lenders to grant mortgages
exceeding a certain percentage (at that time 75%) of the property’s value, as long as a mortgage
insurer insured the excess.
 

1980s

Ea rly 1980s: Interest rates for mortgages increased to record levels, reaching a prime rate as high as
22.75% in 1981 (Bank of Canada, 2022). The ability to purchase a house was out of reach for the
average Canadian.

1987 : The federal government, through the NHA and CMHC, introduced mo rt ga ge-ba cked
securit ies (MBS). These securities provided investors with an opportunity to make secure investments
in Canadian residential mortgages, thus increasing the supply of low-cost funds available for mortgage
lending. These securities are comparable to top-quality government bonds that are backed not only by
the overall strength of Canada’s housing market but also by the federal government’s guarantee.
 

1990s

1992 : The Home Buyers’ Plan (HBP) was implemented, allowing first-time buyers to withdraw funds
tax-free from their Registered Retirement Savings Plan (RRSP) to purchase or build a house and helping
to stimulate the housing market.

1996: CMHC introduced emili, an electronic appraisal and valuation system used to screen applications
for mortgage insurance. With emili, a more automated insurance and valuation system was put in
place which effectively reduced the processing time on most mortgage application decisions.

Throughout the 1990s, e-commerce, the process of conducting business via the Internet, became more
common. Many lenders started using the Internet to streamline their business operations and promote
their mortgage products and services.
 

2000s

2 006: The collapse of the U.S. housing market, known as the subprime mortgage crisis, played a key
role in the global financial crisis of 2006 to 2009.

Select the plus icon (or use the next arrow) to learn more about the subprime mortgage crisis.

2 008: The Canadian government took steps to maintain the availability of longer-term credit in
Canada by purchasing up to $25 billion in insured mortgage pools through CMHC. This process helped
Canadian financial institutions raise longer-term funds and make loans and mortgages available to
consumers, home buyers, and businesses.

In addition to the federal financial support, changes were made to the mortgage insurance framework
that reinforced the importance of prudent borrowing and adjusted minimum standards for
government-backed, high ratio mortgages.

According to these rules, the maximum amortization period was changed from 4 0 years to 35 years.
Zero down payment mortgages were disallowed, and new government-backed residential mortgages
required at least a 5% down payment. New loan documentation standards were introduced to confirm
borrowers’ sources of income, level of income, and property value.
 

The subprime mortgage crisis

In the previous decade, low interest rates and strong economic growth led to a surge in housing
purchases, causing prices to sharply rise.

To continue to entice borrowers into the mortgage market, many lenders aggressively promoted
subprime mortgages. Subprime mortgages are loans issued to borrowers who do not meet the
conventional underwriting guidelines. These mortgages are offered with a low or zero down payment,
long amortization periods, and low introductory interest rates that accelerate quickly after the initial
year or two of the loan.

These predatory incentives lured borrowers to purchase beyond their financial means without
understanding what effects rising interest rates would have on their ability to afford their mortgage
payments.

The American housing market meltdown was felt by the rest of the world. Shock waves from the
downturn were amplified and extended by sophisticated financial products and practices first
introduced in the late 1980s and early 1990s.

Most notable was the practice of securit iza t io n. This is a process where lenders bundle mortgage
loans on their books and sell them as securities in secondary markets, essentially buying and selling
debt.
Mortgage-backed securities were very attractive investments since they offered much higher financial
returns than government bonds. Individual investors, lenders, pension funds, and even government
agencies around the world invested in mortgage-backed securities hoping for a high return on what
they thought were secure assets.

Inevitably, interest rates rose and a massive number of subprime mortgages defaulted. Housing prices
started to collapse, property values plunged, and the securities backed by these mortgages started to
default. Eventually, banks and other institutions wrote off large amounts of securitized mortgages as
these bad loans quickly started to erode their balance sheets.
 

2010s

2 010: The federal government introduced measures to protect borrowers from overextending
themselves financially as interest rates were likely to rise from historic lows.

These adjustments included enhanced borrowing requirements for all high-ratio insured mortgages,
limiting the residential mortgage refinancing amount to 90% of the property, and requiring a
minimum down payment of 20% for government-backed mortgage insurance on non-owner occupied
residential rental properties (i.e. one to four units).

2 011: Further changes to the standards regulating government-backed insured mortgages were made
to reduce the potential debt load on Canadian home buyers.

These changes included reducing the maximum amortization period to 30 years for new government-
backed insured mortgages with loan-to-value ratios of more than 80%, lowering the maximum
residential refinancing amount to 85%, and withdrawing government insurance backing on non-
amortizing lines of credit secured by residential properties, such as home equity lines of credit
(HELOCs).

2 012 : As the federal government continued to shore up Canada’s housing finance system, further
changes to the requirements for government-backed insured mortgages took effect.
These adjustments included again reducing the maximum amortization period, now to 25 years to
further reduce the total cost of interest and help Canadians build equity in their homes more quickly.
Refinancing amounts were further reduced to 80%, while the maximum GDS was fixed at 39%, and
the maximum T DS was fixed at 4 4 %. Government-backed insured mortgages were also limited to
residential properties of less than $1 million.

These changes better protected Canadian homeowners from economic shocks or increases in interest
rates. These measures were largely successful, and the Canadian banking system was ranked the
strongest in the world by the World Economic Forum in the years following the 2008 global financial
crisis. (CBA, 2013)

2 017 : The federal government launched the National Housing Strategy. This policy focuses on
increasing Canadians’ access to affordable housing, including community housing, rental support, and
homeownership.

2 019: As part of the National Housing Strategy, the federal government introduced the First-T ime
Home Buyer Incentive program, which offers contributions to borrowers’ down payments totalling 5-
10% of the home’s purchase price for applicants with incomes under $120,000. This sum, which must
be paid back as a percentage of the sale value when the home is sold, is intended to lower the costs of
borrowing for middle-income households.

2 02 2 : In response to rapidly rising home prices in major Canadian cities, buyers in Toronto, Vancouver,
and Victoria, were given access to higher borrowing amounts with lower qualifying income
requirements.

C O NT I NU E
Knowledge Check-In: Mortgage
history
Select the best answer to the following multiple-choice questions.

Keyboard Instructions:
–

Tab to the question, then use the Up and Down arrow keys to move
from one answer choice to another.

Once a choice is selected, Tab to the Submit button and press the
Spacebar or Enter.

To retake the question, tab to the Take Again button and press the
Spacebar or Enter.
1. What is the Crown Corporation charged with administering the
Canadian government’s role in the mortgage industry?

The Bank of Canada.

The Canadian Mortgage and Housing Corporation.

The National Housing Strategy.

The National Housing Act.

SUBMIT

Complete the content above before moving on.

2
2. When were interest rates on mortgages at their highest?

1944-1946.

1965-1967.

1980-1982.

2006-2008.

SUBMIT

Complete the content above before moving on.

3. In what decade did e-commerce and automated systems begin to

play a larger role in the mortgage industry?

1980s.
 1990s.

2000s.

2010s.

SUBMIT

Complete the content above before moving on.

4. What are some of the key ways that CMHC has intervened in the
mortgage market to protect home buyers?

Limiting mortgage terms, adjusting mortgage

insurance rates, and offering financial programs.

Raising credit limits and directly lending funds.

Governing who is allowed to purchase homes
and where.

Guaranteeing all Canadians the right to a home.

SUBMIT

Complete the content above before moving on.

NE X T PA G E
Lesson 5 of 6

Conclusion
Mary Swaf eld

Mortgages are dynamic. We have learned they have a long history, almost as long as the idea of
private property itself. Mortgages are affected by world events, local markets, and the needs
and wants of individual borrowers.

Your job as a mortgage professional is to be the intermediary between lenders and borrowers,
and that relationship is crucial to keeping the mortgage industry running smoothly. In this role,
you are a valuable source of information for your clients, so it is important to remain up-to-date
with current regulations, policies, and practices. The information in this course is current to the
time of publication, but it is your responsibility always to verify details with your brokerage. It is
also important to become a member of your local professional association, which are a valuable
source of current information and ensure that members are provided with timely updates when
changes in regulations, legislation, or policies occur.

In the next unit, we will examine how the mortgage industry

is regulated and monitored in Canada, by whom, and what
resources and organizations are available to mortgage
professionals.

C O NT I NU E TO R E FE R E NC E S
Lesson 6 of 6

References
Mary Swaf eld

Bank of Canada. (2022, May 11). Interest rates posted for selected products by the major
chartered banks. Weekly data update. https://www.bankofcanada.ca/rates/banking-and-
financial-statistics/posted-interest-rates-offered-by-chartered-banks/

Canadian Bankers Association. (2013, September 4 ). Canadian banks remain soundest

according to World Economic Forum, six years in a row.
https://web.archive.org/web/2014 0726203926/http://www.cba.ca/en/media-room/65-news-
releases/678-canadian-banks-remain-soundest-according-to-world-economic-forum-six-years-
in-a-row

Government of Alberta. Real Estate Act, R.S.A. 2000, c. R-5.

https://www.qp.alberta.ca/documents/Acts/R05.pdf

Hayes, A. (2022, February 8). Gross debt service ratio (GDS). Investopedia.
https://www.investopedia.com/terms/g/grossdebtserviceratio.asp#:~:text=The%20gross%20debt
%20service%20ratio%20is%20a%20measure%20of%20housing,them%20for%20a%20mortga
ge%20loan.

ADDIT IO NAL RESO URCES

Alberta Real Estate Act

Canadian Mortgage and Housing Corporation

Alberta Mortgage Brokers Association
 Mary Swaf eld

AMBA Fundamentals - M1 - Unit 2: Mortgage

Regulations, Associations, and Professionals

IN TR ODUCTION

Introduction

MOR TGAGE R EGULATION S, ASSOCIATION S, AN D PR OFESSION ALS

Federal Mortgage Regulators

Alberta’s Mortgage Regulators

Trade Associations and Organizations

Mortgage-Related Professionals

CON CLUSION

Conclusion
Lesson 1 of 6

Introduction
Mary Swaf eld

Consumers trust mortgage professionals and industry members with their personal and
financial wellbeing during a mortgage transaction. Applying for a mortgage involves handing
over extensive personal information, documentation, and access to major financial
transactions.

What sort of regulations, standards, and monitoring is in place to ensure that the public
confidence in mortgage services remains high?
Several organizations exist to protect consumers and real estate industry members. Who are
these guardians, and who needs monitoring? Let’s have a look!

By the end of this unit, you will be able to:

Describe the role of the federal government in regulating the mortgage industry.

Describe the role of the provincial government in regulating the mortgage industry.

Describe RECA’s role and key responsibilities.

Identify additional trade associations and related organizations.

Outline the roles of associated professionals in the mortgage industry.

NE X T PA G E
Lesson 2 of 6

Federal Mortgage Regulators

Mary Swaf eld

The mortgage and real estate agencies are primarily regulated at the provincial level. However,
they must operate within a general framework established by the Government of Canada. This
includes both legislation and government agencies.

C O NT I NU E

Federal legislation
At the federal level, a number of regulatory statutes affect the mortgage brokerage industry.
These include:

The Competition Act, which contains criminal and civil provisions to prevent anti-
competitive practices in the marketplace.

The Canada Interest Act, which imposes requirements on how interest is described
and calculated in loan and mortgage documents.

The Personal Information Protection and Electronic Documents Act (PIPEDA),

which is Canada’s legislation governing the collection, use, and disclosure of
personal information collected through commercial activity applicable to all private
enterprises across Canada and all organizations under federal jurisdiction.

The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLT FA),
which implements specific measures to detect, deter, and prevent money
laundering, terrorist activity, financing, and other threats to the security of Canada.
Proving the source of funds is imperative for mortgage lending.

The Criminal Code of Canada, which contains various prohibitions against criminal,
theft, or fraud activities related to mortgage brokerage transactions.

Canada’s Anti-Spam Legislation (CASL), which protects consumers and businesses

from the misuse of digital technology, including spam and other electronic threats.
It aims to help businesses stay competitive in a global, digital marketplace. CASL is
most generally known for protecting the public from unsolicited emails or texts.

We will look at the role of federal legislation in the Canadian mortgage industry in more depth
in an upcoming unit.

C O NT I NU E
The Office of the
Superintendent of
Financial Institutions
(OSFI)
While each province oversees its own licensing and regulations for mortgage professionals, the
Office of the Superintendent of Financial Institutions (OSFI) supervises all federally regulated
banks and insurers, trust and loan companies as well as private pension plans subject to federal
oversight. The OSFI is an independent federal government agency. It regulates and determines
if mortgage lenders are in good financial condition and monitors the risk level in lending.
Due to the level of household debt in Canada, mortgage lending represents a significant portion
of lenders' balance sheets. In 2012, OSFI began issuing guidelines on underwriting practices to
ensure financial institutions could withstand any possible major downturn in the real estate
market. It continues to monitor lenders and mitigate risk in the mortgage industry.

Alberta has a counterpart office, the Alberta Superintendent of Financial Institutions (ASFI),
which is responsible for overseeing provincially regulated financial institutions, such as credit
unions, loans, and trust corporations. This is why provincial credit unions can sometimes have
different guidelines for underwriting and different levels of risk tolerance than federal
institutions.

NE X T PA G E
Lesson 3 of 6

Alberta’s Mortgage Regulators

Mary Swaf eld

Most of the key regulation of the mortgage industry is set out in provincial legislation, and
administered by regulatory bodies independent of the Government of Alberta.

C O NT I NU E

Evolution of self-
regulation
Prior to the proclamation of Alberta’s Real Estate Act, the real estate and mortgage brokerage
industries were regulated by the provincial government and legislated by different statutes.

Industry representatives put forward an initiative to establish a model of self-regulation similar

to other professions such as lawyers, doctors, and accountants. This model was aimed at
developing a more professional industry through educational requirements, establishing
standards of conduct for industry members, and an effective investigative and enforcement
process.
On November 1, 1995, the provincial government proclaimed the Real Estate Act. The Act
combined the regulation of real estate industry members, property managers, business brokers
and mortgage brokers into one statute and established the Real Estate Council of Alberta
(RECA) as the regulatory body.

On July 1, 1996, RECA assumed regulatory responsibility of the Real Estate Act of Alberta and
regulatory control over Alberta’s real estate and mortgage brokerage industries. RECA assumed
the regulation and licensing of Alberta’s real estate appraisers in 2004 , though this
responsibility was removed in 2020. In 2021, RECA also assumed the regulation and licensing of
condo managers as a subset of property managers.

Alberta is one of only a few jurisdictions in North America with self-regulation of the real estate,
mortgage brokerage, condo manager, and property manager industries, which is fully funded
by industry members.

In January 2019, Service Alberta engaged KPMG to conduct a review in accordance with
Ministerial Order SA: 001/2019 and its terms of reference. KPMG’s role was to conduct interviews
and review documentation in order to assess, at a high level, the Real Estate Council of Alberta's
performance against established criteria. KPMG considered findings in light of common and
leading governance practices for non-profit and regulatory entities of a similar scale, and
provided advice in this report to the Minister on recommended actions relating to Council’s
governance.

With the passing of the Real Estate Amendment Act 2020, the Government of Alberta tasked
RECA with divesting itself of pre-licensing education and creating a framework where pre-
licensing education is delivered by third-party course providers.

As a self-regulatory organization, RECA does not receive government funding for its operations.
In other provinces, regulatory responsibility is either carried out by a government agency or
shared between the government and a delegated administrative body.

 Did Yo u Kno w? Prio r t o t he Real Est at e Amendent Act 2020, RECA

pro vided pre-licensing educat io n fo r o t her sect o rs, but t he Mo rt gage
sect o r was unique: because o f o ur ext ensive experience in mo rt gage
t raining and educat io n, AMBA was t he so le pro vider o f t he Pract ice o f
Mo rt gage Bro kering co urse, as well as t he pre-licensing exam. AMBA has
been t raining and educat ing mo rt gage bro kers fo r well o ver 25 years.

C O NT I NU E

The Real Estate Act

The Real Estate Act of Alberta is the piece of legislation that regulates residential real estate,
commercial real estate, property management, condominium management, and mortgage
brokerage industries in Alberta. Only the provincial legislature may amend it, as it is a provincial
statute. The Minister of Service Alberta recommends amendments to the Act as required and
generally monitors RECA. In turn, RECA administers the Act on behalf of the provincial
government.

