MORTGAGE GLOSSARY

MORTGAGE TERMS

A

Accelerated Biweekly Payment:

Payment frequency that allows you to pay the half of monthly payment every two weeks. You have 26 payments a year and pay one extra monthly payment, which means you will payoff your mortgage earlier and will save interest charges.

Accelerated Weekly Payments: 

Payment frequency that allows you to pay the quarter of monthly payment every week. You have 52 payments a year and pay one extra monthly payment, which means you will payoff your mortgage earlier and will save interest charges.

Adjustable Mortgage Interest Rate:

With adjustable rate , both interest rate and mortgage payment vary, based on market conditions.

Amortization:

The length of time over which the debt will be paid in full.

Appraisal Value:

Appraisal is the process of estimating the value of the property, usually for lending purpose. The appraisal value may or may not be same as purchase value or market value of the home.

Appraiser:

Certified professional who does the appraisal.

Appreciation:

The increase in value of the property from the original purchase value.

Assumption Agreement:

A legal document signed by homeowner to assume the obligations of the mortgage by the builder or previous owner.

B

Blended Rate:

Interest that is applied to renewed mortgage or loan and new term which blends with your existing rate on your existing mortgage.

Blended Payment:

Mortgage payment that includes principal and interest. It is to be paid for the term. Even though total payment remains same, the principal portion increases over time and interest portion decreases as the interest is always calculated on the remaining balance.

Bank Rate:

Canada’s central bank, Bank of Canada applies minimum lending rate to institutions. Change in bank rate leads to change s in Prime Rate, which is the rate of interest that commercial banks charge to low risk customers. This gets translated on the mortgage rates.

C

Cash Back Mortgage:

The optional feature that pays you a percentage of the mortgage amount in cash soon after the closing. You may have to pay a higher interest rate on the mortgage. If prepayment option is used before the end of the term, you will have to return the proportional amount of the cash back received.

Certificate of Status:

Aka Estoppel Certificate that outlines condominium corporation’s financial and legal state.

Closed Mortgage:

Closed mortgage can not be paid in full or in part before the end of the term. Lenders may allow increased mortgage payment or a lump sum payment on the anniversary of the mortgage. Lender is may charge penalty for prepayment.

Closing Costs:

Costs incurred in addition to the purchase price of the home. It includes legal fees, land transfer fees, and other disbursements, that repayable on closing day. For residential resale properties it may range from 1.5% to 2.5% or upto 4% if it is new builders home. Closing costs for commercial properties are higher than residential properties.

Closing Day:

Date on which sale of property becomes final and new owner takes ownership. All utilities are billed to the new owner starting on the closing day.

CMHC (Canada Mortgage Housing Corporation):

Canada Mortgage Housing Corporation is a crown corporation that offers mortgage loan insurance products.

CMHC Insurance Premiums:

Homebuyer that needs mortgage loan with less than 20% down payment, has to pay insurance premium to CMHC. Factors that affect the premiums are; purpose of the property(owner occupied or rental), type of loan(purchase or refinance), ability and income verification (business for self or employed) and loan to value(the higher the loan to value the higher will be premium).

Commitment Letter or Mortgage Approval:

Written notification from lender to borrower that approves the advancement of mortgage funds under specified conditions.

Conditional Offer:

An offer to purchase that is subject to conditions related to financing, sale of a property and inspection. Usually a time limit is specified for fulfillment of the stipulated conditions.

Collateral Charge or Mortgage:

Mortgage that allows the ability to borrow additional funds subject to lender’s approval without the discharge of the mortgage hens there are no legal fees. When you want to switch the mortgage to another lender, it is important to note that other lenders may not accept the transfer of your mortgage. This means you will incur discharge fee for the existing mortgage and register a new mortgage.

Convertible Rate:

The mortgage feature that allows you to change from variable rate to fixed rate. visa versa is not allowed.

Conventional Mortgage:

Mortgage loan up to a maximum of 80% of the loan to value of the property. Typically it is lower of purchase price and market value of the property. Mortgage insurance is usually not required for conventional mortgage.

Credit Report:

A report that lender uses to determine the creditworthiness of borrowers. It has information of the ability to handle the debt obligations and outstanding debts.

