Humber/Ontario Real Estate Course 3 Exam Practice

Considering financial leverage, a higher loan-to-value ratio means:

1. There is less risk to the lender.

2. The borrower has greater equity in the property.

3. The borrower's initial investment is lower.

4. The interest rate will be lower.

5. The borrower will receive better mortgage terms.

The correct answer is: The borrower's initial investment is lower.

A higher loan-to-value ratio indicates that a larger proportion of the property's value is financed through debt compared to the borrower's equity. This means that the borrower is contributing less of their own money towards the purchase of the property, resulting in a lower initial investment. In such cases, since the borrower is using more borrowed funds and less of their own capital, this leverages their investment; they can invest a smaller amount personally while still gaining control over a larger asset. However, this higher leverage also typically comes with increased risk to both the borrower and the lender, as the borrower has less equity cushion to absorb potential declines in property value. The other options primarily relate to aspects that do not directly correlate with a higher loan-to-value ratio. For example, a higher ratio generally indicates increased risk to the lender and does not automatically grant the borrower better mortgage terms or lower interest rates.