Humber/Ontario Real Estate Course 4 Exam Practice

Which type of payment arrangement carries the highest risk for the lender?

1. A 10-year amortized loan

2. An interest only mortgage, with quarterly interest payments

3. An interest plus specified principal mortgage

4. An interest accruing mortgage

5. A fully amortized mortgage

6. A balloon payment mortgage

The correct answer is: An interest accruing mortgage

When a lender provides a loan, they typically make profit from the interest paid. The longer the loan term, the more interest the lender can collect. However, in this scenario, the lender only collects interest, but not the principal amount, making it a high-risk arrangement. If the borrower defaults on payments, the lender may not be able to recover the principal amount. Comparatively, options A, C, and E involve regular payments towards both the principal and interest, reducing the risk for the lender. Option F, a balloon payment mortgage, may also be considered high-risk as it involves a large payment due at the end of the loan term, increasing the chances of default. However, option D, an interest accruing mortgage, poses the highest risk for the lender due to its lack of regular principal payments.