The legislation has four components:

The Real Estate Act, or “t he Act ,” is the statute enacted by the provincial
legislature and is the responsibility of the Minister of Service Alberta.

The Real Estate Act Regulations, or “t he Regulat io ns,” are amendments or

interpretations to sections of the Act made by the Minister or the Lieutenant
Governor in Council.

The Real Estate Act Rules, or “t he Rules,” are the standards of practice for
industry members as established and amended by RECA.

The Real Estate Act Bylaws, or “t he Bylaws,” are RECA's guidelines for its
governance and other administrative functions.

C O NT I NU E

Real Estate Council of

Alberta (RECA)
The Real Estate Council of Alberta (RECA) is the independent governing authority that sets,
regulates, and enforces standards for residential real estate, commercial real estate, property
management, condominium management, and mortgage broker licensees in Alberta.
RECA's mandate is to:

protect consumers

protect against, investigate, detect, and suppress fraud as it relates to the business of
licensees

set and enforce standards of conduct for licensees and the business of licensees to
promote the integrity of, and confidence in, the industry

provide, or support the provision of services that promote regulatory compliance by

licensees.

Board of Directors & Industry Councils

RECA’s Board of Directors is composed of three members of the public appointed by the
Minister of Service Alberta, and four licensees, one appointed from each of the four Industry
Councils from among their members. The purposes of the Board are to set the strategic
direction and ensure the effective operation of Councils, to protect against, investigate, detect
and suppress fraud as it relates to the business of licensees and to protect consumers, to
provide, or support the provision of, services and other things that facilitate the business of
licensees, as provided for in the Real Estate Act Regulations, and to administer the Real Estate
Act, the Regulations, the Bylaws, and the Rules. An administrative staff, led by the Chief
Executive Officer, assists the Board and the Councils in fulfilling their duties.
There are four Industry Councils, one for each of the specific sectors within the industry. These
are:

Residential Real Estate Broker Industry Council

Commercial Real Estate Broker and Commercial Property Manager Industry Council
(includes rural/agri-business)

Residential Property Manager Industry Council (includes condominium management)

Mortgage Broker Industry Council

Each Industry Council is comprised of two members of the public appointed by the Minister of
Service Alberta, and three licensees from that particular sector, elected by other licensees from
that sector. The purpose of each Industry Council is to set and enforce standards of conduct
for licensees and the business of licensees in order to protect consumers and promote the
integrity of the industry, and to administer the Real Estate Act, the Regulations, the Bylaws,
and the Rules. Each Industry Council may establish rules setting out the conditions for a person
to become and remain a licensee of their particular industry sector, including the minimum
standards for conduct and education requirements.

Office of the Registrar

The Office of the Registrar has primary responsibility for RECA’s regulatory functions. This
includes licensing and discipline, as well as trust assurance and practice review. The Registrar is
responsible for the Office of the Registrar.
What RECA Does for Consumers

RECA is co mmit t ed t o pro t ect ing co nsumers t hro ugh:

Education Standards
–
Establishing education standards for entry into the real estate, mortgage brokerage, property
management, and condominium management industries:

All licensees must complete the minimum education standards before applying for a
license.
Suitability and Character
–
Ensuring the suitability and character of individuals who wish to enter these industries

All licence applicants must provide a Certified Criminal Record Check to RECA, and
undergo a suitability screening process. Applicants have to answer questions about past
disciplinary proceedings, criminal proceedings, bankruptcies, and more when they want to
become licensed and when they renew their license annually. RECA uses a Good Character
Policy as the basis for approving or denying an application for a licence.

E&O Insurance
–
Requiring mandatory participation in an errors and omissions insurance program

All real estate and mortgage licensees must carry errors and omissions insurance as a
condition of licensing. This insurance protects consumers against unintentional loss
because of mistakes or unintended negligence made by a licensee.

Standards of Business
–
Setting standards of business conduct that promote the integrity of the industries

RECA’s sets high standards of ethical and professional conduct for licensees. Licensees
must follow the standards set out in the Real Estate Act and the Real Estate Act Rules.

Investigating Complaints
–
When licensees breach the industry standards, consumers can make a complaint to RECA, and
RECA will begin an investigation into the conduct of that licensee.

The Registrar and/or Hearing and Appeal Panels have the power to discipline, fine, and
suspend licensees.
Consumer Protection Fund
–
Administering the Consumer Protection Fund

The Consumer Protection Fund compensates consumers who have been the victim of
fraud, breach of trust, or a failure to disburse or account for money held in trust by a
licensee in connection with a trade in real estate or deal in mortgages.

Source of Information
–
Providing information to consumers about real estate, mortgage, and property management
services, and the business of licensees

RECA has a comprehensive website containing everything a consumer should know about
licensees, and what to expect when working with a licensee. RECA Information Officers
are also available to answer consumer questions.

What RECA Does for Licensees

RECA is the authority behind the residential real estate, commercial real estate, property
management, condominium management, and mortgage brokerage industries. RECA helps
licensees ensure they’re competent, ethical, professional, and valuable to consumers. It does this
through education standards and licensing, information and regulatory compliance resources,
as well as ongoing compliance initiatives.

RECA performs the following key functions specific to the practice of industry members:
Licensing Services
–
New and existing licensees can contact licensing services to help them with the myRECA online
licensing system, their application, their supporting documents, their renewal, and anything
else related to their license.

Brokers are also encouraged to contact the broker licensing administrator to help them with
brokerage licensing issues, corporate structure changes, or ownership changes.

Information Services
–

RECA’s information officers are available to answer licensee questions

about rules, advertising, the residential measurement standard,
consumer relationships, and so much more.

Credentialing Support Services

–
RECA’s Credentialing Support Services team is available to learners
enrolled in RECA Education courses, including pre-licensing and
relicensing courses. Credentialing Support Services can help learners
with technical difficulties, general content questions, arranging exams,
and requesting extensions.

Professional Resources
–
RECA has extensive resources available on its website for licensees.
Those resources include sample forms; written guides for advertising,
the Residential Measurement Standard, transaction brokerage,
designated agency, and complaints and investigations; checklists for
property inspections, rural property inspections, residential
measurement standard, and so much more.

Regulatory Compliance Advice

–
RECA’s Real Estate, Condominium Management, and Mortgage Broker Regulatory Compliance
Advisors provide brokers with guidance and advice on a number of regulatory compliance
issues. The Regulatory Compliance Advisors are able to provide the advice on a without
prejudice basis; your conversations with them are confidential and cannot be used against you.
RECA’s regulatory practice advisors have decades of experience as practicing members of the
industry, and as industry regulators.

C O NT I NU E

Service Alberta
The Ministry of Service Alberta and Red T ape Reduction (typically referred to as Service Alberta)
works to ensure a fair marketplace for consumers at the provincial level. It investigates
consumer complaints, enforces consumer protection legislation, and licenses and registers
regulated businesses and charitable organizations. The Ministry provides an appropriate
regulatory framework and informs consumers and businesses of their rights and responsibilities.
Service Alberta works with regulatory organizations, including RECA, that administer provincial
legislation in specific market sectors.

Other Government of Alberta statutes that affect mortgage brokerage are the responsibility of
the Minister of Service Alberta, including:

The Consumer Protection Act has rules that businesses must follow to protect
Alberta consumers. The Act sets out certain unfair practices that businesses cannot
engage in. It also sets out ways for consumers to challenge a transaction with a
business that did not follow the rules.

The Personal Information Protection Act, which governs the collection, use, and
disclosure of personal information by private sector organizations. This Act
recognizes both the right of the individual to have their personal information
protected and the need of organizations to collect, use, or disclose personal
information for reasonable purposes.

The Law of Property Act, which provides legal principles regarding property rights
subject to instruments such as contracts, conveyances, and mortgages.
 C O NT I NU E

Knowledge Check-In: Regulation

1

Keyboard Instructions:
–

Use Tab and Shift+Tab to move from one answer choice to

another.

Press Spacebar to select or de-select your answer.

Once a choice is selected, Tab to the Submit button and press the
Spacebar or Enter.
 To retake the question, tab to the Take Again button and press the
Spacebar or Enter.

1. Which of the following pieces of legislation are part of the federal

government’s regulation of mortgage brokering? Select all that apply.

The Real Estate Act.

The Competition Act.

The Canada Interest Act.

The Canada Mortgage and Housing Corporation

Act.

The Law of Property Act.

The Personal Information Protection and

Electronic Documents Act.

The Criminal Code of Canada.

 Canada’s Anti-Spam Legislation.

SUBMIT

Complete the content above before moving on.

Keyboard Instructions:
–

Tab to the question, then use the up and down arrow keys to
move from one answer choice to another.

Once a choice is selected, tab to the Submit button and press the
Spacebar or Enter.

To retake the question, tab to the Take Again button and press the
Spacebar or Enter.
2. What does it mean for the mortgage and real estate industry to be
self-regulating in Alberta? Select the correct answer.

The Government of Alberta funds RECA to

enforce the regulations for the industry set out in
the Real Estate Act.

RECA advises the government on the necessary

legislation and professional standards for industry
members.

The government sets professional standards and

regulations for industry members, which are then
enforced by RECA.

The industry sets and enforces professional

standards and regulations for its members
through RECA, and RECA is funded entirely by its
members.

SUBMIT

Complete the content above before moving on.

 3

3. Which of the following are part of RECA’s responsibilities to

consumers? Select all that apply.

Establishing education standards

Ensuring the suitability & character of potential

licensees

Requiring mandatory E&O insurance

Setting standards of business conduct

Regulating lenders

Investigating complaints

Administering the Consumer Protection Fund

Providing information to consumers

Monitoring credit scores

SUBMIT

Complete the content above before moving on.

NE X T PA G E
Lesson 4 of 6

Trade Associations and Organizations

Mary Swaf eld

In addition to major regulatory bodies, there are also various professional trade associations
and organizations in the mortgage industry that you will interact with throughout your career.
These associations have unique advantages and provide various benefits, such as educational
opportunities, conferences, networking opportunities, and member resources.

C O NT I NU E

Alberta Mortgage
Brokers Association
(AMBA)
The Alberta Mortgage Brokers Association is an independent, non-profit provincial trade
association for mortgage brokers and other industry professionals, such as lenders, insurers,
lawyers, and technology providers. AMBA is the voice of the province's mortgage industry and
has been representing the interests of Alberta Mortgage Brokers since 1975.

Through advocacy, education, professional development, and community, AMBA is committed

to advancing Alberta's Mortgage Broker industry. As a registered non-profit operating under
the Societies Act, AMBA is governed by an elected Board of Directors. Membership is by
application and is available to Mortgage Brokerages and Industry Partners. AMBA members are
governed by a Code of Conduct and have access to special services, products, and events that
focus on advancing the career of its members. You can learn more about AMBA HERE.

C O NT I NU E
Mortgage
Professionals Canada
(MPC)
Mortgage Professionals Canada is a nationally recognized advocate for Canada’s mortgage
brokering channel. They work with key federal entities, including CMHC, OSFI, and the Bank of
Canada, in creating and updating policies with federal and provincial decision-makers. The
trade association is the largest network of mortgage professionals in Canada, with over 15,000
members represented by mortgage lenders, brokers, insurers, and other industry professionals.
To become a member of MPC in Alberta, a brokerage or industry partner must also be a
member of AMBA.
 C O NT I NU E

The Canadian Alternative Mortgage Lenders Association’s (CAMLA) mission is to provide our
members with a coordinated National Voice, which can ensure as an industry, Altnerative
Mortgage Lenders can operate harmoniously with the real estate industry, regulators,
stakeholders and partners. CAMLA provides an avenue for alternative mortgage lenders to
exchange ideas and explore ways of improving the sector; encourage principled and
professional practices by Alternative Mortgage Lenders; educate the public at large about
Alternative Lending; encourage individual potential borrowers to be informed about the
appropriateness of Alternative Mortgage Lending to the borrowers’ circumstance; and to
advocate on behalf of, and represent the interests of Alternative Mortgage Lenders.
 C O NT I NU E

Alberta Real Estate

Foundation
The Alberta Real Estate Foundation was established in 1980 by the Real Estate Agents’
Licensing Act (a precursor to the current Real Estate Act). The Foundation supports real estate
initiatives that benefit the industry, communities, and people of Alberta.

The purpose of the Foundation is to promote and undertake initiatives including:

The education of related professionals and the public regarding the real estate
industry.

Legal reform and research in the real estate industry.

Projects and activities that advance and improve the real estate industry.

C O NT I NU E

Law Society of Alberta

The Law Society of Alberta (LSA) is a self-governing organization for Alberta's lawyers. The LSA
sets standards and enforces those standards for Alberta lawyers. In addition to providing
services for lawyers, the organization offers several services and informational topics for the
public.
The LSA is proactively engaged in providing information about fraudulent schemes targeting
Alberta lawyers and in sharing tips to help lawyers prevent fraud from happening. Of particular
interest to industry members is the topic of mortgage fraud.

NE X T PA G E
Lesson 5 of 6

Mortgage-Related Professionals
Mary Swaf eld

Mortgage professionals aren’t the only important players helping Canadians and Albertans
navigate the real estate market. You will work with many other real estate industry members
who play an expert role in the mortgage transaction process.

C O NT I NU E

Real estate industry

members
A real estate industry member is any person duly licensed by the Act who, on behalf of another
and for consideration or other compensation, either alone or through one or more persons,
trades in real estate.

Buying or selling any property is a major financial decision for any individual. Real estate
industry members play an important role in ensuring consumers understand the buying and
selling process. The work of the real estate industry member sets the stage for the mortgage
professional.
For example, a real estate agent may help a consumer with the purchase of a property subject
to financing. As such, the real estate agent may refer the buyer to the mortgage professional
who will search out various lenders to facilitate the mortgage transaction for the buyer.

 Note: In Alberta, not all real estate industry members are

REALTORS® . The Canadian Real Estate Association (CREA)
owns the REALTOR® trademark, and only real estate
professionals who are members of their local real estate
board are allowed to use the term REALTOR® .

C O NT I NU E
Real estate lawyers
Real estate lawyers ensure that the borrowers’ or lenders’ legal interests are protected during
real property transactions. These individuals typically perform the following services:

Review and confirm that title to the property is properly transferred to the buyer.

Assist with and explain the purchase contract.

Ensure all closing mortgage documentation (e.g., title search, title insurance) is
completed properly and delivered promptly.

Draft mortgage documents for execution.

Collect transaction fees and disburse funds to the lender.

C O NT I NU E

Real estate appraisers

Real estate appraisers are accredited individuals who estimate the market value of real estate
for consideration or other compensation. Some appraisers also provide real estate appraisal
consulting services. The estimated market value determined by the appraiser helps the lender
decide the reasonable loan amount for the mortgage.
 C O NT I NU E

Real property
assessors

Real property assessors are professionals who prepare market value assessments to calculate
property taxes by collecting data for residential, non-residential, and agri-business properties.
Assessors measure value on all types of property, including houses, industrial facilities, shopping
centers, oil and gas pipelines, and farmland.
 C O NT I NU E

Real property
inspectors
For property inspectors, the type of professional hired is dependent on the property to be
inspected (i.e., residential, or commercial). Residential property inspectors (also called home
inspectors) provide an independent and objective analysis of a residential property’s major
systems and components, and can alert potential buyers of any deficiencies observed on/in the
property.

Condo document
reviewers
As you'll learn in the next Module, residential condominiums may represent as much as 25-50%
of a mortgage professional’s transactions. Understanding how condominiums function as a
corporation and as a community is important information, but condominium documents are
often difficult for purchasers to obtain and/or understand. As a mortgage professional, it's
important that you review and understand standard condo documents.

Often, a client or a real estate associate will seek out a Condo Document Reviewer - that is, a
company or person hired to collect and review all relevant condo documents and provide a
report of the findings. The review typically includes information about the condo corporation,
common property, function of the board of directors, operating budget, significance of the
reserve fund, owner occupancy and bylaws.
 C O NT I NU E

Mortgage insurers
Mortgage insurers provide transactional default insurance to mortgage lenders, typically when
the mortgage loan amount exceeds 80% of the appraised value of the property or sale price
(whichever is lower). Mortgage default insurance protects the lender when a borrower defaults
by making up any shortfall needed to repay the loan if the sale of the property does not cover
the debt. Premiums are based on a percentage of the property’s value and can be paid upfront
or combined with the mortgage payment.

