Commercial Real Estate TransactionsChapter 1 · 64 practice questions

Chapter 1: Commercial Property Types and Construction

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Overview of Residential Financing

This chapter covers the fundamental concepts of residential mortgage financing that real estate professionals in Ontario must understand to competently serve their clients. It explains the regulatory framework governing mortgage lending, the distinction between conventional and high-ratio loans, the role of mortgage loan insurance, and the critical limitations on a real estate broker's involvement in financing advice. Mastery of these topics is essential for guiding buyers through the financing process while remaining compliant with the Code of Ethics and Ontario regulations.

Mortgage Loan Insurance Mortgage Loan Insurance Lender protection — Legal requirement for high-ratio loans (NHA) DEFINITION Mortgage loan insurance protects the LENDER (bank), not the borrower, against payment default. ✓ Protects the lender in case of default LEGAL REQUIREMENT Mandatory under the National Housing Act (NHA) for high-ratio loans (down payment < 20%). ✓ NHA — Federal law APPROVED PROVIDERS • CMHC (Canada Mortgage and Housing Corporation) • Sagen — private insurer • Canada Guaranty — approved private insurer LOAN-TO-VALUE (LTV) THRESHOLDS CONVENTIONAL LOAN Down payment ≥ 20% LTV ≤ 80% — no insurance HIGH RATIO Down payment < 20% LTV > 80% — insurance required COST OF INSURANCE • The premium is paid by the borrower • Can be added to the loan amount • The cost varies based on down payment CONCRETE EXAMPLE — Property at $500,000 Down payment: $100,000 (20%) LTV = 80% → Conventional No insurance Down payment: $75,000 (15%) LTV = 85% → High ratio NHA insurance required Key point for the broker: Identify the 20% threshold to guide the client NHA ACT CMHC

Key Concepts

RESIDENTIAL FINANCING — ON-REAL4 MORTGAGE PROCESS 1. Pre-Approval 2. Application 3. Processing 4. Underwriting 5. Approval 6. Closing LOAN TYPES CONVENTIONAL 20% down typical FHA 3.5% down, MIP VA 0% down, veterans USDA Rural, 0% down KEY PARTIES BORROWER Obligor on note LENDER Funds the loan APPRAISER Property valuation TITLE COMPANY Title search & insurance LEGAL DOCUMENTS PROMISSORY NOTE Personal promise to pay MORTGAGE / DEED OF TRUST Property as security LOAN ESTIMATE Closing costs disclosed CLOSING DISCLOSURE Final terms & costs KEY CONCEPTS AMORTIZATION Principal + interest ESCROW Taxes & insurance PITI Principal, Int, Tax, Ins LTV RATIO Loan-to-value % REGULATORY FRAMEWORK TILA / RESPA Consumer protection acts ECOA / REGULATION B Equal credit opportunity USEFUL LIFE / RECOURSE Statute of limitations Residential Financing — Ontario Real Estate License Exam Module ON-REAL4

Conventional vs. High-Ratio Mortgages

Conventional vs. High-Ratio Mortgages Conventional vs. High-Ratio Mortgages Down payment & loan-to-value ratio (LTV) — NHA Rules (Quebec/Canada) ✓ CONVENTIONAL MORTGAGE Down payment ≥ 20% of purchase price LTV ratio ≤ 80% ✓ No mandatory mortgage insurance Example — Property at $500,000 Down payment: $100,000 (20%) Loan: $400,000 → LTV = 80% ✓ Conventional mortgage — no insurance Features: • No insurance premium to pay • No premium added to the loan amount • Subject to stress test (OSFI B-20) ⚠ HIGH-RATIO MORTGAGE Down payment < 20% of purchase price LTV ratio > 80% ✗ Mortgage loan insurance MANDATORY Example — Property at $500,000 Down payment: $75,000 (15%) Loan: $425,000 → LTV = 85% ✗ High-ratio mortgage — insurance required Features: • Mandatory NHA insurance (federal) • Premium added to the loan amount • Subject to stress test (OSFI B-20) REGULATORY REMINDER National Housing Act (NHA) CMHC • Sagen • Canada Guaranty Protects the LENDER, not the borrower REGULATORY REMINDER National Housing Act (NHA) CMHC • Sagen • Canada Guaranty Protects the LENDER, not the borrower ✗ Mortgage loan insurance MANDATORY ✓ No mandatory mortgage insurance

A mortgage is classified based on the loan-to-value (LTV) ratio, which compares the loan amount to the property's purchase price or appraised value.

