Mortgage Glossary

ACCELERATED BI-WEEKLY / WEEKLY MORTGAGE PAYMENTS

Mortgage payments which are made every 2 weeks for a total of 26 payments per year or every week for a total of 52 payments per year. There is an additional monthly payment the client occurs each year, that is directly applied to the principal. The client makes 13 months of payments per year opposed to 12. The additional monthly payment is applied evenly to each biweekly or weekly payment cycle.

Amortization generally drops by 2.5 years by paying on an accelerated payment frequency.

 

AMORTIZATION PERIOD

The number of years it will take to repay a mortgage in full. For conventional mortgages, the maximum is 30 years with “A” lenders and 35 years with “B” lenders. For insured mortgages, the maximum is 25 years. The higher the amortization, the lower the mortgage payment.

 

APPRAISED VALUE

An estimate of the market value of the home that the borrower pledges as security for the mortgage. This value may be equal, greater than or less than the purchase price of the property.

 

BLENDED PAYMENT

Payment consists of both a principal and an interest component, paid on schedule (e.g. weekly, biweekly, semi-monthly, monthly) for the duration of mortgage term. The principal portion of payment increases, while the interest portion decreases over the term of the mortgage as the balance of the mortgage declines.

 

BLENDED RATE MORTGAGE

A mortgage that combines the amount a borrower owes under an existing mortgage with additional mortgage money required. Example; borrower owes $100,000 @ 2.69% and is requesting an additional $200,000 in funds at today’s rate of 3.00%. The new rate and mortgage amount will be blended with the old rate and mortgage amount and a new rate will be extended to the borrower. In this case, the rate would be between 2.69% and 3.00%. 

 

BRIDGE FINANCING

A loan made for a short term, to “bridge” (or cover) the time gap between completing the purchase of one property or the sale of another property. A bridge loan is required when the scheduled purchase date of a home is before the scheduled sale date of the home.

The bridge loan covers the amount of down payment & closing costs that are needed on the day of the purchase transaction. Three conditions are needed for a bridge loan:

  • A firm sale agreement
  • A firm purchase agreement
  • A mortgage product (secured lines of credit included) on the subject property

 

CARRYING COSTS

The expenses of living in and maintaining a home. This includes mortgage payments, property taxes, condo fees, heating, repairs and other home related expenses. When completing a mortgage application, you must prove to the lender you can service the carrying costs on subject & non-subject homes.

 

CLOSED MORTGAGE

A mortgage that may not be prepaid, or early renewed, unless the borrower is willing to pay a prepayment penalty. Each lender has various pre-payment provisions that can be applied to a closed mortgage without incurring a penalty. The interest rate in a closed mortgage is secured for the term.  

 

CLOSING DATE

The date the purchase of the property becomes final, and the new owner obtains title and takes possession.

 

CONVENTIONAL MORTGAGE

A first mortgage of up to 80% of the property’s appraised value or purchase price, whichever is lower.

 

DEED

A legal document that transfers ownership of the property to the buyer.

 

DEFAULT

Failure to repay an outstanding debt as agreed. Mortgage payments must be brought up to date to avoid foreclosure or power of sale.

 

DEPOSIT

A sum of cash that is required to be paid to the vendor by the purchaser. This money is a symbol of the purchaser’s commitment to buy. If the offer is accepted, the deposit is due within 24 hours of the acceptance date and forms a portion of the buyers down payment amount.

 

DOWN PAYMENT

The amount of money put forward by the buyer toward the purchase price of a home.

 

EQUITY

The difference between the price for which a property could be sold, less the total debt registered against the property. The maximum equity take-out without selling a home is 80% of the appraised value, less the registered mortgage and debts secured against the property.

 

EFFECTIVE INTEREST RATE

This is the actual interest rate paid on a loan or mortgage. In Canada, mortgages typically have a higher effective interest rate because interest rates are compounded semi-annually or twice per year.

 

FIRST MORTGAGE

The mortgage that is considered to be in first place and will have first claim on assets in the event of default.

 

FIXED RATE MORTGAGE

A mortgage in which the rate of interest has been fixed for a specific period of time. The mortgage payment and interest rate are guaranteed for the length of the term.

 

GROSS DEBT SERVICE (GDS) RATIO

The percentage of gross annual income required to cover payments associated with housing related costs. Payments include mortgage principal, interest, property taxes and condo fees.

 

HIGH-RATIO MORTGAGE

A mortgage amount between 80.01% – 95.00% of the appraised value of a home. High ratio mortgages are only eligible on purchase transactions and come with additional insurance premium costs.

 

INTEREST RATE

The annual percentage amount charged in return for borrowing funds. The interest rate is the cost of borrowing money. Interest rates are usually quoted as a percentage of the principal sum borrowed. The interest rate is affected by many factors, such as inflation, the economy, the government, and the federal funds rate. Low rates are generally better for borrowers, while high rates are better for those trying to save?

 

LAND TRANSFER TAX

A fee paid to the municipal and/or provincial government for the transferring of property from seller to buyer. In Ontario the levy on homes is calculated as 2% x Purchase Price – $3,525.00. As a first-time home buyer, an additional $4,000.00 is rebated and applied at the lawyer’s office.