Canada Mortgage and Housing Corporation (CMHC), a federal Crown corporation, and private
mortgage insurers such as Sagen and Canada Guaranty Mortgage Insurance Company provide
mortgage default insurance.

C O NT I NU E

Title insurers
T itle insurers provide policy coverage and agree to indemnify the insured against losses or
damages incurred due to undetected or unknown title defects. Apart from providing
protection from title defects, a title insurance policy may cover losses resulting from title fraud,
errors in surveys and public records, existing liens against the property title, or encroachment
issues.
 C O NT I NU E

Mortgage lenders
Mortgage lenders include any person, group, or institution participating as a lender in a debt
obligation secured by a mortgage. Lenders can range from large financial institutions to
governments to private individuals. The lender is the entity providing the funding and sets out
the legally stipulated criteria needed by borrowers to qualify for a loan.
 C O NT I NU E

Underwriters
Underwriters are individuals employed by a lender or insurer and are responsible for verifying the
mortgage application information and supporting documentation, making a risk assessment of
the applicant and the property, and approving or declining the mortgage based on this
assessment.
Underwriters never interact with the applicants directly; mortgage professionals are always the
intermediaries between the lender (including the underwriter) and the borrower.

Closing service
companies
Sometimes referred to as a "title closing company", closing service companies' are an
alternative for mortgage professionals and lenders, specifically when dealing with switch,
transfers, or refinancing mortgages. While different aspects of closing are typically handled by
separate, individual service providers (i.e. real estate lawyers), a closing service company typically
offers multiple services and at a lower cost. Closing companies (such as First Canadian T itle or
Fidelity National Financial) provide title insurance, mortgage document processing, and other
related services to a wide variety of lending institutions and mortgage professionals.
 C O NT I NU E

Knowledge Check-In: Associations

and Professionals
1

Keyboard Instructions:
–

Tab to the first answer choice in the left column, then use the up
and down arrow keys to cycle through the choices until the one
you want is selected.
 Press the spacebar to activate the selected choice. It’ll turn gray,
which means it’s ready to be linked to a match in the right column.
If you want to deactivate the selected choice, press the spacebar
again or press the Esc key.

When a choice is active (gray), use the right arrow key to switch to
the column of matches on the right side of the question, then use
the up and down arrow keys to cycle through the matches until
the one you want is selected.

Press the spacebar to link the active choice on the left to the
selected match on the right.

Use the left arrow key to switch back to the column of choices on
the left side of the question and continue linking choices and
matches.

After linking all choices on the left with matches on the right, press
Enter to submit your answer.

1. Match the following professionals to a brief description of their role in

the mortgage industry.

Provides default insurance to

mortgage lenders when the
Mortgage insurer
mortgage loan-to-value exceeds
80%

Provides mortgage funding and

Mortgage lender sets out the criteria for borrowers
 to qualify for a loan.

Accredited individual who

Real estate appraiser estimates the market value of
real estate.

Protects the participants’ legal

Real estate lawyer rights, often by reviewing or
drafting documentation.

Collects data and prepares

Real property assessor market value assessments to
calculate property taxes.

Provides an objective analysis of a

Real property inspector property’s major systems and
components.

A person who trades in real

REALTOR Ⓡ estate, and is a member of their
local real estate board.

Provides policies to protect

owners against losses or
T itle insurer
damages related to property
titles.

Verifies application documents

Underwriter and makes a risk assessment of
 the applicant and property.

Provide title insurance, mortgage

Closing service
document processing, & other
companies
related services.

SUBMIT

Complete the content above before moving on.

NE X T PA G E
Lesson 6 of 6

Conclusion
Mary Swaf eld

In this unit, we examined the complex framework of legislation, regulatory bodies, associations,
and industry members who keep the mortgage industry running.

In the next unit, we will discuss the various mortgage

products available in Canada and consider how you can
match your clients to the product that best fits their needs.

NE X T PA G E
 Mary Swaf eld

AMBA Fundamentals - M1 - Unit 3: Mortgage

Products in the Canadian Market

IN TR ODUCTION

Introduction

MOR TGAGE PR ODUCTS IN TH E CAN ADIAN MAR KET

Mortgage Insurance

Types of Mortgages

Other Mortgage Products in Canada

CON CLUSION

Conclusion

R EFER EN CES

References
Lesson 1 of 6

Introduction
Mary Swaf eld

Many Canadians anticipate entering into the real estate market as an important stage in their
financial future. Even in times of upheaval in the market, real estate is regarded as a safe
investment that can build over time.

Beyond finding a home to live in, real estate is also seen as future retirement income, potential
revenue generation, a way to finance renovations, or access other investment opportunities.

Despite this general cultural knowledge about real estate and its importance in the lives of
Canadians, there is no easy guide on buying property, financing, or mortgages.
As a mortgage professional, you will encounter a diverse range of people with various
experiences and reasons for obtaining a mortgage. Your role is to know the market and provide
the best possible options and products for your client’s needs.

In this unit, we’ll consider the different options available to borrowers to access the property
market.

By the end of this unit, you will be able to:

Identify the differences between insured and uninsured mortgages.

Describe the different mortgage options available to Canadian borrowers.

Identify mortgage options to fit with different buyer scenarios.

NE X T PA G E
Lesson 2 of 6

Mortgage Insurance
Mary Swaf eld

There are many variations to the type of mortgage that a borrower can obtain, depending on
their needs. One distinguishing aspect of a mortgage is the requirement for mortgage
insurance. Insured mortgages are backed by the federal government, and ultimately Canadian
tax payers.

C O NT I NU E

Conventional
mortgages
A conventional, or uninsured mortgage is when the loan-to-value amount is 80% or less. The
borrower’s down payment is, therefore, 20% or more.

Conventional mortgages do not, by law, have to be insured. However, there may be instances
where mortgage insurance may be required by the lender.

C O NT I NU E

Insured mortgages
A high-ratio, or insured mortgage, is when the loan-to-value amount is greater than 80%. The
borrower’s down payment is, therefore, less than 20%. Canadian law requires that federally-
regulated lenders must offer insurance with high-ratio mortgages.
High-ratio mortgage insurance is available from Canada Mortgage and Housing Corporation
(CMHC), which is a federal Crown Corporation, and approved private sector mortgage insurance

providers such as Canada Guaranty and SagenTM (formerly Genworth Financial Canada).

The mortgage insurance premium applied is based on the loan-to-value ratio. Typically the
premium ranges from 0.600% to 4 .00% and is applied based on the loan amount (CMHC,
2018). As the loan-to-value increases, so does the mortgage insurance premium. Insured
mortgage rates tend to be lower than conventional mortgage rates because the insurance
protects the lender against loss. However, high-ratio borrowers still pay more overall, due to the
added costs of insurance premiums.

Benefits of mortgage default

insurance
Mortgage insurance protects the lender if the borrower defaults on the loan. This transfers risk
from the lender to the mortgage insurer. The borrower pays the mortgage default insurance
premium to the lender, who pays the mortgage insurer. The borrower can either pay the
premium upfront or add it to the mortgage amount.
These premiums are pooled and used to pay lenders in cases of default. Mortgage default
insurance premiums and guidelines may change over time; therefore, mortgage professionals
must stay current on mortgage default insurance developments.

Borrowers also benefit from mortgage default insurance. Mortgage default insurance allows
borrowers to purchase residential property with a minimum down payment of 5%. Without it,
minimum down payments would need to be higher to offset risk to the lenders. With such a
requirement, the ability to purchase a house would be out of reach for many Canadians.

NE X T PA G E
Lesson 3 of 6

Types of Mortgages
Mary Swaf eld

While insured vs. uninsured mortgages is one way of categorizing the types of mortgages
available in Canada, many other types of mortgages satisfy the needs of borrowers in the
market.

The following are some common products and situations you may encounter as a mortgage
professional.

C O NT I NU E

Equity take-out
With an equity mortgage , a borrower can refinance a whole new first mortgage or take

out another loan against their existing equity in their property. A new loan will be registered on
title as a second mortgage or higher. Funds are advanced in a lump sum with repayments
made over time at a specified interest rate.
Another type of equity mortgage is an equity line of credit. Select each tab to learn more
about equity options for residential and commercial mortgages.

HEL O C CLOC

A home equity line of credit (HELOC) is an equity loan for residential

mortgages that gives property owners access to the existing equity in
their property, up to a qualifying maximum credit limit.

Property owners can access up to 65% of their house's appraised value

or purchase price (whichever is lower), less any prior outstanding charges
on the title. In contrast to a home equity loan, where the funds are
advanced in a lump sum, a home equity line of credit is a revolving line
of credit. The borrower can withdraw multiple advances of the loan
proceeds at their discretion up to the lender’s stipulated maximum.
 HEL O C CLOC

Business owners can also benefit from the built-up equity in their
commercial property by applying for a commercial line of credit
(CLOC). Just as a home equity line of credit is secured by residential
property, a commercial line of credit is secured by commercial property
and registered on title. Funds are accessible to the borrower on a
revolving basis to be used at the borrower’s discretion.

C O NT I NU E

Wraparound
mortgages
Lenders use a wraparound mortgage (or umbrella mortgage) to secure a loan on a property
with one or more existing mortgages.
A wraparo und mo rt gage occurs when a lender assumes an original first mortgage and
provides a loan greater than the original mortgage. In this instance, the borrower simply gets
the difference between the original and larger mortgages. The advantage to the borrower is
that the interest rate on the original loan is combined with the interest rate on the new loan.
This generally results in a lower interest rate for the borrower.

In a property sale, the new purchaser makes one payment to the new lender, who then makes
payments on the first mortgage. In other words, the first mortgage has been “wrapped around”
by the second. Although both mortgages are registered on title, the purchaser is only paying
one mortgage.

Example:

Kai has a mortgage for $100,000 and needs additional

financing of $200,000. A lender provides a wraparound
 mortgage for $300,000 and assumes the original $100,000.
The lender advances $200,000 to Kai.

Kai benefits from a wraparound mortgage because the

interest rate on the wraparound mortgage of $300,000 is less
than the interest rate applied on the additional financing
amount of $200,000.

C O NT I NU E

Blanket mortgage
Rather than requesting a mortgage for each unit of a multi-housing development, a builder
can arrange a blanket mo rt gage to cover an entire project. A blanket mortgage is when a
single mortgage charge is registered over two or more property titles in the same province. It is
often also referred to as an int er alia mo rt gage.

When a unit is purchased, the buyer arranges the mortgage on their individual lot with the
blanket lender. The builder’s blanket mortgage is reduced by a partial discharge of each unit
sold. As more units sell, each new buyer arranges a mortgage until the original blanket
mortgage is discharged.
 C O NT I NU E

Construction or draw
mortgage
A co nst ruct io n or draw mo rt gage is a type of loan advanced in stages to a developer or
builder, on behalf of a borrower, as work on a construction project progresses. The stages or
intervals when funds are made available to the developer or builder may vary between lenders.

One progress advance schedule might forward funds in three stages, as follows:
Stage 1

The first installment is paid at 35% completion, when the roof is shingled, rough plumbing
and electrical components are installed, and the structure is insulated.

Stage 2

Additional funds are advanced at 65% completion, when the plastering and drywall are
completed, the furnace is installed and working, and the interior walls are erected.

Stage 3

At 100% completion of the construction, the last funding installment is advanced.

 C O NT I NU E

Participating
mortgage
A part icipat ing mo rt gage consists of a mortgage or group of mortgages in which two or
more lenders have fractional equitable interests. In this arrangement, the lender is entitled to
share in the revenues from the property owned by the borrower.

A participating mortgage is sometimes used to lend money when circumstances are unusual,
such as when the mortgage funds exceed standard guidelines and the lender wants to
participate in the project to compensate for the additional risk. This can occur through profit
sharing, bonuses, or other fees.

Example:

Lupita purchases three units of a commercial complex, and

each unit is being leased. In addition to the mortgage
payment of principal and interest paid to the lender, she is
required to pay a certain percentage of the rental income. In
this way, Lupita is participating in the income stream
provided by the particular property.

C O NT I NU E
Discount or bonus
mortgage

A discount mortgage is a type of variable mortgage where lenders offer a discount on the

interest rate for a set period. The effect of a discount is to increase the yield or effective interest
rate. Therefore, a discount generally provides a greater return to the lender.

The loan's principal, less the discounted interest charged by the lender, is the amount advanced
to the borrower.
A discount mortgage may also refer to the opposite situation, where the loan amount
advanced is increased to reduce the yield to the lender. Such a situation is called a bo nus
rather than a discount.

C O NT I NU E

Collateral mortgage
A collateral mortgage is a form of protection for the loan registered against the property.

A collateral mortgage is a loan secured by a written note of indebtedness (for example, a

promissory note, personal guarantee, or assignment of some other form of security).

It is secondarily secured by a mortgage registered against the subject property.

The payment requirements on this type of mortgage are covered in the written note, and once
paid in full, the collateral mortgage is discharged from the title of the property.

A collateral mortgage is generally not assumable, as it is subject to some other form of security
between the parties.

C O NT I NU E

Reverse mortgage
A reverse mo rt gage is a loan for residential property owners 55 years of age and older (the
age qualification applies to all parties on the title) that allows them to convert the equity in
their house to cash without selling the property or making payments. The homeowners can
receive up to 4 0% of their property value, while the specific mortgage amount is based on their
age, property type and location, and its current appraised value.

The borrower does not have to make regular or lump-sum payments with a reverse mortgage.
Instead, the interest on the reverse mortgage accumulates, and the equity in the property
decreases with time. The borrower usually does not have to pay the loan back or make any
interest payments to the lender as long as they live on the property. However, if the borrower
sells the house, or it is no longer their principal residence, they must repay the loan and any
interest it has accumulated. Upon the property owner's death, their estate is responsible for
paying out the loan.

C O NT I NU E
Purchase plus
improvements
mortgage
A purchase plus impro vement s mo rt gage is a financing option for borrowers looking to
consolidate the cost of a residential purchase with the cost of property improvements all in the
same mortgage. This type of mortgage eliminates the need to obtain secondary financing to
pay for the improvements after the initial mortgage is advanced.

When applying for a purchase plus improvements mortgage, the borrower must provide the
lender with a description and cost estimates for the proposed renovations submitted by
qualified contractors. When the mortgage is advanced, the improvement funds are held in
trust and are not released until the work is completed and inspected.
 Example:

Samir is considering purchasing a primary residence valued

at $275,000, but it requires renovations to the kitchen and
bathroom estimated at $25,000. He qualifies for a purchase
plus improvements mortgage. The lender adds the cost of
the improvements to the purchase price when measuring
the loaned funds against the total value (i.e., $300,000). The
financing proceeds, but a portion of the mortgage funds are
held in trust and only released to Samir once the renovations
are completed and inspected.

C O NT I NU E

Switch or transfer
A swit ch o r t ransfer mo rt gage is similar to refinancing. The borrower requests a new rate
and term with a new lender, but the amortization and outstanding loan amount remain
unchanged.

It is more common for a borrower to consider a switch or transfer at the maturity of their
existing mortgage term, as there are no prepayment penalties associated.

A borrower may transfer at any time, but they may incur out-of-pocket fees associated with
breaking their existing contract.
 C O NT I NU E

Portable mortgages
Po rt ing a mo rt gage means moving an existing mortgage, including its balance, rate, and
terms, from the sale of one property to a new property. Lenders have varying offerings
regarding porting mortgages, so it is important for a mortgage professional to know and
understand the various possibilities.

Porting a mortgage does not bypass a borrower’s need to qualify for a new mortgage on the
newly purchased property. It can be a great advantage to borrowers to avoid penalties or keep
an existing low rate.

C O NT I NU E
Assumable mortgages
A very rarely used mortgage transfer is an assumable mo rt gage. As the name suggests, an
assumable mortgage occurs when the property purchaser also assumes the existing mortgage.

The new borrower will still need to meet the qualifying requirements of the mortgage provider,
but this type of mortgage can be a possible sales advantage to the new purchaser of the
property.