Credit Score:

A three digit number (scale of 300-900) that is calculated using mathematical formula used by Credit reporting agencies, like Equifax, TransUnion to depict how risky it would be for lenders to lend you the money based on your credit profile and credit history.

D

Default on Payment:

Failure to make a mortgage payment in accordance with the mortgage terms.

Delinquency:

Failing to make mortgage payment on time.

Deposit:

Sum of money deposited in trust by purchaser when putting an offer to purchase a property. It can be held by Vendors Real Estate Brokerage, Solicitor until the closing of the transaction.

Down Payment:

The amount of money you put towards the purchase of your home. It must be at least 5% of the purchase price, although can be more. The amount of deposit will determine if you have to pay mortgage default insurance.

E

Estoppel Certificate:

Also known as Status Certificate, outlines the condominium corporation’s financial and legal state.

 Equity:

The difference between value of the property and total debts registered against the property. Equity increases over time when regular mortgage payments are made. Improvements to the property may affect the equity.

F

Fire Insurance:

Before a mortgage can be advanced buyer must arrange fire insurance . The fire insurance binder is required at the time of closing.

Firm Offer:

An offer to purchase a property with no conditions attached.

Fixed Rate Mortgage:

A mortgage loan where interest rate and payment do not change for the specific term.

Foreclosure:

A legal process where lender takes the possession of the property through court for default on any of the mortgage terms and sells it to recover the unpaid debt.

Freehold:

Freehold title gives the owner exclusive right /ownership of the property for indefinite period as opposed to a leasehold title that is an interest that gives the right to use and occupy the land and building for a defined period.

G

Gross Debt Service (GDS) Ratio:

The percentage of gross income before deductions required to cover household costs, such as mortgage payments, property taxes, heating and 50% of condo fees (if applicable). Generally GDS ratio should not be more than 35% if beacon is less than 680 else  39% if the beacon score is above 680.

H

High Ratio Mortgage:

Mortgage loan higher than 80% of loan to value of the property. This type of mortgage must be insured by CMHC, Genworth, AIG or Private Company, for the benefit of the lender against payment default.

Hold Back:

The amount of money required to be withheld by a lender during construction or renovation of the property to ensure satisfactory completion of the same.

Home Inspector:

A person who inspects the home to check if anything is not working or is unsafe. He reports all repairs needed and gives recommendations.

Home Equity:

The difference between the value of the property and unpaid  balance of the mortgage and other debt registered against the property. Equity increases as mortgage is paid down and/or value of the property increases. Improvements can also affect the equity.

Home Equity Line of Credit:

A line of credit secured by the property. Money can be borrowed up to the credit limit approved which is usually a percentage of the property value.

Home Buyers Plan (HBP): 

Federal program that allows first time home buyer’s to withdraw money from their Registered Retirement Savings Plan (RRSP, tax free to make their down payment or other closing costs. HBP is administered by Canada Revenue Agency.

I

Inspection:

Examination of the property by a building inspector selected by purchaser.

Interest:

The cost of borrowing the money.

Interest Rate:

The percentage used to calculate the interest to be paid.

Interest Rate Cap:

A maximum interest rate that can be charged on a variable interest rate mortgage, regardless of any increase in market interest rates.

Interest Rate Differential (IRD):

IRD is a prepayment charge that applies in case principal is paid off prior to the maturity date of the term of mortgage or principal is paid down below the specified prepayment privilege amount. IRD amount is the difference between the annual interest rate on the mortgage and the posted interest rate on the mortgage  that is closest to the remaining term less any rate discount received, multiplied by the amount being prepaid, and multiplied by the time remaining on the term.

Interim Financing: 

Short term financing to help buyer bridge the gap between closing date of the purchase of the new property and the closing date of the sale of the current property.

J

Joint Venture:

A project undertaken by two or more parties to achieve a mutual objective.

K

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L

Lease:

An agreement to rent for a period of time at an agreed price.

Lender:

An institution or person who lends money to people or companies. The lender sets the terms and conditions but they are negotiable.

Line of Credit:

Type of a loan where borrower can draw funds as needed up to a specific limit approved.

