Mortgage Glossary & Terms

MORTGAGE GLOSSARY

Here is some basic information on mortgage terminology, mortgage costs and some tips on how to make an informed decision on your mortgage needs. While this is not an all-inclusive list, I hope it will help you find the right mortgage for your needs.   Always consult a professional.

 

 

MORTGAGE TYPES

 

Closed Mortgage:   This type of mortgage must usually remain unchanged for whatever term you agree to.  Prepayment costs will apply if you payout, renegotiate, or refinance before the end of term.  See Penalties, Prepayment:

Benefits:

• Provides lower rates than open or convertible terms
• Allows you to make an annual prepayment of up to 10-15% of your original mortgage amount

 

Open Mortgage:   This type of mortgage may be repaid, in part or in full, at any time during the term without any prepayment costs.

Benefits:

• Provides flexibility until you are ready to lock into a closed term
• Allows you to pay off any or all of the mortgage without prepayment penalties/costs

 

Conventional Mortgage: A mortgage that does not exceed 80% of the purchase price of the home. Mortgages that exceed this limit must be insured against default, and are referred to as high-ratio mortgages.

Benefits:

• You do NOT pay any Mortgage Default Insurance Premium

 

         

 

High-Ratio Mortgage: If you don't have 20% of the lesser of the purchase price or appraised value of the property, your mortgage MUST be insured against payment default by a Mortgage Insurer, such as CMHC or Genworth Financial Canada.  Other Lender surcharges, terms & conditions may apply.

NOTE:  This is NOT the same as Mortgage Life Insurance

Benefits:

• Allows homebuyers who have a small/limited downpayment to get into the Housing market, build up equity, and stop renting.

 

 

RATE TYPES

 

Fixed Rate:  An interest rate that does not change during the entire mortgage term.

Benefits:

• You can take advantage of the same interest rate for the entire term with a regular payment that stays the same
• You will have the security of knowing exactly how much your payments are and how much of your mortgage will be paid off at the end of your term

 

Variable Rate:    An interest rate that will fluctuate in accordance with the prevailing market prime rate during the mortgage term.

Benefits:

• Historically, variable rates have been lower than fixed rates and could save you more money
• If rates go down, a larger portion of your payment goes towards principal, helping you pay off your mortgage faster
• Your regular payment stays the same even if rates change

 

 

Capped Variable Rate:   An interest rate that will fluctuate in accordance with the prevailing market prime rate during the mortgage term, BUT, has set limits on rate increases/decreases.

Please read the fine print, and have your Mortgage Broker explain the differences.

Benefits:

• Allows you to Lock-In to a lower rate should rates fall
• Should rates go up, the Lock-In provision will fix your rate at a Capped/Predetermined rate

 

 

General Mortgage Terms

 

Accelerated Payment Plans:  An Accelerated Payment Plan is a great way to save thousands of dollars of interest and be mortgage free years earlier. The savings are a result of the additional principal amounts paid each month. Any payment plan can be accelerated, simply by pre-paying an amount each month or decreasing your amortization.  In essence, you are making one extra monthly payment per year, causing your mortgage to be paid off more quickly.  The most common accelerated plan is the Bi Weekly payment option.  For example: easy payment increase.

 

Accelerated Bi-Weekly Payments, IF:  

 

Monthly payment = $1,000,

Annual Sum of payments (12 payments x $1000) = $12,000   

       Accelerated Bi- Weekly Payment plan (26 payments x $500 = $13,000).

        (The borrower agrees to pay 1/2 of the monthly payment 26 times per year.)

 

Thus, the borrower will be paying the equivalent of one extra monthly payment per year. The result is faster repayment of the mortgage, "accelerated", and the consequent interest savings.

 

      Bi-Weekly - Accerlerated

     You will pay 1/2 of the monthly payment every 2 weeks.

 

     Weekly - Accerlerated

     You will pay 1/4 of a monthly payment every week, and get the same benefit.

 

Agreement of Purchase and Sale:   A legal agreement that offers a certain price for a home. The offer may be firm (no conditions attached), or conditional (certain conditions must be fulfilled, waived before the deal can be closed).

 

Amortization Period:  The time over which all regular payments would pay off the mortgage. This is usually 25 years for a new mortgage, however can be greater, up to a maximum of 40 years.

 

Appraisal:  The process of determining the value of property, usually for lending purposes. This value may or may not be the same as the purchase price of the home.