Assumable mortgages are best arranged directly between the new buyer and the lender if that
lender allows such a transaction.

C O NT I NU E

Vendor take-back
mortgage
The vendo r t ake-back mo rt gage, also referred to as seller take-back mortgage, simply
means the seller provides some, or all, of the mortgage financing for part of the property's sale
price.
When the buyer takes possession and title of the property, they make mortgage payments
directly to the seller. The seller registers their mortgage interest on title, which can be a first,
second, or subsequent mortgage.

C O NT I NU E

Interim or bridge
financing
Int erim, o r bridge, financing is typically assumed for a short period of time, usually a few
months to a year.
Interim financing can be useful for:

A developer or builder who is unable to secure long-term financing during the

construction period.

A buyer pending the financing of a purchase.

Others in need of short-term financing.

In essence, it provides a bridge until long-term financing is obtained.

The interest rate for interim or bridge financing is often higher than the interest rate for long-
term financing. Initially, the loan for interim or bridge financing for a developer or builder is
secured by way of a first mortgage, with advances being made against the construction
progress. The bridge lender may be guaranteed a minimum amount of interest.

Usually, lenders issuing interim or bridge financing will not advance the funds unless there is a
mortgage commitment from another lender who agrees to finance the project once
completed. The mortgage funds would then be used to pay out the interim or bridge
financing.

NE X T PA G E
Lesson 4 of 6

Other Mortgage Products in Canada

Mary Swaf eld

First-Time Home Buyer

Incentive

The First -T ime Ho me Buyer Incent ive (FT HBI) is a CMHC program designed to assist those
making their first real estate purchase.
CMHC offers to assist first-time buyers by joining as a co-equity partner in the purchase of a
home. Provided the borrower has a minimum of 5% down, CMHC will contribute another 5% to
10% toward the down payment. This varies depending on whether the borrower is purchasing
an existing property or a new build: the 10% top-up is provided for newly constructed homes.

The loan must be paid in full after 25 years or when the home is sold. Partial repayment is not
permitted. It must also be repaid if the borrower chooses to port their mortgage, or if one
owner buys the other(s) out of the property.

There are no monthly payments to be made on this loan the way one would pay back a
mortgage or a credit card. More information on this program is available on the CMHC website.

C O NT I NU E
Home Buyers’ Plan
The Ho me Buyers’ Plan (HBP) is a federal program that allows Canadians to withdraw from
their registered retirement savings plans (RRSPs) to buy or build a home for themselves or for a
relative with a disability.

The current HPB limit is $35,000. The government provides 15 years to repay the amount
withdrawn, making this option an attractive opportunity for borrowers who have a little saved
up, but not quite enough to pay for the full down payment and closing costs.

More information on the Home Buyers’ Plan is available from the Government of Canada
website.

C O NT I NU E
Knowledge Check-In: Mortgage
Products

For each of the brief scenarios below, select the mortgage product that is most appropriate for
the client’s situation.

Keyboard Instructions:
–

Tab to the question, then use the up and down arrow keys to
move from one answer choice to another.

Once a choice is selected, Tab to the Submit button and press the
Spacebar or Enter key.
 To retake the question, tab to the Take Again button and press the
Spacebar or Enter key.

1. HomeTech is a developer building a strip of new townhouses in

Edmonton’s river valley. HomeTech is seeking financing for the initial
project, but each unit will be sold as it is completed. What is the best
mortgage option for HomeTech?

Collateral mortgage.

Vendor take-back mortgage.

Blanket mortgage.

SUBMIT

Complete the content above before moving on.

 2

2. Stephanie is buying an older condo apartment. The building and unit

are in good shape, but she wants to update the kitchen and bathrooms
before moving in. She would prefer to arrange all of her financing at
once. What is the best mortgage option for Stephanie?

Bridge financing.

Purchase plus improvement mortgage.

Home equity line of credit.

SUBMIT

Complete the content above before moving on.

3
3. David and Tomàs have lived in their home for three years, but they
would like to move to a different neighbourhood in the city. They have
a great rate on their current mortgage, and they are hoping to avoid
penalties for breaking their agreement early. What is the best mortgage
option for David and Tomàs?

Portable mortgage.

Assumable mortgage.

Switch or transfer mortgage.

SUBMIT

Complete the content above before moving on.

4
4. Jaida is moving back to her hometown to care for her mother, Jean,
who has multiple sclerosis. Jaida would like to purchase a home with a
ramp and easily accessible doorways, halls, and ground-level fixtures to
help Jean get around. Jaida has some money saved in personal savings
and RRSPs, but the home she has found is a little more expensive than
she thought. What is a good option for Jaida and Jean?

Reverse mortgage.

Purchase plus improvement mortgage.

Home Buyers’ Plan.

SUBMIT

Complete the content above before moving on.

NE X T PA G E
Lesson 5 of 6

Conclusion
Mary Swaf eld

In this unit, we have considered the many mortgage options available to borrowers in Canada.

Knowing these options—both the common and lesser known products—will enable you to
confidently advise your clients and match their needs to the most suitable lender and
mortgage products.

In the next unit, we will examine the various kinds of lenders

operating in the mortgage market.

C O NT I NU E TO R E FE R E NC E S
Lesson 6 of 6

References
Mary Swaf eld

Canada Mortgage and Housing Corporation (2018, March 31). Mortgage loan insurance
premiums.
 Mary Swaf eld

AMBA Fundamentals - M1 - Unit 4: Lenders

and Mortgage Financing

IN TR ODUCTION

Introduction

LEN DER S AN D MOR TGAGE FIN AN CIN G

Types of Mortgage Lenders

Credit Analysis and Mortgage Lending

Residential and Commercial Mortgages

CON CLUSION

Conclusion

R EFER EN CES

References
Lesson 1 of 6

Introduction
Mary Swaf eld

Typically, when thinking about the mortgage industry, most people have the image of
residential homes and major banks in their minds. However, the mortgage landscape is much
more complex, and there are many players involved at different levels and segments of the
market. There are a multitude of lenders, each with their own policies, products, rates, offerings,
and preferences.

As a practicing mortgage professional, you will likely work closely with a few specific lenders,

depending on the focus of your business and the relationships you build. However, it is
important to stay informed about the range of lenders and products in the marketplace.
In this unit, we will walk through an overview of the key types of mortgage lenders, as well as
the markets they serve. We will also consider some of the key ratios lenders use when assessing
residential and commercial clients.

By the end of this unit, you will be able to:

Identify the types of mortgage lenders in the Canadian market.

Distinguish between prime, near-prime, subprime, and alternative lending.

Identify the debt ratios used for assessing residential mortgages.

Identify the debt ratios used for assessing commercial mortgages.

NE X T PA G E
Lesson 2 of 6

Types of Mortgage Lenders

Mary Swaf eld

While it is difficult to group the various and numerous lenders due to the number and scope of
their products and services, generally speaking, lenders can be categorized into the following
groups:

institutional lenders,

non-institutional lenders,

government funding, and

private lenders.

We will review each group in more detail below.

C O NT I NU E

Institutional lenders
The majority of lending in Canada is done through institutional lenders. Institutional lenders are
financial companies that lend funds for an interest fee and whose loans are regulated by law.
They are referred to as “A lenders” or “Grade A lenders".

In Alberta, these entities include chartered banks, credit unions, trust and loan companies, AT B
Financial, life insurance companies, pension funds and finance companies. Institutional lenders
are sometimes referred to as “conventional lenders.”

Institutional lenders accept deposits, such as savings accounts and RRSPs, and can use these
funds for various loans, including mortgages. These loans are generally conservative, as they will
appear on the institution’s balance sheets and need to reflect the best interest of shareholders.

Chartered banks
Canada’s first permanent banking institution was the Bank of Montreal, established as a joint-
stock operation by a group of subscribers in 1817, and granted a charter in 1822. A number of
other chartered banks were established in the following decades, and a series of mergers in the
mid-twentieth century led to what are now known as Canada’s “Big Five” banks:
 Royal Bank of Canada (RBC),

Toronto Dominion Bank (T D Bank),

Bank of Nova Scotia (Scotiabank),

Bank of Montreal (BMO),

and the Canadian Imperial Bank of Commerce (CIBC). (Granger 2017).

Up until the 194 0s, the primary function of a bank was to accept deposits and grant
commercial loans. Since then, banking practices and financial institutions have evolved
alongside the economy. In 1954 and 1967, amendments to the Bank Act enabled banks to offer
new services such as mortgages and consumer loans.
The Bank Act is the law passed by Parliament to regulate Canada's chartered banks. The
statute has three main goals (Boothe 2016):

1 Protecting depositors' funds.

2 Insuring the maintenance of cash reserves.

3 Promoting the efficiency of the financial system through competition.

The Bank Act separates banks into three groups: Schedule I, Schedule II, and Schedule III banks.
Select the tabs below to learn more about these groups.

S C HEDUL E I S C H E D U L E II S C H E D U L E III

Domestic banks whose purchased shares are held by individuals and

groups, such as mutual funds and pension funds, with no single owner
permitted to control more than 10% of the banks' voting stock. These
institutions are authorized to accept deposits in Canada.

S C HEDUL E I S C H E D U L E II S C H E D U L E III

Foreign bank subsidiaries authorized under the Bank Act to accept

deposits in Canada.

S C HEDUL E I S C H E D U L E II S C H E D U L E III
Foreign bank branches of foreign institutions that have been authorized
under the Bank Act to carry on banking operations in Canada.

Credit unions
Credit unions are member-based cooperatives that offer a full range of financial services for
their members, including mortgages. Due to the broad range of banking services and mortgage
lending options offered to their members, credit unions remain competitive with other financial
institutions.

Some credit unions service a region or area, while others are specific to a group of individuals
such as teachers, firefighters or government employees. These institutions offer services purely
for the benefit and incentive of their members. For example, a credit union may offer a year-end
rebate to all of its members, reducing the cost of the credit union’s services or the interest paid
on the member’s mortgage.

While doing business with a credit union requires a membership, this is easily obtainable.

Trust and loan companies

Trust companies entered the financial landscape in the late 1800s. They are financial
institutions that operate under either provincial or federal legislation. Historically, trust
companies have been narrower in scope than banks regarding the financial services offered.

Trust companies were originally designed to act as trustees (i.e., holding and managing
investments for the benefit of another) and professionally manage estates, trusts, and pension
plans.
T rust co mpanies were able to redefine their role to expand their banking operations into
complete banking facilities for both individuals and businesses. Trust companies have always
been active in mortgage lending, and their rates are competitive. Most of these financial
institutions have been acquired or merged with banks and those that are part of the mortgage
brokerage industry primarily concentrate on obtaining new mortgages (i.e. mortgage
origination).

Lo an co mpanies are often affiliated with trust companies, but there are differences between
these two financial institutions. A loan company cannot provide trustee functions. By law, only
trust companies are allowed to perform these activities.

Secondly, a loan company must obtain funds through debentures (debt obligation normally
issued against the corporation's credit rather than a specific asset) instead of short-term
certificates and savings deposits.

ATB Financial

AT B Financial (AT B), formerly Alberta Treasury Branch, was established by the Government of
Alberta in 1938 as a public banking institution. It was re-formed as a provincial Crown
Corporation in 1997. Though it is technically not a bank (as it does not have a federal charter
under the Bank Act), it is now a full-service financial institution with branches throughout the
province. Alberta is unique among provinces for having its own banking institution (Anielski and
Ascah 2018).

The original mandate of AT B was to provide funding for projects and proposals deemed to have
public benefit that other lenders avoided due to location or risk. In today’s market, AT B
Financial is an active mortgage lender in all areas of the real estate industry.

Life insurance companies

Life insurance companies have been established as mortgage lenders for many years. At one
time, the life insurance industry in Canada was the most important source of mortgage funds.

Their ability to provide mortgage financing was achieved mainly due to the following:

They were the largest single depository of long-term savings in Canada.

 Due to their organizational size, their mortgage administration processes
benefitted from certain economies of scale and operational efficiencies.

Due to the long-term nature of their liabilities and their annual net inflow of funds
from premiums, the liquidity of assets was not of concern.

Life insurance companies have large sums of money flowing into them every month from the life
insurance premiums paid by policyholders. These institutions have a wide selection of financial
products to invest in, such as stocks, bonds, mutual funds, mortgages, etc. Life insurance
companies allocate a certain portion of their portfolio to mortgage lending since mortgages
offer good security and interest rate returns.

Pension funds

Pension funds are another form of mortgage financing. However, pension funds rarely finance
individual mortgages and typically concentrate in the commercial sector due to the large sums
of capital.

Interest rates offered by these funds are usually competitive; however, their underwriting
guidelines are often more restrictive.
Finance companies
Finance companies are another source of mortgage funding. Unlike banks, they cannot accept
deposits; however, these organizations provide financial solutions to individuals and businesses.

Finance companies are particularly active in the secondary mortgage market through collateral
loans and promissory notes. A promissory note is a written promise to repay a specified amount
over a specified period of time.

These loans are secured through a promissory note with additional collateral security in the
form of a mortgage. In the event of default, the lender has the right to recourse against the
note or the mortgage, but usually not both. Collateral loans are becoming more popular
because they are easy to arrange, and the terms are generally flexible.
 C O NT I NU E

Non-institutional
lenders

Despite misconceptions, non-institutional lenders are not predators out to scam unsuspecting
borrowers. Non-institutional lenders compete in the market with institutional lenders, and they
often work in conjunction together.

How do non-institutional lenders differ from institutional lenders?

They cannot accept deposits.

They are typically only available to consumers through a mortgage professional.

 They have extremely conservative lending guidelines.

Mortgage bankers
Due to the competitive nature of the Canadian mortgage industry, more lenders are seeking
out markets to obtain new mortgage clients. Mortgage bankers provide an alternative financial
choice to consumers and are not mainstream institutions. They differ from chartered banks in
that they cannot accept deposits.

Mortgage bankers finance mortgages by using their funds or investor funds. Their funds are
typically generated using commercial lines of credit, then pooling the funds and selling bundles
of mortgages as mortgage-backed securities to the investment marketplace.

Due to these investments' regular income, pension plans and insurance companies are large
buyers of mortgage-backed securities. While some mortgage bankers participate in mortgage-
backed security pools, others have arrangements with banks to lend their money.
Mortgage bankers typically use mortgage professionals to source mortgage applicants but can
vary their marketing approach to distribute their products directly to consumers, which may
occur through call centres. However, they rarely provide in-person service.

C O NT I NU E

Government lenders
The federal and provincial governments provide mortgage loans through various lending
programs. These are made available to specific industries or sectors of the economy. The main
purpose of government-financed programs is to help establish, maintain, and further develop
commercial, industrial, and agri-business ventures in Canada.

Government lending agencies for mortgages include:

Farm Credit Corporation (FCC)

–
The Farm Credit Corporation (FCC) is a federal crown corporation
established to assist with farm loans. It is the most common source of
farm mortgage financing other than private lenders.

Agricultural Financial Services Corporation (AFSC)

–
The Agricultural Financial Services Corporation (AFSC) is a provincial
crown corporation providing access to capital through lending products
and services to support Alberta’s farming operations and commercial
agri-businesses. Agri-businesses are industry sectors that include all
aspects of food production, from grain, and livestock productions, to
consumer goods.

Canada Mortgage and Housing Corporation (CMHC)

–
The Canada Mortgage and Housing Corporation (CMHC) is a federal
crown corporation that aims to make mortgage loans affordable for all
Canadians through housing development strategies and mortgage
insurance, among other initiatives.

Through the National Housing Act (NHA) and insured through Canada
Mortgage and Housing Corporation (CMHC), the federal government
offers NHA Mortgage Backed Securities (NHA MBS).

Under the NHA MBS program, investors are offered a secure investment
in Canadian residential mortgages, helping to increase the supply of
funds available for mortgage lending.

The graph below illustrates the percentage share of residential mortgage credit by institutional
and government lending categories. It does not include that portion of mortgage credit
originated by private lenders.

Select the label on each segment to bring up the relevant lender.

Keyboard Instructions:
–

Use Tab and Shift+Tab to move from one closed marker to

another.

Press Enter or the Spacebar to open a marker.

Use the up and down arrow keys to scroll through the contents of
an open marker.