Liquidity:

Assets and Investments that can be easily converted into cash, that include Savings, Canada Savings Bonds, Treasury Bills and Mutual Funds. Home is not considered a liquid because  it can not be easily cashed.

Locked-in Registered Retirement Savings Plan: 

A Registered Retirement Pension Plan carries funds transferred from registered pension plan, this plan is set up solely for retirement income purposes. The locked in pension funds can also be opened through a financial institution, locked in for specific period as agreed by both parties.

Lein:

A lien is a claim registered against property for money owing. It can be filed by a contractor or sub-contractor for their unpaid services.

Lump sum prepayment:

Lump sum prepayment is made in lump sum, and it reduces directly the principal balance of your mortgage, with or without penalty.

M

Maturity Date:

The last day when the term of mortgage expires. On its Maturity date, the mortgage loan is fully paid in full or its renewed.

Mortgage:

A mortgage is a loan, secured against the property you are purchasing, this secures repayment of loan raised on the property. The mortgage loan is discharged with payment of its principal and interest as per the terms of the mortgage commitment. Mortgage safe called “hypotheques” in Quebec.

Mortgagee and Mortgagor:

Mortgagee is the lender and mortgagor is the borrower.

Mortgage approval:

A Mortgage approval is a commitment in writing to borrower by the Lender, it specifies terms and conditions of advancement of mortgage funds.

Mortgage Broker:

A mortgage broker works in the interest of the borrower and arrange lender with terms and rates best suitable to borrowers.

Mortgage Life Insurance:

Mortgage life insurance is also called mortgage insurance, it provides coverage for your family in case of your death before the  of mortgage is paid off.

Mortgage Lender:

Mortgage lender acts for mortgage lending, its an institution like banks, trust companies and credit unions.

Mortgage Loan Insurance:

Mortgage loan insurance is a coverage provided for residential mortgages wherein the loan to value ratio is more than 80%, its available through CMHC, Genworth, Canada Guaranty. It protects lending institution in case of losses occurred due to non payment of mortgage by borrower. It benefits Canadians to make the home ownership earlier, it also the growth in the home equity sooner.

Mortgage Payment:

Mortgage payment is a regular payment which includes both interest and principal.

Mortgage Term:

A term of mortgage loan as per lender commitment and conditions, including interest rate and repayment.

MLS- Multiple Listing Service:

A multiple listing service that lists homes for the sale congaing descriptions about home. This computer based service is used by professionals, consumers and lenders.

N

Net worth:

Net worth describes financial worth after subtracting liabilities from your total assets.

O

Offer to Purchase:

Offer is an written contract setting out the terms and schedules under which buyer agrees to buy the home. On its acceptance by seller, it becomes an legal document that binds the people who has signed to its terms and conditions.

Open Mortgage:

Open mortgage provides flexibilty to pre pay the mortgage in part or full before its term.

Operating Costs:

The expenses paid by homeowners to operate a home each month. These includes utilities, property taxes, insurance, telephone, security alarms, repairs and maintenance.

P

Payment Schedule:

The mortgage payments paid weekly, bi-weekly, monthly.

Porting:

Porting is a feature that allows to move the existing mortgage from current property to the new property not having to to loose the current interest rate, terms and conditions on the mortgage.

Premiums:

The insurance premium paid to cover the mortgage amount, charged by CMHC or Genworth or Canada Guaranty.

Principal:

The amount borrowed from a lender, it does not includes interest.

P.I.T.H:

Principal, interest, taxes and Heating Costs- used for GDS (Gross Debt Ratio) and TDS (Total Debt Service Ratio).

Property Insurance:

Insurance that is bought on the building for protection against risks to property, such as Fire, Weather damage. It should be high enough to cover for the building to be rebuilt if destroyed.

Property Taxes:

Taxes charged by city where property is located and is usually based on the value of the home. In some cases lenders collect taxes as a part of mortgage payment, which is then paid to the city on behalf of the owner.

Pre-authorised debit:

A withdrawal from the account made by the lending institution or lender with written concent of the account holder. Lenders usually ask for pre-authorized debit form from borrowers banking institution to withdraw mortgage payments to be drawn from mortgagee’s account.

Posted Rate: 

Interest rate advertised by financial institution without any discounts. Brokers can get borrowers discounted rates on the mortgages and loans.