In Toronto, the levy is doubled to include a Municipal fee and the First Time Buyers is increased to $8475.00?

 

LIABILITIES

Obligations outstanding. For example: Property taxes, mortgage payment, loans, car leases, balances on lines of credit and credit cards.

 

LOAN TO VALUE (LTV) RATIO

The ratio of the loan to the appraised value of the property.

 

MATURITY DATE

The last day of the term of your mortgage agreement. The mortgage must be paid in full, refinanced, switched to a new lender or the agreement renewed with the current lender.

 

MORTGAGE

A mortgage is both a loan used to purchase or refinance a home and a security for the repayment of the loan.

 

MORTGAGE DISABILITY INSURANCE

Insurance that pays the mortgage installments should the insured borrower become ill or disabled and unable to work.

 

 

MORTGAGE DEFAULT INSURANCE

Government-backed or privately backed insurance protecting the lender against the borrower’s default on mortgages. The three mortgage default insurers in Canada are Sagen, CMHC and Canada Guaranty.

 

MORTGAGE LIFE INSURANCE

Insurance that pays off the mortgage debt should the insured borrower pass away.

 

MORTGAGE PAYMENT

The regular installments made towards paying back the principal and paying interest on a mortgage. Lenders offer repayment in different schedules including weekly & biweekly (accelerated or standard, semi-monthly and monthly

 

MORTGAGEE

The lender.

 

MORTGAGOR

The borrower.

 

MULTIPLE LISTINGS SERVICE (MLS)

A computer-based system for relaying information to real-estate agents about properties for sale. The MLS listing lists basic details for the property including the property benchmarks.

 

OPEN MORTGAGE

Allows partial or full payment of the principal at any time, without penalty. This is beneficial to those looking to pay out their mortgage in a short time frame.

 

PRE-APPROVED MORTGAGE

A mortgage for a set maximum amount based on annual income, down payment and credit history. Many lenders will allow a rate hold of up to 120 days, which secures market pricing in the event of rising interest rates. This is a key component to help the purchaser establish an affordable price range.

 

PREPAYMENT OPTIONS

Allows the borrower to prepay a portion, or all the principal balance, with or without penalty. These options are typically restricted to specific amounts and times. Most lenders offer 20% pre-payment provisions on the original mortgage balance and the privileges reset on the anniversary date of the mortgage loan.

 

PRINCIPAL

The amount initially borrowed under the mortgage.

 

REFINANCING

Changing the terms and conditions of the mortgage, generally by drawing equity out of the property. The maximum refinance value is up to 80% of the appraised value. During a refinance, the amortization and loan amount is adjusted and the ability to add a Home Equity Line of Credit is available.

 

REGISTERED RETIREMENT SAVINGS PLANS (RRSP)

An RRSP is a retirement savings plan. Deductible RRSP contributions can be used to reduce your tax. First time home buyers are eligible to withdraw up to $35,000 for the purchase of their first home, tax free.

 

RENEWAL

Re-negotiation of a mortgage loan at the end of a term. Most lenders will not re-qualify the mortgage loan upon renewal.

 

SECOND MORTGAGE

A mortgage granted when there is already a mortgage registered against the property. If the borrower defaults and the property is sold, the second mortgage is paid after the first. Reasons for a second mortgage include debt consolidations, property and income tax arrears, renovations and avoid penalties with your first mortgage lender (among many others). 

 

SECURITY

Property (assets) offered as backing for a loan. In the case of mortgages, the property being purchased or refinanced forms the security for the loan.

 

STATEMENT OF ADJUSTMENTS

A document detailing the exact amount owed by the purchaser to the vendor upon closing. It includes the balance of the purchase price, reimbursement for any prepaid utilities or services and lawyer fees and costs.

 

SURVEY

A document providing details of a property’s boundaries, measurements, and structures. It will also describe any easements, rights-of-way, or encroachments made by either your property or by adjoining properties onto your property. Surveys are very helpful when exploring renovation and construction options.

 

TERM

The length of time that a mortgage agreement covers. The total length of a mortgage is usually made up of several terms. When the term expires, the mortgage is usually repaid in full or renegotiated for another term. The most common term in Canada is 5 years.

 

TITLE

The legal evidence of ownership to a property.

 

TITLE INSURANCE

An insurance policy issued by a company that assumes risk. In this case, the risk is that once title has been transferred to a new owner through a closing process, evidence comes to light that challenges the new owner’s right to clear title. Title insurance is mandatory on purchase transactions when closing through a big 5 bank.

 

TITLE SEARCH

A detailed examination of the registered title documents to ensure there are no liens or other encumbrances (claims) on the property.

 

TOTAL DEBT SERVICE (TDS) RATIO

The percentage of a borrower’s gross (before tax) monthly income needed to cover payments for mortgage debt and fixed charges (principal, interest, taxes, condominium fees, lease payments) and all other debts and obligations (typically loans and credit cards).

 

VARIABLE-RATE MORTGAGE (VRM)

A mortgage with fixed payments but fluctuates with interest rates. The changing interest rate determines how much of the payment goes towards the principal. Some lenders will adjust your payments to reflect changes in interest rates, while other will leave the payment as is.

 

VENDOR

The seller in a real estate transaction.