A borrower approaches a mortgage agent seeking to maximize immediate cash flow and mitigate the impact of rising interest rates, while maintaining the flexibility to make lump-sum payments without penalty. Their credit score is excellent, and they anticipate a significant bonus within the next 18 months that they wish to apply directly to their principal. Considering these objectives, which mortgage product is LEAST suitable for this borrower?

Question: A borrower approaches a mortgage agent seeking to maximize immediate cash flow and mitigate the impact of rising interest rates, while maintaining the flexibility to make lump-sum payments without penalty. Their credit score is excellent, and they anticipate a significant bonus within the next 18 months that they wish to apply directly to their principal. Considering these objectives, which mortgage product is LEAST suitable for this borrower?

Answer options:

• A 5-year fixed-rate mortgage with a 20% prepayment privilege.
• A variable-rate mortgage with a fixed payment (VRM).
• A collateral charge Home Equity Line of Credit (HELOC). ✅ A reverse mortgage.

Correct answer: A reverse mortgage.

Explanation: A reverse mortgage involves no regular mortgage payments, thus maximizing immediate cash flow but does not allow for application of a bonus to principal as the principal balance typically increases over time with accumulated interest and fees, making it unsuitable for the goal of paying down debt with a future bonus. The borrower's objectives lean towards products that allow principal reduction and offer payment flexibility. While a HELOC offers flexibility, it might expose them to rising rates and potentially higher payments if they draw heavily, contrary to mitigating rising rates. The fixed-rate mortgage prevents exposure to rising rates and grants prepayment options. The VRM with fixed payments helps manage immediate cash flow, and the variable component might allow for more of the payment to go towards the principal as rates fall, or less as they rise within the fixed payment structure, while also allowing for lump sum payments.