  • Conventional mortgage: A mortgage where the loan amount is 80% or less of the property's value (LTV ≤ 80%). This requires a down payment of at least 20% of the purchase price. Conventional mortgages do not require mortgage loan insurance.
  • High-ratio mortgage: A mortgage where the loan amount exceeds 80% of the property's value (LTV > 80%), meaning the down payment is less than 20%. High-ratio mortgages must be insured by mortgage loan insurance.

The 20% down payment threshold is a cornerstone of Canadian mortgage regulation. Any down payment below this level triggers mandatory insurance, regardless of the borrower's creditworthiness or income.

Mortgage Loan Insurance

Mortgage loan insurance protects the lender (not the borrower) against default by the borrower. It is required by law under the National Housing Act (NHA) for all high-ratio mortgages with a down payment of less than 20%.

  • The insurance is provided by CMHC (Canada Mortgage and Housing Corporation, a federal Crown corporation) or by approved private insurers: Sagen (formerly Genworth Canada) and Canada Guaranty.
  • The borrower pays the insurance premium, which is typically added to the mortgage amount.
  • The insurance does not protect the borrower; it compensates the lender if the borrower defaults on payments.

The Role of the Real Estate Broker in Financing

The Role of the Real Estate Broker in Financing The Role of the Real Estate Broker in Financing Code of Ethics — Ont. Reg. 580/05, ss. 3, 4, 5 | Real Estate and Business Brokers Act, 2002 | MBLAA 2006 🚫 PROHIBITIONS — Real Estate Broker ✗ Providing personalized financial advice (analysis of the client's personal situation) ✗ Recommending a particular loan product (loan type, rate, term, institution) ✗ Guaranteeing the obtaining of financing (approval, amount, conditions) ✓ OBLIGATION — Refer ✓ Directing the client to a professional duly authorized and competent ✓ Licensed mortgage broker (FSRA) licence issued by the Ontario authority ✓ Qualified financial advisor according to the applicable regulatory framework ⚖ LEGAL AND REGULATORY FOUNDATIONS Code of Ethics Ont. Reg. 580/05, ss. 3-5 Competence, prohibitions, duty to refer Act of 2002 Real Estate and Business Brokers Act General framework of the profession MBLAA 2006 Mortgage Brokerages, Lenders and Administrators Act — Licence required FSRA — Financial Services Regulatory Authority of Ontario 📋 PROFESSIONAL BEST PRACTICES Identify the client's financing needs and recommend a specialized consultation Never express an opinion on the rate, term, or type of appropriate loan Refer to a licensed mortgage broker as soon as the client raises their financing needs — The real estate broker acts as an intermediary — financial advice is exclusively the responsibility of authorized professionals

Under Ontario Regulation 580/05 (Code of Ethics) and the Real Estate and Business Brokers Act, 2002 (REBBA), real estate brokers have a strictly limited role regarding mortgage financing.

  • A broker must not give personalized financial advice, recommend specific loan products, or guarantee that financing will be obtained.
  • If a client asks for advice on mortgage financing or which loan product to choose, the broker's duty is to refer the client to a licensed mortgage broker or qualified financial advisor.
  • This prohibition exists because real estate brokers are not licensed under the Mortgage Brokerages, Lenders and Administrators Act, 2006 (MBLAA) to conduct mortgage brokerage activities. Only individuals holding a license from the Financial Services Regulatory Authority of Ontario (FSRA) may engage in mortgage brokerage.