 

Appraisal Value:  An estimate of the market value of the property.

 

Assumable:  Some mortgages are assumable with qualification. This means that should you sell your house before the term of the mortgage is completed, the purchaser can take over your mortgage if they qualify. This allows you to avoid paying a penalty to break your mortgage.

 

 

Blend & Increase:  The ability to increase your existing mortgage or the term of the mortgage, with only the increased amount or term at today’s interest rate. The interest rate for the existing mortgage is combined or blended with the interest rate of the increased amount. This is advantageous if you have a good rate on your existing mortgage or if you want to avoid a penalty to pay out an existing mortgage.  

 

Blended Payments:  The most common payment type.  Payments consist of both a principal and an interest component, paid on a regular basis during the term of the mortgage:

          Weekly – 52 Payments

BiWeekly – 26 Payments

Monthly – 12 Payments

Semi Monthly – 24 Payments

The principal portion of payment increases, while the interest portion decreases over the term of the mortgage, but the total regular payment usually does not change.

 

Bridge Loan / Interim Financing:   Short-term financing to help a buyer bridge the gap between the closing date on the purchase of a new home and the closing date on the sale of the current home.

For example, if the purchase of your new home closes in 55 days but the sale of your current home closes in 60 days, you will need interim or bridge financing. This is because for 5 days, you will own both properties, until, you receive money from the sale of your current home.  Thus, requiring short-term interim or bridge financing.  

 

 

Collateral:  Properties or assets that are offered to secure a loan or other credit. Collateral becomes subject to seizure on default of payment.

 

Commitment Letter:  This is the document that your Lender will confirm the basic terms and conditions upon which the lender will provide the mortgage and indicate the conditions that must be met before funding. The standard conditions include but are not limited to receipt of an appraisal, income verification by way of employment letters and income tax returns, as well as verification that the purchasers downpayment has not been borrowed.

 

Canada Mortgage and Housing Corporation (CMHC):   The National Housing Act (NHA) authorized Canada Mortgage and Housing Corporation (CMHC) to operate a Mortgage Insurance Fund which protects NHA Approved Lenders from losses resulting from borrower default.

 

Certificate of Location or Survey:   A document specifying the exact location of the building on the property and describing the type and size of the building including additions, if any.

 

Certificate of Search or Abstract of Title:   A document setting out instruments registered against the title to the property, e.g. deed, mortgages, etc.

 

Charge:     Another word for Mortgage.

 

Closing Costs:   Various expenses associated with purchasing a home. These costs can include, but are not limited to:

• Legal/notary fees and disbursements
• Land transfer taxes
• Adjustments for prepaid property taxes
• Condominium common expenses, if applicable

 

Closing Date:   The date on which the sale of a property becomes final and the new owner takes possession.

  

CMHC:  A division of the Government of Canada that acts as Canada's national housing agency. The CMHC's mandate is to help Canadians access a variety of affordable housing options. It also researches housing and real estate trends in Canada and around the world, providing research to consumers, businesses and other government divisions. The major activity of the CMHC, and the one for which it is best known, is mortgage loan insurance, which insures approved lenders (such as Canada's chartered banks) against borrower default. Mortgage loan insurance provides approved borrowers access to low-cost mortgage rates. CMHC approved buyers may purchase property with as little as 5% down payment.

 

CMHC or GEMICO Insurance Premium:   Mortgage insurance insures the lender against loss in case of default by the borrower. Mortgage insurance is provided to the lender by CMHC or GEMICO and the premium is paid by the borrower.

 

Conditional Offer:   An offer to purchase subject to conditions. These conditions may relate to financing, or the sale of an existing home. Usually a time limit in which the specified conditions must be satisfied is stipulated.

 

 

Debt-Service Ratio:   The percentage of the borrower's gross income that will be used for monthly payments of principal, interest, taxes, heating costs and condominium fees.

 

Deed (Certificate of Ownership):   The document signed by the seller transferring ownership of the home to the purchaser. This document is then registered against the title to the property as evidence of the purchaser's ownership of the property.

 

Deposit:   A sum of money deposited in trust by the purchaser when making an offer to be held in trust by the vendor's agent, broker, lawyer or notary until the closing of the transaction.

 

Discharge:   If the borrower has paid off the mortgage, they would have their lawyer formally discharge the mortgage (Discharge of Charge/Mortgage – Form 3, Land Registration Reform Act) & be released from further obligation to the Lender, as well as, have clear Title.