Use the left and right arrows to move from one open marker to
another.

Press Esc to close a marker.

 

 


 

NHA mortgage-backed securities (30%)

 

Chartered banks (49%)

 

Credit unions (13%)

 

Pension funds (2%)

 

Special purpose corporations (2%)

 

Life insurance companies (2%)

 

Trust and mortgage loan companies (1%)

C O NT I NU E

Private Lenders
Private lenders offer an optional source of financing to borrowers when their needs for a
mortgage do not meet traditional lending criteria.

We will examine the major types of private lenders individually.

Mortgage investment corporation (MIC)

Mortgage investment corporations (MICs) are private investment and lending companies that
service residential and commercial mortgage transactions. The Alberta Securities Commission
regulates these corporations through the Alberta Securities Act.

Investors purchase shares in a MIC as an investment in a diversified pool of mortgages. The MIC
pools investor funds to lend money to borrowers.

MICs may invest solely in residential mortgages, commercial mortgages, or a combination of

the two. MICs concentrate on loans perceived as riskier for many institutional lenders. Their fees
and interest rates are typically higher to compensate for the perceived risk.
Under federal guidelines, at least 50% of their mortgage investments must be in residential
mortgage assets combined with cash held on deposit. Residential mortgage assets would
include single-family mortgage assets and multi-family mortgage assets.

A mortgage investment corporation is structured similarly to an income trust where all of its
net income (profit) is distributed to its investors according to their proportional share. The
revenue stream of a mortgage investment corporation consists mainly of mortgage interest
and fee income.

The diagram below shows how funds flow through an MIC.

Select the labels to learn more about the different components.

Keyboard Instructions:
–

Use Tab and Shift+Tab to move from one closed marker to

another.

Press Enter or the Spacebar to open a marker.

Use the up and down arrow keys to scroll through the contents of
an open marker.

Use the left and right arrows to move from one open marker to
another.

Press Esc to close a marker.

 

 


 

Individual investors
 

MIC

Mortgage investment corporation.

 

Mortgage investments
 

Capital

Moves from individual investors to MICs.

 

Dividends

Moves from MICs to individual investors.

 

Mortgage loans

Moves from MICs to mortgage investments.

 

Interest, fees, penalties

Moves from mortgage investments to MICs.

Syndicated mortgage

A syndicated mortgage is where two or more investors participate, directly or indirectly, as

lenders in the debt obligations secured by a mortgage. Here, the investment and risk is
associated with one property, whereas a MIC spreads the investment and risk over a number of
properties.

A syndicated mortgage does not necessarily follow any specific guidelines, as it becomes more
of an agreement or loan between individuals.

Interest rates with private lenders are higher and the terms are usually short - about a year.
When submitting a file to private lenders, it is very important to create a solid exit strategy for
the borrower.
 

Interest, fees, penalties

Moves from mortgage investments to MICs.

Syndicated mortgage

A syndicated mortgage is where two or more investors participate, directly or indirectly, as

lenders in the debt obligations secured by a mortgage. Here, the investment and risk is
associated with one property, whereas a MIC spreads the investment and risk over a number of
properties.

A syndicated mortgage does not necessarily follow any specific guidelines, as it becomes more
of an agreement or loan between individuals.

Interest rates with private lenders are higher and the terms are usually short - about a year.
When submitting a file to private lenders, it is very important to create a solid exit strategy for
the borrower.
Currently, syndicated mortgages are regulated by the Alberta Securities Commission and also
by the Real Estate Council of Alberta (RECA) when the dealing in syndicated mortgages is by a
mortgage professional registered with RECA.

C O NT I NU E

Knowledge Check-In: Lender Types

For each of the questions below, select the type of lender that best corresponds to the
description given.

Keyboard Instructions:
 –

Tab to the question, then use the up and down arrow keys to
move from one answer choice to another.

Once a choice is selected, Tab to the Submit button and press the
Spacebar or Enter.

To retake the question, tab to the Take Again button and press the
Spacebar or Enter.

1. These lenders are active in the secondary mortgage market through

collateral loans and promissory notes.

Pension funds.

Finance companies.

Life insurance companies.

Mortgage investment corporations.

SUBMIT
 Complete the content above before moving on.

2. Canada’s “Big Five” banks are examples of this type of lender.

Finance company.

Trust and loan company.

Chartered bank.

Credit union.

SUBMIT

Complete the content above before moving on.

 3

3. This institution, unique to Alberta, provides full financial services, but

is not chartered under the Bank Act.

ATB Financial.

Agricultural Finance Services Corporation.

AIMCO.

Canadian Western Bank.

SUBMIT

Complete the content above before moving on.

4
4. This provincial Crown Corporation provides access to capital for agri-
business.

Farm Credit Corporation.

Canada Mortgage and Housing Corporation.

Mortgage Investment Corporation.

Agricultural Finance Services Corporation.

SUBMIT

Complete the content above before moving on.

5. These institutions allocate a large portion of the funds they have from
policyholders’ premiums toward the mortgage market.
Pension funds.

Life insurance companies.

Trust and loan companies.

Chartered banks.

SUBMIT

Complete the content above before moving on.

NE X T PA G E
Lesson 3 of 6

Credit Analysis and Mortgage Lending

Mary Swaf eld

Although approval guidelines and policies on the types of mortgages acceptable to lenders will
differ, the mortgage brokerage industry has developed a common classification system
dividing the lending market according to three groups: prime, near-prime, and subprime.

C O NT I NU E
Prime lending

Prime lending, also referred to as “A lending,” occurs when loans are made to well-qualified
borrowers with good-quality property. “Prime” in this instance indicates the lender has a high
degree of confidence that the borrower can and will pay the debt obligation and failing that,
then the sale of the property will cover the mortgage obligation. Traditionally, a borrower in this
category qualifies for financing from all lenders. Generally, prime lending is carried out by
institutional lenders.

C O NT I NU E

Alternative lending
market
Alternative lending, broadly defined, deals with borrowers who typically do not meet
conventional underwriting criteria and who represent a segment of the population with
financial or documentation difficulties. For example, these borrowers may have no Canadian
credit history or lack a credit history entirely, or they may currently be employed but lack a
long job history or tax records.

The alternative mortgage lending market develops innovative solutions for Canadians who are
unable to find financing through traditional sources and typically promotes their products and
services to mortgage professionals.

Lenders differ in specializations and the terms or conditions they offer on their mortgage
products. This is especially true with alternative lenders. Therefore, as a mortgage professional,
possessing an in-depth knowledge of the underwriting guidelines of the various lenders will
place you in a position that will allow you to differentiate and seek out alternative lenders.

In Canada, the alternative lending market is growing in size and strength due to the varied
needs of borrowers who require mortgage financing. As a result, in order to stay competitive,
more institutional lenders are becoming increasingly open to servicing consumers who would
typically choose an alternative lender for their mortgage needs.

Undoubtedly, competition on the part of the different mortgage lenders in this segment of the
market will only intensify in the coming years, as evidenced in the form of marketing strategies,
price competition and innovative product design.

Alternative lending includes both near-prime and subprime lending, which are detailed in the
subsections below.

Near-prime lending

Near-prime lending, referred to as “B lending,” occurs when loans are made to borrowers who
may not meet traditional lending guidelines. There are many reasons why a borrower may not
fit the established criteria, and these reasons may have nothing to do with whether or not the
individual is a good credit risk. For example, newly immigrated people, people employed with
multiple part-time jobs, some self-employed people, and people wishing to consolidate debt are
just a few examples of borrowers who might not meet conventional underwriting requirements.

With near-prime financing, the lender also accepts riskier mortgage characteristics such as a
higher loan-to-value amount not insured under CMHC guidelines, or attributes of the property
such as location, condition, or age that cause the loan to carry elevated risk. Generally
speaking, near-prime lending is provided by some institutional and private lenders.

Subprime lending

Subprime lending, or “C lending,” generally occurs when a borrower and property fail to meet
conventional underwriting guidelines but funds are still advanced. Subprime borrowers typically
have lower credit scores and show data on their credit reports associated with higher default
rates, including limited debt experience, excessive debt, failure to pay debts, a history of missed
payments, and recorded bankruptcies.

Additionally, there may be no verifiable income, employment issues, excessive loan-to-value ratio
for the property, or a substandard property value due to its location, condition, or age.

Subprime loans are considered more of a risk for the lender due to the borrower’s lower credit
rating. To compensate for this added risk, lenders typically charge higher interest rates on
subprime mortgages. These mortgages are generally funded by private lenders.

For a brief overview of the 2008 subprime mortgage crisis, refer to the timeline in the “Mortgage
Fundamentals” unit in this module.
NE X T PA G E
Lesson 4 of 6

Residential and Commercial Mortgages

Mary Swaf eld

A residential mortgage occurs when borrowed funds are used for the purchase of real property,
for the construction of a new residence, for the purchase of a new or existing residence, to
refinance an existing mortgage or to finance a renovation or consolidate debt.

Residential financing also includes mortgages secured by rural real estate when its use is of a
residential nature, such as a recreational or vacation property.
Commercial mortgages involve properties associated with commerce or trade. In commercial
mortgage lending, financing can be used to construct or develop an investment property or
office building, purchase an existing commercial property, renovate or expand an existing
business or consolidate business debt.

C O NT I NU E

Residential mortgages
To qualify for a residential mortgage, a lender will want to verify a borrower’s personal
creditworthiness. The lender will want to know if the borrower has a job, can afford the
mortgage payments, and has established credit.

When applying for a residential mortgage, lenders follow two simple affordability guidelines to
determine how much a borrower can pay in housing costs: the gro ss debt service rat io
(G DS) and t o t al debt service rat io (T DS).
These ratios are presented in the form of a percentage and may be adjusted to lenders’
guidelines. Borrowers must qualify according to both ratios.

Note that the government can set the parameters around qualification, which lenders must
follow.

Gross debt service ratio (GDS)

As we discussed in the unit “Mortgage Fundamentals,” the GDS ratio examines household debt
in proportion to income.

These costs include mortgage payments of principal and interest, property taxes and heating
expenses. Together, these costs are sometimes referred to by the acronym PIT H for short.

To refresh your memory: If the property being considered is a condominium, then the GDS ratio
must include 50% of the condominium fees. In addition, for chattel or leasehold loans, 100% of
site or ground rents must be included. Also, if the loan is a high-ratio mortgage, the insurance
fee, if not paid upfront by the borrower, is added to the total loan amount and included in the
GDS calculation.

Lenders set varying qualifying ratios. For example, if a lender sets their qualifying GDS at 39%,
applicants whose GDS exceeds 39% will not qualify. This means the applicants’ monthly housing
costs exceed 39% of their gross monthly income.

Example:

Benny and June want to buy a home and are seeking

financing. Their combined monthly gross (before deductions
and taxes) income is $7,000, and their monthly housing
costs break down as follows:

Monthly mortgage payment (principal

$1,250.75
and interest):

Monthly property tax: $150

Monthly heating cost: $100

$1,500.75
Total monthly housing costs:
(PITH)

PITH: $1,500.75

Divided by combined gross monthly

$7,000
income:
 Gross debt service ratio (GDS) = 21%

In this example, the GDS ratio does not exceed 39%;

therefore, Benny and June qualify for mortgage financing if
the lender has set their qualifying ratio to 39%.

Total debt service ratio (TDS)

While borrowers may qualify for a mortgage based on the GDS ratio, lenders also calculate a
borrower’s total monthly debt load.

As defined in the unit “Mortgage Fundamentals,” the T DS ratio includes PIT H expenses in
addition to other contractual debts such as car loans, bank loans, credit card payments, and
other financial commitments.
Example:

Continuing the previous example, the lender sets an

affordability guideline of 44% for the TDS ratio. They
consider the additional debt commitments of Benny and
June with a combined monthly gross income of $7,000.00.

Monthly mortgage payment (principal

$1,250.75
and interest):

Monthly property tax: $150

Monthly heating cost: $100

Other debt: $1,000

Total monthly costs: $2,500.75

Total monthly debt: $2,500.75

Divided by combined gross monthly

$7,000.00
income:

Total debt service ratio (TDS) = 36%

 In this instance, the TDS ratio is less than 40%; therefore
Benny and June qualify for a mortgage with this lender. If
the total monthly costs were in excess of 44% of their
$7,000.00 gross monthly income, they would not qualify for
the mortgage even if they had met the GDS criteria.

C O NT I NU E

Commercial
mortgages
Apart from residential properties, commercial properties are also used as security for
mortgages. These properties are used for commerce or trade. A commercial mortgage is simply
a mortgage with which a company or an individual finances the purchase of a business
property, either for their own use or to lease to a third party. Some common commercial
mortgage products provide funding for the following:

Raw land for development.

Specific use properties (e.g., hotels, motels, restaurants, service stations).

Leisure industry properties used as recreational facilities.

Retail facilities (e.g., shopping centres, strip malls, outlet malls).

Office buildings and industrial properties.

Commercial mortgage applications tend to be more complex and specialized than residential
mortgages. It can take months to assemble applications with additional documentation and
criteria. As each loan application is unique, it is typically underwritten on a case-by-case basis.

While requirements usually vary among lenders, most require detailed information on the
borrower as well as the property. Typical underwriting guidelines may include the following
information:

Feasibility study that reports on the economic, market and physical characteristics
of the project.

Current real estate appraisal.

Construction and site analysis, building and construction plan, architectural

drawings, structural engineering reports, environmental reports, compliance
certificates, land-use regulations, development and building permits.

Financials detailing estimated gross income, expected vacancy rates, all expenses
(excluding debt service), projected income and cash flow estimates.
 Borrower information comprising supporting documentation of past project history
or experience in operating income properties, financial statements, credit check of
company or individual, background and history of the company or developer.

List of professionals advising the borrower (e.g. accountant, auditor, tax specialist,
lawyer, engineer, other consultants).

The priority in commercial mortgage lending is the property’s cash flow and the availability of
income to support the mortgage debt. Two common calculations lenders use when
underwriting a commercial mortgage application are the loan-to-value (LT V) ratio and the debt
service coverage ratio (DSCR).

Loan-to-value
The lo an-t o -value rat io (LT V) expresses the amount of the commercial mortgage as a
percentage of the appraised value of the property. While mortgage providers’ lending policies
do vary, most lenders will offer a maximum loan-to-value ratio between 75% and 80% with
some lenders financing up to 90%. A detailed appraisal report conducted by an accredited
commercial appraiser will provide the lender with the required estimated property valuation
needed to determine the mortgage amount.

Debt service coverage ratio

Regardless of whether a property is newly constructed or a resale, lenders will carefully evaluate
the income or potential income the property will generate. The debt service co verage rat io
(DSCR) measures the property’s ability to cover the mortgage payments and can be defined as
the ratio of a property’s net operating income to its mortgage payments. Net o perat ing
inco me is a company or property's income after operating expenses are deducted, but before
deducting interest and taxes.

The higher the DSCR is, the more net operating income is available to service the debt. For
example, a DSCR of 1.15 indicates that the property produces a net operating income 15%
greater than what is required to pay the loan. On the other hand, a DSCR of less than 1.00
indicates insufficient cash flow to cover required debt payments.
Lenders prefer a DSCR greater than 1.00, as this indicates less risk of payment default.

Example:

Lulu owns a restaurant with an annual net operating income

of $100,000, and an annual debt service (total amount of
interest and debt payments) of $110,000. The DSCR is 0.91
($100,000 divided by $110,000). In this scenario, the DSCR
indicates that the restaurant has a negative cash flow and
that the income produced by the property is only sufficient
to pay 91% of the total debt service. The result is that Lulu
will have to supply the shortfall of $9,900 or $9% of the total
annual debt service on their property.

Apart from the LT V and DSCR figures, lenders may also consider break-even analysis,
capitalization rates, and vacancy rates. These concepts will be considered more in-depth later
on in the program.
 C O NT I NU E

Knowledge Check-In: Lending

Approaches
1

Keyboard Instructions:
–

Tab to the question, then use the up and down arrow keys to
move from one answer choice to another.
 Once a choice is selected, Tab to the Submit button and press the
Spacebar or Enter.

To retake the question, tab to the Take Again button and press the
Spacebar or Enter.