Mortgage Stress Test (OSFI B-20 Guidelines)

Mortgage Stress Test (OSFI B-20 Guidelines) Mortgage Stress Test (OSFI B-20 Guidelines) Mandatory stress test for conventional mortgages — including switches to a different lender OSFI Office of the Superintendent of Financial Institutions B-20 Guidelines Federal requirements for federally regulated lenders Stress Test Qualifying rate higher than the contract rate Minimum Qualifying Rate (MQR) Contract rate + 2% or the central bank posted rate, whichever is higher Scope of Application ✓ Conventional loans (down payment ≥ 20%) ✓ High-ratio loans (down payment < 20%) ✓ Switches to a different lender Non-Subject Cases ✗ Renewal with the same lender ✗ Certain variable-rate loans ✗ Insured mortgages (exemptions) Impact on Borrowing Capacity The maximum loan amount is reduced — pre-qualification is essential Source: OSFI — B-20 Guidelines · Real Estate Brokerage Training

The Office of the Superintendent of Financial Institutions (OSFI) is the federal body responsible for regulating federally regulated financial institutions in Canada. Under the B-20 guidelines, OSFI requires that lenders apply a stress test for most conventional mortgages (including renewals at different lenders) to ensure borrowers can afford payments if interest rates rise.

  • The stress test typically requires borrowers to qualify at the greater of the contract rate plus 2% or the Bank of Canada's conventional 5-year fixed posted rate.
  • Mortgage loan insurance providers (CMHC, Sagen, Canada Guaranty) have their own stress test requirements for insured mortgages, but OSFI's B-20 guidelines apply to all federally regulated lenders for uninsured mortgages as well.

Important Regulations and Procedures

The National Housing Act (NHA)

The National Housing Act (NHA) The National Housing Act (NHA) Federal law governing mortgage insurance in Canada CMHC — Primary role • Authorizes mortgage insurance • Acts as public insurer • Sets eligibility rules • Protects approved lenders (Canada Mortgage and Housing Corporation) Approved private insurers • Sagen — subsidiary of MG.A • Canada Guaranty • Approved by CMHC • Same rules as CMHC • Regulated competition Legal obligation • Down payment < 20% → insurance required • High-ratio loan (LTV > 80%) • Protects the LENDER, not the borrower • Covers payment default • Premium added to mortgage approves offer REGULATORY THRESHOLD — DOWN PAYMENT ≥ 20% down payment Conventional loan — LTV ≤ 80% OR < 20% down payment High-ratio loan — LTV > 80% CONSEQUENCES FOR THE BORROWER ✓ Conventional loan → NO insurance required ✓ High-ratio loan → MANDATORY insurance (NHA) ✓ Premium: 0.6% to 4.5% of the loan ✓ Payable at signing or added to the loan EXAMPLE — PROPERTY WORTH $500,000 Down payment $100,000 (20%) Down payment $75,000 (15%) LTV 80% Without insurance LTV 85% With insurance NHA — Federal law | CMHC + Sagen + Canada Guaranty | Lender protection | Premium based on down payment

The NHA is the federal statute that governs mortgage loan insurance in Canada. It:

  • Authorizes CMHC to provide mortgage insurance.
  • Sets the framework for private insurers (Sagen, Canada Guaranty) to offer equivalent insurance.
  • Mandates insurance for high-ratio mortgages with down payments under 20%.
  • Establishes general consumer protection and lending standards for insured mortgages.

The Mortgage Brokerages, Lenders and Administrators Act, 2006 (MBLAA)

This Ontario law regulates the business of mortgage brokerage. Key points:

  • Only individuals licensed by FSRA can act as mortgage brokers or mortgage agents.
  • Real estate brokers are not automatically authorized to give financial advice or negotiate mortgage terms.
  • Violating this act by giving unauthorized financial advice can lead to disciplinary action under both REBBA and MBLAA.

