Common Mortgage Terms and Definitions
Agreement of Purchase and Sale: The legal contract a purchaser and seller enter into. Your offer should be prepared by a professional realtor with the knowledge and experience to satisfactorily protect you with the most suitable clauses and conditions
Amortization Period: The number of years it takes to repay the entire amount if the mortgage based on a set of fixed payments.
Appraisal: The process of determining the market value of a property, how much the home is worth today.
Assets: what you own or can call upon. Used to determine net worth or in securing financing.
Assumption: a legal document signed by a buyer that requires the buyer to assume responsibility for the obligation of an existing mortgage. If someone is assuming your mortgage ensure you get a release from the mortgage company to ensure that you are no longer liable for the debt.
CMHC: a federal Crown corporation that administers National Housing Act (NHA). Among other services they also insure mortgages for lenders that are greater than 80% of the purchase price or value of their home. The cost of the insurance is the borrower’s responsibility and is normally added to the mortgage amount. These are often referred to as “high ratio” or “insured” mortgages.
Closed Mortgage: A mortgage that cannot be prepaid or renegotiated for a set period of time without penalties.
Closing Date: The date on which the new owner takes possession of the property and the sale becomes final.
Collateral: An asset, such as term deposit, Canada Savings Bond, or automotive that you offer as security for a loan.
Credit Score: A system that assesses a borrower credit record on a number of items, assigning a score that is used to determine a borrower’s credit worthiness.
Demand Loan: A loan where the balance must be repaid upon request.
Deposit: A sum of money deposited in trust by the purchaser on making an offer to purchase. When the offer is accepted by the vendor (seller) the deposit is held in trust by the listing real estate broker, lawyer, or notary until the closing of the sale, at which point it is given to the vendor. If a house does not close because of the purchaser’s failure to comply with the terms set out in the offer, the purchaser forgoes the deposit, and it is given to the vendor as compensation for the breaking of the contract (the offer).
Equity: The difference between the market value of the property and any outstanding mortgages registered against the property. This difference belongs to the owner of that property.
First Mortgage: as debt that is registered against a property that has first call on that property.
Fixed Rate Mortgage: a mortgage for which the interest is set for the term of the mortgage.
Gross Debt Service Ratio (GDS): a calculation used by lenders to determine a borrower’s capacity to repay a mortgage. It takes into account the mortgage payments, property taxes, approximate heating costs, and 50% of any maintenance fees if applicable. This sum is then divided by the gross income of applicants. Traditional lending requires 32% GDS as acceptable.
Guarantor: a person with an established credit rating and sufficient earnings who guarantees to repay the loan for the borrower in the event of default.
High Ratio Mortgage: A high ratio mortgage is a mortgage in which a borrower places a down payment of less than 20% of the purchase price on a home. Another way of phrasing a high ratio mortgage is one with a loan to value ratio of more than 80%.
Home Equity Line of Credit (HELOC): a personal line of credit secured against a property, HELOC’s are restricted to more than 65% of the homes value and can be registered in first position
Insurance: there are 3 types of insurance that can be related to a mortgage.
- Mortgage Insurance which is required when the loan to value exceeds 80% or the down payment is less than 20%.
- Property Insurance which insures the replacement value of the property in the event of fire etc.
- Mortgage Protection Insurance insures the mortgage balance or payments in the event of death or illness.
Interest Adjustment Date (IAD): The date on which the mortgage term will begin. This date is usually the first day of the month following the closing. The interest cost for those days from the closing date to the first of the month are usually paid at closing.
Interest Only Mortgage: a mortgage where the monthly interest is the minimum required payment each month. The full principle balance remains outstanding. Payment sare lower than an amortized mortgage as no money is being put toward the principle amount being borrowed.
Mortgage: A mortgage is a loan that uses real estate as security. Once the loan is paid off the lender provides a discharge for that mortgage.
Mortgagee: The financial institution or person (lender) who is lending the money using a mortgage.
Mortgagor: The person who borrows the money using a mortgage.
Open Mortgage: A mortgage that can be repaid at any time during the term without any penalty. For this convenience, the interest rate is higher than a closed mortgage. An open mortgage is often obtained if you plan to sell or pay off your mortgage entirely.
P.I.T: References the mortgage payment including Principle, Interest, and property Tax due on a mortgage. Taxes aren’t always included in your payments depending on your loan to value some institutions will allow you to pay your own property taxes direct.
Portable Mortgage: An existing mortgage that can be transferred to a new property. Porting a mortgage is often used to avoid paying penalties when buying a new property or if the interest rate is much lower than the current rates.
Prepayment Penalty: A fee charged to a borrower by the lender when the borrower prepays all or part of a mortgage over and above the amount agreed upon. Although there is no law as to how a lender can charge you the penalty, a usual charge is the Interest Rate Differential (IRD) or 3 months interest. Understanding how each lender calculates their IRD could mean a difference of thousands of dollars in penalties.
Prime Rate: The rate that is suggested by the Bank of Canada on which most banks base their prime mortgage lending rate.
Principle: The amount of the loan before interest.
Rate Commitment: The number of days the lender will guarantee the mortgage rate on a mortgage approval. This can vary amongst lenders and products and can range from 30 to 120 days.
Refinance: The replacement of an existing debt obligation with a new obligation under different terms.
Renewal: When the mortgage term has concluded, your mortgage is up for renewal. At this point you have options to choose a new term with current lender or transfer/switch to a new lender at no cost.
Second Mortgage: A debt registered against a property that is secured by a second charge on the property behind a first mortgage.
Switch: to transfer an existing mortgage from one financial lender to another. Can be mid term which could incur a penalty or at renewal and can be arranged without fees to you.
Term: The period of time the financing agreement covers. The terms available are 6 months, 1 through 5, 7 and 10 year terms. The interest rates will be fixed based on the term chosen.
Total Debt Service (TDS) Ratio: a calculation used by lenders to determine a borrowers capacity to repay a mortgage. It takes into consideration the mortgage payments. Property taxes, approximate heating costs, 50% of maintenance fees if applicable, and any other monthly payment obligations (personal loans, car payments, lines of credits, credit cards, other mortgages etc). This sum is divided by the gross income of the applicants. Traditional lending requires this ratio to be 40%
Variable Rate Mortgage: a mortgage for which the interest rate fluctuates based on changes in prime.
Vendor Take Back Mortgage (VTB): a mortgage provided by the vendor (seller) to the buyer.