1. Ash is seeking approval for a residential mortgage. Ash has some

money saved for a down payment, and their credit is generally good,
but they work mainly as a freelance coder, supplemented with some
part-time jobs. Which category does Ash fall into?

Prime lending.

Near-prime lending.

Subprime lending.

Alternative lending.

SUBMIT
 Complete the content above before moving on.

2. Lizette is recently divorced and has only just opened up bank

accounts and credit cards in her own name. She has a great full-time
job in a government office, but she is having trouble securing a
mortgage to buy a home. What kind of lender would you recommend
to Lizette?

Prime lending.

Near-prime lending.

Subprime lending.

Alternative lending.

SUBMIT
 Complete the content above before moving on.

Keyboard Instructions:
–

Use Tab and Shift+Tab to move from one answer choice to another.

Press Spacebar to select or de-select your answer.

Once a choice is selected, Tab to the Submit button and press the
Spacebar or Enter.

To retake the question, tab to the Take Again button and press the
Spacebar or Enter.

3. Larry and Jerry are purchasing a cafe along a beautiful walking route
in Edmonton’s river valley. Which of the following pieces of information
will lenders be interested in reviewing? Please select all that apply.

A list of personal endorsements for the project

from community leaders and neighbours.

Current real estate appraisal.

 Structural engineering and environmental reports.

Analysis of past businesses on the site.

Complete borrower information, including credit

checks, financial statements, and documentation
of past experience managing similar projects.

SUBMIT

Complete the content above before moving on.

4. Larry and Jerry’s cafe has a glowing list of recommendations, but it

also comes with many costs and a few debts. Which ratio will lenders
look at to evaluate the cafe’s income before approving a mortgage?

Loan-to-value.
Debt service coverage ratio.

Gross debt service ratio.

Total debt service ratio.

SUBMIT

Complete the content above before moving on.

NE X T PA G E
Lesson 5 of 6

Conclusion
Mary Swaf eld

In this unit, we have learned there are four main categories of lenders: institutional lenders, non-
institutional lenders, government funding, and private lenders. We learned about how lenders
qualify applicants for residential and commercial mortgages.

Equipped with the knowledge of what lenders exist and how they operate, you can help your
clients navigate what can sometimes be a confusing and sometimes intimidating marketplace
to ensure they save time and money.

In the next unit, we will consider the larger economic

landscape and forces that shape the mortgage market.

C O NT I NU E TO R E FE R E NC E S
Lesson 6 of 6

References
Mary Swaf eld

Anielski, M., & Ascah, B. (2018, August 30). Alberta’s public bank: how ATB can shape the new
economy. Parkland Institute. https://www.parklandinstitute.ca/albertas_public_bank

Boothe, P. (2016, August 12). Bank Act. The Canadian Encyclopedia.

https://www.thecanadianencyclopedia.ca/en/article/bank-act

Granger, A. (2017, November 10). Banking in Canada. The Canadian Encyclopedia.

https://www.thecanadianencyclopedia.ca/en/article/banking
 Mary Swaf eld

AMBA Fundamentals - M1 - Unit 5: Economic

Forces and the Mortgage Market

IN TR ODUCTION

Introduction

ECON OMIC FOR CES AN D TH E MOR TGAGE MAR KET

Mortgages and the Financial Landscape

Mortgages and Interest Rates

CON CLUSION

Conclusion

R EFER EN CES

References
Lesson 1 of 5

Introduction
Mary Swaf eld

Home ownership is a significant step in life for many Canadians. It is both a source of pride and
a beneficial financial investment. As a mortgage professional, you play an important role in
helping Canadians make what is likely to be one of the biggest financial investments of their
lives.

In this unit, we will consider the forces that influence the mortgage industry in the context of
the larger economic market.

By the end of this unit, you will be able to:

Identify the differences between the primary and secondary mortgage markets.

Identify the general economic forces that influence the mortgage market.

Describe the influence of government policy on the mortgage market.

Identify the safeguards the government has put in place to protect borrowers.

NE X T PA G E
Lesson 2 of 5

Mortgages and the Financial Landscape

Mary Swaf eld

The Canadian real estate market is one of Canada’s essential capital markets, along with the
mortgage market, stock market, and the bond market. Markets fluctuate in value every day.
They are influenced by government policies, interest rates, and economic cycles. The health of
the real estate market plays an important role in the well-being of Canadian communities and
the ability of Canadians to access homeownership.

C O NT I NU E

Capital market
Savers and borrowers interact through Canada’s capit al market .

The main agents in the economy are households, businesses, and the government. At any time,
some economic agents are saving—their income exceeds their expenses. Other agents are
borrowing—they spend more than they received or accumulated.

Generally speaking, the capital market serves to transfer funds from savers to borrowers.
Transactions occur on a local, regional, national and global basis, encompassing many savers,
borrowers, and transactions in different sub-markets. One such sub-market of the capital
market is the mortgage market.

C O NT I NU E

Mortgage market
Borrowers seeking financing of real property rely on the mo rt gage market . The mortgage
market competes with the capital market through competition with other investments for a
share of the total supply of savings.

Investment funds flow to segments of the market that promise the most attractive returns
despite expected risks.
As demand for funds in the mortgage market increase, the interest rate on mortgages
increases, attracting investment funds away from other capital market segments and into the
mortgage market.

Conversely, when there is a decrease in the demand for funds in the mortgage market,
mortgage interest rates decrease, and investment funds are divested to other capital markets.

Mortgage funding has been a part of the financial landscape for many years, and it is vital to
the Canadian economy. Canada has one of the most solid mortgage systems globally; it’s a
balanced system intended to help all sectors of the economy, from residential, commercial, and
agri-business.

The mortgage market offers consumers alternative options outside traditional residential
purchase or construction transactions. When an individual or business seeks funds, the
mortgage market typically helps finance the transaction.
The mortgage market consists of two sub-markets, the primary and secondary mortgage
markets.

Select each term in the accordion below to learn more.

Primary mortgage market

–
In the primary mortgage market, consumers and investors access
common sources of financing made available through many lenders
such as chartered banks, treasury branches, credit unions, loan
corporations, trust corporations, insurance companies, mortgage
investment corporations, syndicated mortgages, or any party engaged in
the business of making loans secured with mortgages.

The primary mortgage market consists of lenders responsible for

originating and servicing new loans designed to assist in new
construction, the acquisition of existing property, or renovation projects
in residential, commercial, industrial and agri-business development
projects. The lenders supply funds directly to the borrowers and hold
the mortgage until the debt is paid. Thus, the primary mortgage market
provides the necessary structure for borrowers and lenders to transfer
funds. The primary mortgage market determines both the cost and
availability of mortgage funds.

Secondary mortgage market

–
The secondary mortgage market involves purchasing and selling
existing mortgages. In this market, mortgage loans are purchased from
primary lenders, bundled together, then pooled and traded as
mortgage-backed securities to investors. A mortgage-backed security
is an investment based on a pool of underlying mortgages.
In this market, the investor buys the right to receive the stream of
payments that the borrower agreed to pay the original lender. The
strategy of bundling and selling mortgage loans as securities creates
more funds available for lending, therefore allowing more borrowers to
obtain mortgage financing.

NE X T PA G E
Lesson 3 of 5

Mortgages and Interest Rates

Mary Swaf eld

What factors impact real estate market economics and the mortgage brokerage industry?
Generally, a weak economy leads to low interest rates, while strong economic growth leads to
higher interest rates.

From the borrower’s perspective, interest represents the cost of borrowing money.

From the lender's perspective, interest is the compensation for the service and the risk of
lending money.

C O NT I NU E

General economic
patterns
As a major piece of the economy overall, the mortgage industry is influenced by general
economic patterns, locally, nationally, and globally. The following economic factors can
influence interest rates, which in turn influence the mortgage market.
Business cycles
Business cycles are regular upswings and downswings in major factors of economic activity—
output, employment, income, and sales (Achuthan, 2022).

These cyclical phases are expansions and contractions. We commonly understand these as
booms, busts, depressions, recessions, etc.

Each cycle has four stages: expansion, peak, contraction, and trough (Achuthan, 2022). The
following diagram illustrates the phases of a business cycle.

Select the labels to identify the different phases of the cycle.

Keyboard Instructions:
–
 Use Tab and Shift+Tab to move from one closed marker to
another.

Press Enter or the Spacebar to open a marker.

Use the up and down arrow keys to scroll through the contents of
an open marker.

Use the left and right arrows to move from one open marker to
another.

Press Esc to close a marker.

 

  



 

Y-axis: Gross Domestic Product (GDP)

 

X-axis: time
 

Peak

Where growth hits its maximum rate.

 

Recession

Recession begins as the cycle moves past its peak and begins to turn downward.
 

Depression

Depression marks a prolonged period of downturn.

 

Contraction

Recession leads into contraction.

 

Trough

The maximum depth of contraction.

 

Recovery

Recovery begins from the maximum depth of contraction.

 

Expansion

Expansion begins when the cycle has recovered losses and begins to grow again.

Growth hits its maxim rate at the peak of expansion, but growth slows, prices stagnate, and
instability grows. Recessions start at this peak of the cycle, continuing to the depth of the
trough. Expansion begins at the maximum depth of contraction, at which point recovery and
expansion begin again.
A recession is a vicious cycle. Cascading declines in output, employment, income, and sales
continue to result in a further drop in output that spreads rapidly from industry to industry and
region to region. This domino effect diffuses recessionary weakness across the economy, driving
movement among these economic indicators and leading to persistent recession (Achuthan,
2022).

A market bubble is an economic cycle characterized by a quick increase in market value,

typically seen in the price of assets. The quick inflation is followed by a rapid decrease in value,
often referred to as a “bubble burst.”

Supply and demand

An increase in the demand for credit in the market will raise interest rates. In a "Seller's Market"
there are more buyers and sellers command a better price and higher rates. Conversely, when
the demand for credit decreases, so do interest rates. A "Buyer's Market" occurs when there are
more sellers than buyers. This result in buyers negotiating a better price and lower rates

A balanced market, or one in equilibrium, is when supply and demand are balanced and prices
stabilize.
Mortgage volume
High volumes of mortgage lending reflect confidence in the safety and desirability of real
estate. Conversely, when real estate values decline and the factors show unfavourable
movement, buyers’ confidence in real estate is reduced, resulting in fewer buyers borrowing
funds and fewer lenders loaning funds.

Foreign ownership
Canada’s real estate is also on the market for international owners and investors. Foreign
investment poses an economic challenge to the domestic market. A country's economy needs
to encourage investment, but it comes at the expense of Canadian buyers priced out of the
market.

With more buyers entering the market and only a finite supply of homes, prices rise, and homes
become less affordable. The dollar exchange and price of real estate in other countries also add
to the demand for property in Canada.

Demographics
The world as we know it is getting smaller. One recent example that has dramatically affected
supply and demand is the surge of people working from home due to the Covid-19 pandemic.
People's housing needs and desires are changing—they want home offices, quiet locations out
of the city, and more space. With only so many homes and a sudden influx of buyers, prices in
some markets dramatically spiked following the first phases of the pandemic.

C O NT I NU E

Government policy
The government also has an influence on the mortgage market through both legislation and
regulation, as well as through monetary policy. The following sections detail ways that the
government impacts the market in Canada.
The Bank of Canada
The Bank of Canada, the country’s central bank, sets monetary policies to influence the
economy by regulating the amount of money in circulation. For example, the Bank of Canada
can increase the Bank Rate to curb inflation.

The Bank Rat e is the interest rate the Bank of Canada lends to domestic financial institutions.
This change in rate directly affects variable mortgage rates.

In a deflationary period, the Bank Rate is decreased to improve the liquidity of cash in the
marketplace, increase economic activity, and encourage consumer spending. This upward and
downward fluctuation in lending rates causes the rise and fall of mortgage rates offered by
financial institutions.

Overnight rates
The o vernight rat e is the interest rate at which large banks lend each other money at market
close. The overnight rate affects the prime lending rat e, which is the interest rate banks lend
to consumers.

What does this mean in the mortgage market? Unfixed mortgage rates are set against the
current prime rate, and the higher the overnight rate is, the higher the interest rates for
borrowers.

The Bank of Canada reviews the overnight rate eight times a year to influence market rates and
circumvent inflation.

Bank of Canada bond yields

Bonds are issued by governments and corporations when they want to raise money. By buying
a bond, you're giving the issuer a loan, and they agree to pay you back the face value of the
loan on a specific date and to pay you periodic interest payments along the way, usually twice
a year. Government of Canada bonds are attractive investments because they are 100%
guaranteed. If held to maturity, they are guaranteed by the federal government to generate a
full return. The Bank of Canada, as part of its normal operations, buys bonds directly from the
government.
 "Ottawa - ON - Bank of Canada" by Wladyslaw is licensed under CC BY 3.0.

When the Bank purchases bonds, it raises their price and lowers their return. The return is the
interest rate paid to bondholders, also called the yield (Bank of Canada, 2020).

Bond yield curve

The bond yield curve is the graphical relationship between interest rates and bond yields.
Interest rates and bond yields have an inverse relationship. Below is a diagram illustrating the
bond yield curve.

Click on the labels to learn more about the variables influencing the curve.

Keyboard Instructions:
–
Use Tab and Shift+Tab to move from one closed marker to
another.

Press Enter or the Spacebar to open a marker.

Use the up and down arrow keys to scroll through the contents of
an open marker.

Use the left and right arrows to move from one open marker to
another.

Press Esc to close a marker.


 

Y-axis: yield (%)

 

X-axis: maturity
 

Rising curve.

Indicates strong economic activity and suggests inflation.

When bond prices decrease, interest rates (yields) increase, and vice versa. When prices increase,
interest rates decrease.

The curve generally flattens or steepens. A rising curve, as depicted in the graph above,
indicates strong economic activity and suggests inflation. With a high yield curve, banks can
borrow money at lower interest rates and lend at higher interest rates.

A flattening curve indicates economic weakness, and inflation and interest rates are expected
to stay low. Banks will be reluctant to lend.

The curve largely influences the mortgage industry through borrowing rates. Five-year bond
rates are tied to fixed-rate mortgages. When bond yields go up, so do fixed mortgage rates.
When they go down, so do mortgage rates.

Stress test
The federal government also changes mortgage qualifying rules that affect the real estate
market. A concern frequently addressed at the federal level is the household debt service ratio,
which is the proportion of household income versus any obligated payments of borrowed credit.
Debt service ratios are used in mortgage qualifying.

Previously, when mortgage rates were low, borrowers obtained larger mortgage amounts than
they otherwise could qualify for. While borrowers could afford their mortgages with low rates,
what would happen should the market shift and rates rise? Would the borrowers still be able to
afford their mortgage payments?

In 2016, the federal government introduced the Canadian mortgage stress test for insured
mortgages; that is, loans with less than a 20% down payment.
Under the stress test, borrowers must qualify for a fixed-rate mortgage at the contract rate
plus an additional 2%, thereby protecting the borrowers should rates increase. This ensured the
mortgage was affordable in a fluctuating market.

Since then, the government continues to adjust this stress test to deal with the evolving
market.

Lender risk
The mortgage transaction's level of risk also affects the interest rate. For example, a high-risk
property or borrower may result in a higher than market mortgage interest rate to compensate
for the added risk to the lender.

Building activity
Building activity or construction activity applies to all three economic sectors.
The primary sector involves the extraction of natural resources. The secondary sector involves
manufacturing the building materials, and the third sector involves providing consultancy
services, like project managers and engineers.

C O NT I NU E

Other factors
Many influences impact the economy and the real estate market. These include:

The rate of inflation in the economy.

The rate of employment and unemployment in a population.

The demographics of households and family compositions.

The rate of population growth.

Consumer habits, such as willingness to spend vs save in economic booms and

recessions.

Investors' willingness to engage in investment opportunities based on their

perception of risk and return.

Market corrections with a decline of 10% or more in a security, asset or financial

market price, lasting from days to months.

Other factors: wars in other countries, global events, etc.

 C O NT I NU E

Knowledge Check-In: Trends and

Forces
1

Keyboard Instructions:
–

Tab to the first answer choice in the left column, then use the up
and down arrow keys to cycle through the choices until the one
you want is selected.
 Press the Spacebar to activate the selected choice. It’ll turn gray,
which means it’s ready to be linked to a match in the right column.
If you want to deactivate the selected choice, press the Spacebar
again or press the Esc key.