The Code of Ethics (Ontario Regulation 580/05)

Sections 3, 4, and 5 of the Code of Ethics are particularly relevant to financing:

  • Section 3: A broker shall promote and protect the best interests of clients, but this does not extend to providing services outside their competency (e.g., financial advice).
  • Section 4: A broker shall avoid any conflict of interest or appearance of conflict. Recommending a specific lender or product could create such a conflict if the broker has a relationship with that lender.
  • Section 5: A broker must exercise reasonable care and skill. Giving personalized financial advice without proper licensing would be a failure of this duty.

Practical application: If a client asks, "Which mortgage is best for me?" the broker must respond: "I am not licensed to give financial advice. I can refer you to a qualified mortgage broker who can help you."

Ontario Regulation 580/05 (Code of Ethics) – Specific Provisions on Financing

The Code of Ethics is explicit: a broker cannot guarantee mortgage approval or provide personal financial recommendations. This includes:

  • Stating that a specific interest rate or loan product is suitable.
  • Promising that financing will be obtained.
  • Comparing mortgage products or advising on the merits of fixed vs. variable rates.

Common Relationships Between Concepts

Relationship between down payment percentage and loan-to-value ratio:

Down Payment ↔ LTV ↔ Insurance Down Payment ↔ LTV ↔ Insurance Conventional loan vs high-ratio loan — NHA Rules (Quebec/Canada) DOWN PAYMENT Down payment: 20% Ex.: $100,000 on $500,000 ✓ Conventional loan ✓ No insurance required Down payment: 10% Ex.: $50,000 on $500,000 ⚠ High-ratio loan NH A insurance mandatory Down payment: 5% Ex.: $25,000 on $500,000 ⚠ High-ratio loan NH A insurance mandatory LTV RATIO 80% Loan: $400,000 ✓ Conventional 90% Loan: $450,000 ⚠ High ratio 95% Loan: $475,000 ⚠ High ratio LOAN INSURANCE ✓ No insurance Conventional loan NH A not required ⚠ Insurance required NH A — CMHC, Sagen, Canada Guaranty ⚠ Insurance required NH A — CMHC, Sagen, Canada Guaranty LTV = Mortgage ÷ Purchase price × 100 | Key threshold: 80% LTV (20% down payment) | NH A: National Housing Act
  • Down payment of 20% = LTV of 80% → conventional mortgage, no insurance required.
  • Down payment of 10% = LTV of 90% → high-ratio mortgage, insurance required.
  • Down payment of 5% = LTV of 95% → high-ratio mortgage, insurance required (subject to maximum price and other CMHC rules).

Relationship between mortgage insurance and interest rates:

  • High-ratio mortgages (insured) often offer lower interest rates because the lender is protected from default. However, the borrower pays the insurance premium, which may be a significant upfront or ongoing cost.
  • Conventional mortgages (uninsured) may have slightly higher rates but avoid the insurance premium.

Relationship between OSFI B-20 guidelines and buyer qualification:

  • Even if a borrower has a 20% down payment (conventional), they must still pass the stress test if borrowing from a federally regulated lender. This means the borrower's income must support payments at the stress test rate, not just the contract rate.
  • For insured mortgages (high-ratio), the stress test is applied by the insurer (CMHC, etc.) as part of their qualification criteria.

Relationship between real estate broker and mortgage broker:

  • The real estate broker finds the property and negotiates the purchase agreement.
  • The mortgage broker arranges financing.
  • The two roles are complementary but distinct, governed by separate legislation (REBBA vs. MBLAA). A real estate broker must never cross the line into mortgage brokering without the appropriate licence.

Summary of key thresholds and terms:

ConceptThresholdInsurance Required?Conventional mortgageDown payment ≥ 20% (LTV ≤ 80%)NoHigh-ratio mortgageDown payment < 20% (LTV > 80%)Yes (NHA insurance)Minimum down payment for conventional20%NoMinimum down payment for insured5% (subject to maximum price limits)Yes

This framework ensures that real estate professionals understand the boundaries of their role, the regulatory requirements for mortgage lending, and the key financial concepts that affect a buyer's ability to complete a transaction. Correct application of these principles protects both the client and the broker from legal and financial risk.

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