Prepayment: 

Payment of the principal loan amount in part or in full before the end of the term. Lenders usually charge penalty and fees when prepayment option is used on a closed mortgage if it exceeds the prepayment privilege granted.

Prepayment Charge/Penalty:

Lender may charge prepayment penalty if prepayment is greater than the amount allowed in the mortgage agreement or for paying off the closed mortgage before the end of the term.

Prepayment Privilege: 

Terms of mortgage may allow to prepay an amount towards principal on a closed mortgage in addition to regular payments with out triggering any prepayment charge up to certain limit. Lender can allow to pay a lump-sump payments or increase regular monthly payments. Check with the lender for frequency of changes allowed.

Prime Rate: 

Interest rate that banks charge to lend to favoured clients with good credit. It is used to as a base to calculate interest rates such as Variable Rates and Adjustable Rate Mortgages.

Q

Qualifying Rate: 

Rate that is used to qualify for variable rate mortgages to cover the risk of interest rate increase over term of the mortgage.  It is not the discounted rate that is charged on the mortgage. bank of Canada fixes the qualifying interest rate periodically.

R

Refinance:

New mortgage that allows renegotiation relating to interest rate, term and conditions for any reason such as to get new low interest rate or increasing principal (equity take out) or paying out the mortgage.

Registered Retirement Savings Plan (RRSP): 

Govt sponsored savings plan used for saving for retirement and or even down payment for first home. You can borrow up to $25,000 from your RRSP to be used for downpayment on the purchase of your first home. Funds must on deposit for 90 days before they can be withdrawn. At least one fifth of the funds must be repaid each year, beginning two years after the funds are withdrawn. A signed agreement to buy or build is required and you are allowed only once to participate in this program .

Renewal: 

The process of extending the mortgage for another term with the same lender or with a new lender. Terms and conditions can be changed at the time of renewal without any charge or penalty.

Reverse Mortgage:

A special loan for homeowners 55+, that lets them borrow against the value of the home without selling the home. Unlike equity loans borrowers do not have to make any payments until they choose to move or sell. Homeowners who have equity in home and are struggling to make debt payments and monthly expenses can take advantage of this program. Money can be withdrawn up to 50% of the value of the home and can be a lump sump payment or regular monthly payments or both.

S

Security:

Property that is pledged as a guarantee for the fulfillment of an obligation and that can be claimed by the creditor if the loan is not paid.

Second Mortgage: 

It is another loan secured against the proper which registered after the first mortgage. In case of default it does not have priority over the first existing mortgage since it is registered after the first mortgage. Means the first mortgage gets paid before the funds are used to pay the second mortgage.

Secured Line of Credit:

A flexible borrowing solution that lets you borrow up to a maximum of 80% value of the property. There is one time application fee and low monthly payments.. Interest is charged on the outstanding balance.

Standard Charge Mortgage: 

Mortgage that is usually registered for the actual loan amount of the mortgage. It is generally possible to switch or transfer this mortgage to a new lender. For additional funds you may be required to pay fees to discharge the mortgage and register the new mortgage.

T

Term: 

Period of time that a mortgage agreement is in effect including interest rate, terms and conditions.At the end of the term mortgage can be paid off, renewed and the terms can be renegotiated. Term can be for 6 months or 10 years. Term and Amortization are not the same.

Title Insurance:

Insurance against loss or damage arising from the defect in title, due to existence of any encumbrance or servitude and lien.

Total Debt Service Ratio( TDS): 

The percentage of gross income(before deductions) required to cover the household expenses; mortgage payments, property taxes, 50% of condo fees(if applicable plus other debt payments like car loans, student loan, credit cards, line of credit. Generally TDS ratio should not be more than 42% if beacon score is less than 680 and 44% if beacon score is above 680.

U-Z

Variable Interest Rate Mortgage:

Mortgage with an interest rate that varies (increases or decreases) based on the prime rate and the discount received during the term. The interest rate changes according to the market. Mortgage payments can be fixed , or adjustable or a combination of both fixed and adjustable payments.

Vendor Take-back Mortgage(VTB): 

Vendor can finance the mortgage. The title is transferred to the buyer who makes mortgage payments directly to the Vendor.

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