 

OR,

If the borrower needs to sell before the end of the mortgage term, (either planned or unplanned).   The Lender would have Discharge Fees, may be either 3 Month Interest Penalty or Interest Rate Differential Amount (IRD), whichever is greater dollar amount. 

NOTE:  These penalties could be in the thousands of dollars. Worse yet, if the discharge policy is "No Discharge", the borrower may be locked in for the entire term of the mortgage.  

 

Equity:  The difference between the price for which a home could be sold (market value) and the total debts registered against it.  (The interest of the owner in a property over and above all claims against the property.) 

 

 

Fire Insurance:   Before a mortgage can be advanced, the purchaser must have arranged fire insurance. A certificate or binder from the insurance company may be required on closing.

 

Firm Offer:  An offer to buy the property as outlined in the Agreement to Purchase & Sale in which, either no conditions were attached, OR, the conditions were waived or fulfilled.  This agreement is binding on both the Buyer & Seller.

 

Fixed-Rate Mortgage:  A mortgage for which the rate of interest is fixed for a specific period of time (the term).

 

Foreclosure:  A legal procedure (going to court) whereby the lender eventually obtains ownership of the property after the borrower has defaulted on payments.  This may be costlier & more time consuming than a Power of Sale.

 

 

Gross Debt Service (GDS) Ratio  (32%):   The percentage of gross income required to cover monthly payments associated with housing costs. Most lenders recommend that the GDS ratio be no more than 32% of your gross (before tax) monthly income.

 

Gross Household Income- Gross household income is the total salary, wages, commissions and other assured income, before deductions, by all household members who are co-applicants for the mortgage.

 

 

Inspection:  The examination of the house by a building inspector selected by the purchaser.  A Home Inspection maybe required for Insurance purposes on the property.

 

Interest Rate Differential Amount (IRD):   An IRD amount is a compensation charge that may apply if you pay off your mortgage principal prior to the maturity date or pay the mortgage principal down beyond the prepayment privilege amount. The IRD amount is calculated on the amount being prepaid using an interest rate equal to the difference between your existing mortgage interest rate and the interest rate that we can now charge when re-lending the funds for the remaining term of the mortgage.   In other words, what you would still owe the Lender in interest to the end to the end of the term.

 

Interim Financing:   See Bridge / Interim Financing

 

Interest Adjustment Date:This may apply to mortgages that close on any day other than the requested day of payment. For instances: since some lenders want monthly payments to be made on the first day of the month, they will adjust the interest due on closing so that interest on your mortgage is paid up until the first of the coming month. If you close on the 20th of the month (and the month has 30 days), you will have to pay interest for 10 days so that you are paid up until the first of the coming month. Then your first full mortgage payment will be due on the first of the following month. 

 

Interest Rate:  The interest is the payment to the lender for the use of the mortgage money.  

The interest rate can be:

Fixed (where the rate remains constant for the term) or

Floating (where the rate changes at regular intervals).

 

Short term or convertible terms usually have lower interest rates and can be used to a borrower’s advantage in an unstable market. These mortgages allow you to ride out a fluctuating or falling rate market until rates reach a level where you wish to "lock-in" to a longer term. On the other hand, long term rates offer stability and eliminate the need to monitor rates daily. 

NOTE:  The rate of interest is a key consideration when arranging your mortgage. 

 

 

High Ratio Mortgage:  See Mortgage Types

 

Holdback:   An amount of money required to be withheld by the Lender during the construction or renovation of a house to ensure that construction is satisfactorily completed at every stage.

 

Home Equity:   See Equity

 

Home Inspection:  See Inspection

 

 

Lien:  The right of a creditor to create an interest in real property until a debt is discharged.

 

  

Maturity Date:  Last day of the term of the mortgage agreement.

 

Mortgage:  A contract between a borrower and a lender, where the borrower pledges a property to a creditor as security for the payment of a debt.  "Charge" is another word for mortgage. 

 

Mor  Mortgagee:  The Lender (ie. Bank) who provides a loan secured by a real property mortgage.  

           Mortgagee rights are:  to be Paid, and,

                                 to Assign the mortgage

 

Mor Mortgagor :  A person who takes out a loan which is secured by a real property mortgage.          

           Mortgagor rights are:  Quiet Possession