When a choice is active (gray), use the right arrow key to switch to
the column of matches on the right side of the question, then use
the up and down arrow keys to cycle through the matches until
the one you want is selected.

Press the Spacebar to link the active choice on the left to the
selected match on the right.

Use the left arrow key to switch back to the column of choices on
the left side of the question and continue linking choices and
matches.

After linking all choices on the left with matches on the right, press
Enter to submit your answer.

1. Match each of the following terms to the correct definition.

 The purchase and sale of
Secondary mortgage mortgage loans traded as
market mortgage-backed securities to
investors.

The interest rate at which the

Bank Rate Bank of Canada lends funds to
financial institutions.

The interest rate at which banks

Prime lending rate
lend to consumers.

SUBMIT

Complete the content above before moving on.

Keyboard Instructions:
–

Tab to the question, then use the up and down arrow keys to
move from one answer choice to another.
 Once a choice is selected, Tab to the Submit button and press the
Spacebar or Enter.

To retake the question, tab to the Take Again button and press the
Spacebar or Enter.

2. Which of the following outlines the stages of the business cycle?

Output, Employment, Income, and Sales.

Boom, Bust, Depression, Recessions.

Expansion, Peak, Contraction, and Trough.

Extraction, Manufacturing, Service, and

Information.

SUBMIT

Complete the content above before moving on.

 3

3. What does a rising curve on a bond yield graph indicate?

A reduction in fixed mortgage rates.

Banks are reluctant to lend.

Banks can borrow money at lower interest rates

and lend at higher interest rates.

An increase in bond prices.

SUBMIT

Complete the content above before moving on.

4
4. What is the purpose of the federal government’s mortgage stress
test?

To control the debt service ratios of Canadians.

To protect borrowers if mortgage rates increase in

a fluctuating economy.

To reduce the risk to lenders.

To keep insurance rates low.

SUBMIT

Complete the content above before moving on.

NE X T PA G E
Lesson 4 of 5

Conclusion
Mary Swaf eld

The many economic, social, and political factors that influence the mortgage market are
constantly evolving. While mortgage brokers can’t control the rates, it’s critical that they
understand, advise, and educate their clients about the market and qualifying rates
accordingly.

In the next unit, we will look more closely at market

influences on the process of appraisal and property
valuation.

C O NT I NU E TO R E FE R E NC E S
Lesson 5 of 5

References
Mary Swaf eld

Achuthan, L. (2022, April 1). Business cycle. Investopedia.

https://www.investopedia.com/terms/b/businesscycle.asp

Bank of Canada. (2020, December 17). Understanding quantitative easing.

www.bankofcanada.ca. https://www.bankofcanada.ca/2020/12/understanding-quantitative-
easing/#:~:text=Buying%20government%20bonds%20raises%20their
 Mary Swaf eld

AMBA Fundamentals - M1 - Unit 6: Appraisals, Value, and Market

Influences

IN TR ODUCTION

Introduction

APPR AISALS, VALUE, AN D MAR KET IN FLUEN CES

Real Estate Appraisers

Appraisal Reports

Appraisals and Market In uences

Collecting Data for an Appraisal

CON CLUSION

Conclusion

R EFER EN CES

References
Lesson 1 of 7

Introduction
Mary Swaf eld

Real estate appraisers are industry professionals that you will regularly work with in mortgage transactions. Appraisals play a vital role in the
mortgage lending process. Whether someone is buying a home, selling, or refinancing an existing mortgage, lenders need verification that the
properties they lend on are of market value.

Determining value as defined in real estate is also a vital piece of information in mortgage lending and brokering. The value of property is greatly

influenced by factors in the economy and real estate market.

In this unit, we will look in detail at how appraisals and appraisers work to estimate a property’s value, how market influences affect property
values, and what you need to know about appraisal reports and methodology.

By the end of this unit, you will be able to:

Identify the role of a real estate appraiser.

Distinguish between an appraiser and an assessor.

Identify the formal accreditations of appraisers.

Outline the contents of a real estate appraisal.

Identify the different types of real estate appraisals.

Identify how value is determined with respect to real estate.

Describe the cost approach to value.

Describe the sales comparison approach to value.

NE X T PA G E
Lesson 2 of 7

Real Estate Appraisers

Mary Swaf eld

What is an appraiser?
As defined in the unit “Mortgage Fundamentals,” real estate appraisers are accredited individuals who, for consideration or other compensation,
estimate the market value of real estate. Some appraisers also provide real estate appraisal consulting services. Appraisers provide an
independent, third-party, unbiased opinion of market value which helps lenders decide on a reasonable loan amount for a mortgage. Let’s look
in more detail at an appraiser’s role.

Real estate appraiser vs. assessor

The professions of real estate appraiser and property assessor might sound interchangeable. While their skill sets and domains are similar, their
designations and purposes are different.

The table below reflects the differences as they pertain to the subject matter within this course.
 Appraisers and appraisals Assessors and assessments

A real estate appraiser typically: A property assessor typically:

Specializes in a particular type of real estate Works for a municipal government.

(for example, residential or commercial).
Performs appraisals that apply to entire
Performs appraisals on individual properties. neighbourhoods.

Establishes value primarily for the purposes of Establishes value for the purposes of taxation.
a loan or purchase.

Valuation

A real estate appraiser’s valuation is based on A property assessor’s valuation uses special mass
data such as: appraisal computer software with valuation
models and formulae that compare, standardize,
Location.
and statistically apply data to large groups of
Size. properties.

Condition.

Type of construction.

Comparable sales.

Ideally, a real estate appraiser views the subject

property in person.

Purpose

Appraised value (current market value) can be Assessed property values are used by municipal
used for a number of different purposes but is governments to determine annual property taxes.
most often used by lenders to decide whether a
mortgage request is reasonable, given a particular
property as security.

C O NT I NU E

Appraisal management
companies (AMCs)
Appraisal management companies (AMCs) are third-party companies that operate between the appraiser and contracting party. The intent is
to prevent any influence on the appraiser for a particular value or any other form of collusion.
AMCs provide a portal and online record of appraisal orders, payment capabilities, appraisal reports storage, and sometimes quality control
forms.

AMCs began in the United States in the aftermath of the 2008 financial crisis and moved into Canada shortly after. There are over 700 AMCs in

the United States and currently five in Canada.

Lenders decide whether or not an appraisal is to be ordered through an AMC.

Appraisal management companies vs. appraisal firms

It’s important to find out each lender’s policy regarding appraisal services. Each lender has its own process for appraisals a broker must follow.

Based on lender instruction, you may order an appraisal through:

1 An appro ved appraiser list : The mortgage professional orders an appraisal from any of the appraisal firms on the lender’s
approved list.

2 An appraisal management co mpany (AMC):

Blind mo del: The lender indicates their approved appraisal management companies. The mortgage professional places
an appraisal order through the AMC, which assigns an appraiser.

Preferred part ner: The lender indicates their approved appraisal management companies. The mortgage broker places
an appraisal order and selects their preferred appraisal firm.
AMCs have access to national and provincial networks of real estate appraisers as well as lender-approved lists of real estate appraisers. In the
blind model, they use an automated random job-bidding process using the lender’s approved appraiser list and automate the ordering process,
order tracking, and final delivery of the appraisal to the lender.

With smaller or private lenders, you may issue an appraisal directly from a firm. In this case, you enter into a written service agreement with the

real estate appraiser, and any referral fees are to be approved by and paid for through your brokerage.

C O NT I NU E

Appraiser professional
designations
Understanding the professional designations and associations that regulate appraisers can help you know that you are dealing with an
appropriately licensed and credentialed individual.

Recognized appraisal associations

While there are different bodies that purport to represent appraisers, the Real Estate Act of Alberta recognizes three professional appraisal
associations:

1 Appraisal Institute of Canada (AIC).

 2 Canadian National Association of Real Estate Appraisers (CNAREA).

3 Alberta Assessors’ Association.

Members of these associations are approved to provide appraisals for mortgage lending purposes in Alberta.

Licensing associations
Real estate appraisers are licensed through two national associations:

1 The Appraisal Institute of Canada (AIC).

2 The Canadian National Association of Real Estate Appraisers (CNAREA).

Appraisers are formally trained, tested, and required to complete valuations using prescribed techniques and reporting methods.

Real estate appraisers are required to be independent, objective, and unbiased. They must adhere to the professional standards of practice and
code of ethics of the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP) and the Uniform Standards of Professional
Appraisal Practice (USPAP).

When you are responsible for engaging a real estate appraiser, ensure that they hold the appropriate designation and credentials for the type of
property to be appraised.

The table below outlines the official designations awarded by the Appraisal Institute of Canada (AIC) and the Canadian National Association of
Real Estate Appraisers (CNAREA).

Appraisal Institute of Canada (AIC)

Canadian Residential Appraiser Qualifies an individual to complete appraisals on residential

(CRA). property of up to four suites.

Accredited Appraiser of the Qualifies an individual to appraise any type of commercial,

Canadian Institute (AACI). recreational, industrial, agricultural, or residential property.

Canadian National Association of Real Estate Appraisers (CNAREA)

Appraisal Institute of Canada (AIC)

Qualifies an individual to perform appraisal and consultation

Designated Appraiser – Residential
assignments on residential properties up to, but no more than,
(DAR).
four housing units.

Qualifies an individual to perform appraisal and consultation

Designated Appraiser – assignments on all types of real property, including commercial,
Commercial (DAC). industrial, and investment properties. The DAR must be
completed before getting the DAC designation.

 Note: Real estate appraisers in training are referred to as “candidates.” Candidates do not have
an official designation and may not represent themselves as having a professional designation.
An accredited appraiser must sign all final reports.

NE X T PA G E
Lesson 3 of 7

Appraisal Reports
Mary Swaf eld

What is an appraisal?
An appraisal is defined by the Appraisal Institute of Canada (AIC) as:

“A formal opinion of value expressed either in written or oral form that is prepared as a result of a retainer or an agreement and is intended to
be relied upon by identified parties; and for which the Member assumes responsibility” (Appraisal Institute of Canada, 2016).

A property appraisal and the resulting appraisal report provide a lender with an informed and objective opinion of the market value of a

property. This information helps the lender determine whether a loan request is in line with the value of the subject property.

As background for understanding and interpreting an appraisal report, it is useful to have a general understanding of the appraisal process.
Appraisers follow three steps in preparing an appraisal:
 1 Define the purpose and scope of the appraisal.

2 Collect data using the three different approaches to valuation.

3 Reconcile the data and render an opinion of value.

C O NT I NU E

What is the purpose of an

appraisal?
Property appraisals may be used for varying purposes such as divorce proceedings, sale of property, title or tax issues, insurance valuation, and
mortgage financing. The details of an appraisal relevant for mortgage purposes are detailed in the subsections below.

Stated purpose
–
Any appraisal you arrange as a mortgage professional must have the stated purpose of establishing an opinion of market
value to secure mortgage financing on a property.

Identifying scope
–
The scope of an appraisal identifies what work will or will not be done. For example, a real estate appraiser may view the
property, research, and interview relevant parties, but they may not conduct building inspections, land surveys,
engineering reports, environmental assessments, technical testing, etc.

It is important to be clear about what deliverables you can expect from the real estate appraiser, particularly for
commercial mortgage transactions.

Assumptions and limiting conditions

–
Finally, the purpose and scope of an appraisal report must identify any assumptions, limiting conditions, or hypothetical
conditions that might affect the property value if they were or were not present.

C O NT I NU E
Who orders an appraisal?
As a mortgage professional, you will generally be the one to order appraisals according to lender preferences. Each lender has its own process
for appraisals a broker must follow. While the lender commissions the appraisal, the borrower is the one billed for the expense.

If an insurer orders an appraisal, the insurer typically pays.

You can expect to order an appraisal through an approved appraiser list or an appraisal management company (AMC) based on lender
instructions.

 Note: Be sure you know the lender’s preferences before engaging a real estate appraiser. If you
order an appraisal from a non-approved lender, you may have to pay for a second appraisal.

C O NT I NU E

When are appraisals required?

Not every deal requires a real property appraisal. The number of property appraisals you order will be related to the client niche you serve.

Client type Typical requirement for appraisal

Usually required to determine whether the property value warrants the

Residential mortgages.
mortgage amount requested.

Generally not required for the buyer, as the value is guaranteed for the
lender by the insurer.
High-ratio (insured)
mortgages.
While the insurer will accept the value in the vast majority of high-ratio
(insured) purchases, this is not always the case.

Often required for conventional refinances, secured line of credit deals,

Refinances.
and most privately financed deals.

Commercial and industrial

Almost always required.
mortgages.
 C O NT I NU E

Types of appraisal reporting

options

There are different reporting options. The method used depends on the client’s needs, the complexity of the assignment, and the lender’s

requirements.

The majority of residential appraisals completed for financing purposes are full appraisals. Select the different report options below to learn
more about them.

Full appraisal report

–
A full appraisal report is a standardized report including an interior and exterior inspection of the subject property. The
report produces a market value as of the report's effective date.

Modified full appraisal

–
A modified full appraisal occurs when an appraiser is unable to enter a subject property to conduct a full physical
inspection.

This modification is a result of the COVID-19 pandemic when appraisers were unable to conduct interior inspections.

Appraisers can use virtual inspections through various means while working with the customer. Some may equip
homeowners with cameras to provide appraisers with a guided virtual tour of the home.

Drive-by appraisal report

–
A drive-by appraisal report is a limited report that only provides a market value range. It has limited liability, involves a
limited scope of work, and does not include an interior inspection of the property.

These are used when the loan-to-value ratio is below a lender’s threshold and only for first mortgage purposes.

Desk review appraisal report

–
A desk review appraisal, or a desktop review, relies only on third-party information to complete the assignment. It has
limited liability, involves a limited scope of work, and does not include any property inspection.

These are used when the loan-to-value ratio is below a lender’s threshold and only for first mortgage purposes.

C O NT I NU E

Existing appraisals
An applicant might come to you with an existing appraisal for the property they’re seeking to finance. This arrangement may or may not be

acceptable to a lender or the appraiser.

When you purchase an appraisal, it is completed for a specific use or purpose. The majority of appraisals have a limited use clause that defines
the criteria under which the appraisal can be used.

You cannot use an appraisal for any reason other than the original stated purpose without permission from the appraiser.

If a lender does choose to accept a pre-existing report, it must meet the following conditions (or others, depending on the lender):

Prepared within the last 30 to 60 days.

Accompanied by a transmittal letter from the original real estate appraiser, addressed and directed to the new lender.

Shows the purpose of the report as being for financing and no other purpose (such as divorce proceedings).

Uses sales comparables within a reasonable timeline to demonstrate current market values.

C O NT I NU E
 Knowledge Check-In: Appraisal Basics
1

Keyboard Instructions:
–

Use Tab or the left and right keys to select a category (drop target).

Select the category that matches the current item displayed, then press Enter or Spacebar to move the item to the
selected category.

If the answer is correct, the item will move briefly to the category and then disappear. If the answer is wrong, the
item will shake briefly, then you can select a different category and try again.

Appraiser

Accredited individuals who Establishes value for

provide an independent purposes of a loan or

opinion of market value. purchase.

 Performs appraisals on Typically hired at the
individual properties. direction of a lender.

Valuation based on judgment

of location, condition, or
comparable sales.

Assessor

Accredited individuals who

Performs appraisals for entire
determine the property value
neighbourhoods.
for taxation purposes.

Valuation based on formulae

Typically an employee of a
that standardize data for
municipal government.
groups of properties.

Complete the content above before moving on.

Keyboard Instructions:
–

Use Tab and Shift+Tab to move from one answer choice to another.

Press Spacebar to select or de-select your answer.

Once a choice is selected, Tab to the Submit button and press the Spacebar or Enter.

To retake the question, tab to the Take Again button and press the Spacebar or Enter.
2. Which of the following elements could disqualify a full real estate appraisal made for purposes of mortgage financing?

Select all that apply.

Report prepared within the last three months.

Report used for multiple purposes.

Statement of limiting conditions.

Statement of sales comparables within a reasonable timeline.

Exterior, or drive-by, inspection.

SUBMIT

Complete the content above before moving on.

