Understanding Mortgages: Principal, Down Payment, Amortization Period, Term, and Payments

Key mortgage terms you need to know

Principal: The outstanding amount of the mortgage. When a purchaser first buys their house or condominium, the principal of the mortgage would be the difference between the purchase price and the down payment.
Down payment: The amount of money that the purchaser contributes to the purchase price.
Insured mortgage: If the down payment is less than twenty percent of the purchase price of the property, so that the mortgage is more than eighty percent of the purchase price, then the mortgage is considered higher risk and the purchaser must buy mortgage insurance.
Payment: The regular payments to pay off the mortgage. The payments are usually monthly.
Amortization period: The length of time to pay off the mortgage. This is usually twenty-five years for residential properties such as houses or condominiums.
Term: The length of time during which the interest rate is fixed. This is usually from one to five years.
Closed term mortgage: If a mortgage with a closed term is paid off before the term completes, the borrower must pay a penalty.
Open term mortgage: A mortgage with an open term can be paid off before the term completes with no penalty.
Lump sum payment: In addition to the regular mortgage payments, a borrower is allowed to make extra payments to reduce the principal each time the term of the mortgage completes. Some mortgages also allow the borrower to make small lump sum payments once per year before the term completes.

ASSIGNMENT VERSION # 2

Assume that your group represents the Credit Manager of a North Vancouver Credit Union and that Mr. Wayne Gretski, on his way through Vancouver to the 2022 Olympics, has asked that you analyze the history of his previous and current  mortgage transactions. 


a)    Exactly 10 years ago, Mr. Wayne Gretski purchased a beautiful condo at Whistler for $895,000 and made a down payment of $315,000.  The balance was mortgaged at the Canada Bank at  5.05% compounded semi-annually with monthly payments over 25 years. The interest rate was fixed for a 5 year term, and lump sum payments were allowed at the end of each 5 years without penalty.

i)    Calculate the monthly payment for the first 5 years.  ROUND UP TO THE NEXT CENT.
ii)    Construct an amortization schedule for the first 60 months.  (A schedule showing only the first 3 months, and months 57 to 60 inclusive, with 60 month totals is also required.)
iii)    Calculate the principal outstanding at the end of the first 5 years.
iv)    What percentage of the first five years total monthly payments went to reduction of the debt, and what percentage went to interest?
v)    What percentage of the debt has been paid off by the first five years of payments?

)    Exactly five years ago, Wayne made a lump-sum payment of $200,000 (in addition to the regular payment), and the interest rate was also changed to 4.15% compounded semi-annually.

i)    Calculate the amount being refinanced.
ii)    Calculate the monthly payment for the second 5 year period.  ROUND UP TO THE NEXT DOLLAR.
iii)    How much total interest did Wayne pay in the past two years?

c)    Wayne's mortgage has just come up for further renewal.  He has decided to take advantage of your relatively low rates and wishes to investigate tranferring it to your North Vancouver Credit Union branch that charges 3.65% compounded monthly, payable over 15 years.

i)    Calculate the size of the principal balance being refinanced.
ii)    Calculate the size of the new monthly payment.
iii)    Wayne seems amazed that he has only repaid a small fraction of his original loan.  You will draw a large scale, fully labelled graph that visually explains to Wayne how the loan has been amortized over the past ten (10) years.  You are only expected to plot the annual balances owing.