Canada Mortgage Broker Prep
Practice Test

A. To protect the borrower from job loss

B. To protect the lender against borrower default on high-ratio mortgages ✓

C. To insure the property against fire and flood damage

D. To guarantee that property values will not decrease

Correct — B. Mortgage default insurance protects the lender, not the borrower, when a borrower has a down payment of less than 20% (creating a high-ratio mortgage). If the borrower defaults, the insurer compensates the lender for any losses. The borrower pays the insurance premium, but the coverage benefits the lending institution.

A. The Bank Act

B. The Insurance Companies Act

C. The Trust and Loan Companies Act ✓

D. The National Housing Act

Correct — C. The Trust and Loan Companies Act is the federal legislation that governs trust companies and loan companies in Canada. The Bank Act governs chartered banks, and the Insurance Companies Act governs insurance companies. Each type of financial institution has its own governing legislation.

A. Car loan payments

B. Student loan payments

C. Property taxes ✓

D. Credit card minimum payments

Correct — C. The Gross Debt Service (GDS) ratio includes housing-related expenses: principal and interest payments, property taxes, heat costs, and 50% of condo fees where applicable. Car loans, student loans, and credit card payments are not part of the GDS; they are factored into the Total Debt Service (TDS) ratio instead.

A. A loss in property value resulting from nearby industrial development

B. A reduction in value due to wear and tear, age, or deferred maintenance of the physical structure ✓

C. A decrease in value caused by outdated floor plans or inefficient layouts

D. Depreciation linked to changing market tastes and preferences

Correct — B. Physical deterioration is one of the three forms of depreciation recognized in property appraisal. It refers to the loss in value caused by wear and tear, aging, deferred maintenance, or physical damage to a building's structure and components. Examples include a leaking roof, cracked foundation, or aging plumbing. Physical deterioration can be curable (economically worth repairing) or incurable.

A. Charging a borrower more than the posted interest rate

B. Intentional misrepresentation of information on a mortgage application to obtain financing ✓

C. A lender failing to disclose prepayment penalties before closing

D. A broker recommending an unsuitable mortgage product to a client

Correct — B. Mortgage fraud involves the deliberate misrepresentation of facts on a mortgage application or supporting documents to obtain financing that would not otherwise be approved. Examples include falsifying income, overstating the property's value through appraisal fraud, or misrepresenting the property's intended use (e.g., claiming owner-occupied when it will be rented). Mortgage fraud is a serious criminal offence in Canada.

A. Schedule I chartered banks

B. CMHC

C. Trust companies and credit unions that accept higher-risk applications ✓

D. The Bank of Canada

Correct — C. B lenders (or alternative lenders) in Canada are financial institutions such as certain trust companies, credit unions, and mortgage investment corporations that serve borrowers who do not qualify under the stricter criteria of A lenders (Schedule I banks). B lenders typically accept lower credit scores or non-traditional income but charge higher interest rates to compensate for the increased risk.

A. A mortgage where two lenders share equal security on the same property

B. A mortgage registered for an amount higher than the actual loan disbursed ✓

C. A mortgage that requires a co-signer to be legally valid

D. A mortgage available only for commercial real estate

Correct — B. A collateral mortgage is registered for an amount higher than the actual amount advanced to the borrower. This structure allows lenders to secure additional future borrowing against the same property without re-registering the mortgage. However, it can make it more difficult to switch lenders at renewal without incurring legal costs.

A. The mortgage is fully paid off

B. The borrower must refinance with a new lender only

C. The remaining balance must be renewed or refinanced ✓

D. Interest stops accruing on the outstanding balance

Correct — C. In Canada, the mortgage term (e.g., 5 years) is the period during which the current mortgage agreement is in effect, while the amortization period (e.g., 25 years) is the total time to pay off the mortgage. At the end of the term, the borrower typically has a remaining balance that must be renewed with the same lender or refinanced with a new one.