NE X T PA G E
Lesson 4 of 7

Appraisals and Market Influences

Mary Swaf eld

Appraisals play a key role in determining the value, and therefore mortgage cost, of property. Although we may use the terms “price, “cost,” and
“value” interchangeably in ordinary conversation, these have important distinctions when it comes to appraisals.

Price

Price is the amount a buyer agrees to pay, and the seller agrees to accept under the conditions of a contract.

The list price is the marketed price of a property currently on the market. The sale price is the price upon completion and close of the
transaction.

An appraiser uses the sale price in their appraisal analysis.

Cost
Appraisers use the term co st when referring to the production of real estate. Cost may be an estimate or budget of construction.

The typical costs that appraisers consider include:

Labour.

Materials.

Professional services and administration.

Financing.

Land.

Value

Generally, value represents the monetary worth of a property, goods, or services to buyers and sellers at a given time.

There are many meanings for the term value in real estate. For appraisals, the most commonly used term is market value. Definitions for the
ways that “value” is used in the real estate and mortgage industries follow below.

M A R K E T VA L U E A P P R A I S E D VA L U E A S S E S S E D VA L U E
 Market value is a major focus in most real estate transactions. It is defined as “the most probable
price… for which the specified property rights should sell after reasonable exposure in a competitive
market under all conditions requisite to a fair sale” (Dybvig et al., 2010).

Market value is the most widely used value by lenders and mortgage professionals, as this is the
opinion of value that lenders, buyers, and sellers use to commit their debt and equity capital. We will
go into more detail about how market value applies to real estate transactions.

M A R K E T VA L U E A P P R A I S E D VA L U E A S S E S S E D VA L U E

The appraised value is is a professional judgement of a property's worth, which may not correspond to its actual market value
or selling price. Appraisers provide an independent, third-party, unbiased opinion of market value which helps lenders decide on a
reasonable loan amount for a mortgage.

M A R K E T VA L U E A P P R A I S E D VA L U E A S S E S S E D VA L U E

An assessed value refers to the value of property used for taxation purposes. The definition of
assessed value and how it is determined varies by location.

Market value
Market value is the present worth that a commodity (in this case, a property) can draw on the open market. For anything to have value,
specific value characteristics must be present and perceived by the user and other potential users of the property. All four of these
characteristics must be present for the item to achieve maximum value. Below are the four characteristics of value:

As we noted above, market value is a major focus of real estate transactions and property valuation. Market value is a subjective value, which
means, according to the subjective theory of value, the worth of an object can change based on its context and appeal.

While real estate is widely accepted as a good investment, markets and market value are subject to fluctuation.

Market value is influenced by four factors, sometimes referred to as the Four Principles of Property Valuation:

1 Utility: the ability of a property to meet the buyer's needs.

2 Scarcity: the current and anticipated supply of property in the market relative to demand.

3 Demand or Desire: the desire or need for ownership supported by the financial means to satisfy the desire..
 4 Transferability: the ease with which ownership rights are transferred.

Objective value is based on facts, not opinions. The o bject ive value of a property is based on the cost to build it - it doesn't take into
consideration emotions, perceived value, or what it could possibly sell for on the market.

The interactions of these four factors are reflected in the principle of supply and demand in how they create value in real estate (Dybvig et al.,

2010). Utility and scarcity are factors of supply, while desire and purchasing power are factors of demand.

Supply and demand

The theory of supply and demand is based on the law of demand and the law of supply.
The way the two interact determines the market price and supply of products (Chappelow, 2019).

The law of demand says that at higher prices, buyers will demand less of an economic good.

The law of supply says that at higher prices, sellers will supply more of an economic good.

These two laws interact to determine the actual market prices and volume of goods that are traded on the market.

Several independent factors can affect market supply and demand, influencing both the prices and quantities that we
observe in markets.

Supply and demand in the real estate market

Supply and demand dictate the market value and property availability in the real estate market.
When there is a high demand for property in a market, prices rise as buyers compete for limited resources. This tends to result in bidding wars

and houses selling over asking. This is typically referred to as a market shortage, and is indicative of a "seller's market."

There is less competition in a market with an abundant supply of property, and prices fall. This is referred to a surplus market and is indicative
of a "buyer's market"

When supply and demand are balanced, the market is in equilibrium, and prices stabilize. A market in equilibrium demonstrates three
characteristics (Chen, 2020):

1 The behaviour of agents is consistent.

2 There are no incentives for agents to change behaviour.

3 A dynamic process governs equilibrium outcome.

Principle of substitution
Appraisers must consider what buyers will do and why in an open market. Through the principle of substitution, “the maximum value of a
property is set by how much it would cost to obtain another property that is equally desirable, assuming that there would not be a long delay
or significant incidental expenses involved in obtaining the substitute” (Substitution, n.d.).

Buyers identify alternatives that satisfy the same utility and desire for a lower cost. This is the basis of how all buyers make decisions in the
market.

Homes priced at lower market values that offer competing desirable features generate the most demand in a market.
 C O NT I NU E

Knowledge Check-In: Market Influences

1

Keyboard Instructions:
–

Tab to the question, then use the up and down arrow keys to move from one answer choice to another.

Once a choice is selected, tab to the Submit button and press the Spacebar or Enter.

To retake the question, tab to the Take Again button and press the Spacebar or Enter.

1. As a mortgage professional, you are eager to grow your business, and you are working on building an effective customer

database. Which of the following information about your clients' homes is appropriate to include in your database?

Check all of the answers that apply.

Appraised value.
 Assessed value.

Demand value.

Market value.

SUBMIT

Complete the content above before moving on.

2. Which of the following are the four factors of market value?

Appraisal, desire/demand, scarcity, utility.

Demand/desire, purchasing power, scarcity, utility.

Desire/demand, transferability, scarcity, utility.

Desire/demand, scarcity, tax assessment, utility.

SUBMIT

Complete the content above before moving on.

3
3. Which of the following is NOT a characteristic of a market in equilibrium?

Prices are stabilized through ongoing dynamic exchange.

Competition leads to new supply.

Agents are not incentivized to change their behaviour.

Agents behave consistently.

SUBMIT

Complete the content above before moving on.

NE X T PA G E
Lesson 5 of 7

Collecting Data for an Appraisal

Mary Swaf eld

A real estate appraiser collects data about the property from documentation through researching other similar properties and physical site
inspections of the subject property.

They record the property's key features in a standardized, systematic manner and determine its highest and best use at the time of the
appraisal.

The highest and best use is the cornerstone of any appraisal and determines if using a piece of land supports the highest value and produces
the greatest net return over time.

The real estate appraiser also collects data about the subject property's area and environment. Area (neighbourhood) data can provide valuable

information about land-use restrictions and comparable properties from sales statistics, listings, vacancies, etc.

Once the real estate appraiser has collected the data, they select one or more of three approaches to conducting a valuation. Each approach is
explained in detail in the subsections that follow.
 1 Cost approach to value.

2 Sales comparison approach to value.

3 Income approach to value.

 Note: Since standard forms for real property appraisal include space for sales comparison data
and cost approach data, real estate appraisers commonly use both methods.

C O NT I NU E

Cost approach to value

The cost approach to value, also called the bricks and mortar approach, is when “a property is valued based on a comparison with the cost to
build a new or substitute property. The cost estimate is adjusted for the depreciation evident in the property” (Dybvig et al., 2010).

It is based on the theory that an informed buyer will not pay more for an existing property than the cost of constructing a new build of similar
quality and utility. While they are not equivalent, buyers sometimes equate the value and price of similar existing properties. They also assume
the cost of constructing a new house must always be more than purchasing a similar existing property.

Determining estimated replacement or reproduction costs

The cost approach separates the cost of the land from the cost of the improvements to the land. The cost of the land is estimated as though it
were vacant, usually from existing sales data of vacant land.

The cost for the house is based either on replacement or reproduction, defined as follows:

Replacement : the cost to recreate the property at current prices, using current materials, standards, and construction
methods.

Repro duct io n: the cost to duplicate the original property at current prices but using the materials, standards, and
construction methods used when the original building was constructed.
Appraisers typically estimate the replacement cost unless the property is historic or unique, where a replica would be desired. The estimated

replacement cost (i.e. the cost to replace new) generally represents the upper limit of value for a given property.

Determining the cost of depreciation

To determine the current property value, appraisers subtract the cost of depreciation from the estimated replacement or reproduction cost.

Unless a property is a new construction, a real estate appraiser must always adjust the value to reflect depreciation.

Depreciation is defined as a loss in value from any cause. Real estate appraisers most commonly assess depreciation as caused by one or more
of the following:

Cause. Description.

Depreciation caused by day-to-day wear and tear, decay, or structural

Physical deterioration. aging of a property. For example, a 20-year-old roof is depreciated
compared to a brand new roof.

Depreciation caused by loss of functionality due to an outdated or

Functional obsolescence.
inadequate design. For example, older homes with outdated finishes.

Depreciation caused by factors typically outside the property owner’s

control, such as location and economics. For example, the construction of
External obsolescence.
a busy road in front of a property may decrease the value for buyers who
prefer a quieter or safer area.
Appraised age
To determine the cost of depreciation, the appraiser must first estimate the property’s age.
In this context, age does not refer to the actual or chronological age of the building from its construction date. Appraisers use the following
concepts to determine the age of a property:

Appraised age concept. Definition.

The length of time that an improvement (to the property) can be

Typical economic life. economically used for its intended purpose. Typical economic life is
generally 55 to 60 years.

The observed or maintained age of a structure, closely related to its

Effective age. perceived condition. Effective age is not the same as the actual age of the
structure.

Remaining economic The length of time that an improvement will continue to contribute to the
life. property value.

According to the Marshall & Swift Residential Cost Handbook (2008), houses of average to good construction have a typical economic life of
55 years to 60 years without requiring significant maintenance.

Pros and cons of the cost approach

Pros. Cons.

It separates costs for the building and the land.

This shows the loan-to-value ratio between land Determining the effective age of a property is
and house and indicates if one is under or largely subjective.
overvalued. This is also valuable for insurance
purposes.

Estimates the remaining economic life of a

There may be variations in how different appraisers
property, which can establish an appropriate
calculate depreciation, and not all methods are
amortization period. E.g., few lenders would permit
equal. Specifically, the method known as straight-
a 25-year amortization on a property with a
line depreciation is not accurate for this work.
remaining economic life of 15 years.

Most beneficial when used in a stable market

characterized by regular turnover of property and Not as useful on older properties as the older they
houses that are relatively new. Or in slow markets become, the more difficult it is to quantify
with insufficient sales activity to justify the sales depreciation.
comparison approach.
 Pros. Cons.

Estimating reproduction costs is useful for

determining the value of unique or special-use
buildings such as schools, hospitals, or jails where
there is little market-based or sales data with
which to compare.

C O NT I NU E

Sales comparison approach to

value
The sales comparison approach, or the direct comparison approach, is a valuation process in which an appraiser applies quantitative and
qualitative techniques to comparable sales data.

An appraiser looks at local sales data to find three or more properties comparable to the subject property. They adjust for similar and dissimilar

components until the comparable properties' sale prices are approximately equal to that of the subject property.
The property characteristics commonly compared and adjusted for using the sales comparison approach include the following:

Location.

List price, sale price, and date of sale.

Land parcel size and value.

Gross living area.

Age and condition (often using effective age to determine depreciation).

Style.

Room count.

Basement.

Garage.

Extras (special features, improvements, upgrades).

The appraiser considers the available information regarding conditions influencing the sale of each comparable property and makes
adjustments for increases or decreases in market value due to different dates for each sale. This brings comparable sales in line with the
appraisal date of the subject property.
Real estate appraisers typically use standardized values and formulae to determine what amounts to use for adjustments. This helps minimize
subjectivity in determining value.

The sales comparison approach typically provides the best estimate of value for residential financing.

The application of the sales comparison approach

A main assumption of the sales comparison approach is that the market value of a property is directly related to the sale prices of comparable
properties. Even though value and price are not equivalent, we know that buyers tend to equate the value of similar existing properties.

The validity of the approach depends on the ability to locate several truly comparable properties sold close to the date of appraisal on the

subject property as such that they accurately reflect the same market conditions.

When the market is strong and data is available from many recent property sales, the sales comparison approach is likely the most reliable way
to determine the market value of residential properties.

However, when the market is slow and there are not enough sale transactions to accurately reflect trends in the market, this approach is less
reliable. It’s also less reliable when the characteristics of the comparable properties are too dissimilar because they cannot be assigned a
common value.

C O NT I NU E

Income approach to value

In the income approach, an appraiser analyzes a property's capacity to generate future benefits and uses the potential income to indicate
present value. This approach depends on anticipating future conditions.
The procedures used in the income approach analyze comparable sales data and measure the end of a property’s lifespan, as noted in the cost
approach (Dybvig et al., 2010).

The income approach values property by its earning power or ability to generate benefits. This is also referred to as the present worth of future
benefits.

The income approach to valuation is generally used to determine the market value of larger revenue-generating or investment properties such as

office buildings, shopping malls, restaurants, hotels, and apartment buildings.

Income approach reports are often long, complex documents. They contain a lot of substantiating documentation such as graphical data,
calculations, analysis reports, maps, market statistics, and photos to support the real estate appraiser’s conclusions.

Reconciling data and rendering an

opinion of value
In the final reconciliation of the data, the real estate appraiser considers all three approaches to valuation.

They explain why they did or did not use a certain approach to estimate value. If they used all three approaches, they are considered to be
completed independently of each other.
The appraiser weighs the merits and drawbacks of each approach and provides a rational argument for and against each value estimate. They
reach a final estimate that will become the appraiser’s opinion of value. This final estimate of value is formally documented in the appraisal
report.

The value estimates from different approaches don’t need to agree. Usually, one approach is deemed to provide a better estimate of value than
the others, and the real estate appraiser will explain their reasons for that conclusion.

C O NT I NU E

Knowledge Check-In: Appraisal Data

1

Each card below has a short description that relates to one of the three approaches to value: the co st appro ach, the sales co mpariso n
appro ach, or the inco me appro ach. Match the descriptions to the right approach to valuation.

Cost approach

Assumes a buyer won’t pay

Value based on cost to build a more for a property than a
new or substitute property.
i il b ild t
 similar new build costs.

Appraiser must account for Appraiser must estimate the

depreciation when property’s age and effective
determining value. economic lifespan.

Sales comparison approach

Value determined by analysis Typically provides the best

of similar properties sold in estimate of value for
the area. residential mortgages.

Minimizes subjectivity by
using standardized formulae
to determine value.

Income approach

Values property by its earning Typically used to determine

power or ability to generate market value of larger
bene ts. commercial properties.

Depends heavily on
anticipating future
conditions.
Complete the content above before moving on.

NE X T PA G E
Lesson 6 of 7

Conclusion
Mary Swaf eld

In this unit, we have considered the role of appraisers in the real estate and mortgage industries. Depending on the property, and on the needs
of the lender, an appraiser can take a variety of approaches to estimating the value of a property. As a mortgage professional, you are
responsible for ensuring that you work with accredited appraisers who can offer the best professional advice and expertise.

This completes the first module of this course. In the next module, we will look at the legal
framework for the mortgage industry. We will begin with a more detailed look at federal law,
moving in later units to other levels of government and regulation.

C O NT I NU E TO R E FE R E NC E S
Lesson 7 of 7

References
Mary Swaf eld

Appraisal Institute of Canada. (2016). Canadian uniform standards of professional appraisal practice. Appraisal Institute Of Canada.

Chappelow, J. (2019, September 29). Law of supply and demand. Investopedia. https://www.investopedia.com/terms/l/law-of-supply-
demand.asp#:~:text=The%20law%20of%20demand%20says

Chen, J. (2020, November 27). Equilibrium. Investopedia. https://www.investopedia.com/terms/e/equilibrium.asp

Dybvig, L., Appraisal Institute of Canada, Appraisal Institute (U.S.), & University of British Columbia, Real Estate Division. (2010). The appraisal of
real estate (3rd Canadian). UBC Real Estate Division.

Marshall and Swift. (2008). Residential cost handbook. Marshall and Swift Publications.

Substitution. (n.d.). Real estate definitions. Retrieved May 17, 2022, from https://realestatewiki.donaldsoneducation.com/definition/substitution/