Here is a Simple Glossary of Mortgage Terms:

A

Agreement of Purchase and Sale:

The legal contract between a purchaser and a seller. We recommend that you have your offer prepared by a professional realtor that has the knowledge and experience to satisfactorily protect you with the most suitable conditions and clauses.

Amortization Period:

The number of years it will take to repay the entire amount of the financing based on a fixed number of payments.

Appraisal:

The process used to determine the value of a property.

Assets:

The value of what you own; used to determine net worth or to secure financing.

Assumable Mortgage:

A mortgage which a qualified buyer can take over from the current owner of a property upon its sale. Assuming a mortgage can provide a buyer with a below market interest rate, (if rates are now higher.

B

Blended Payments:

Equal payments consisting of both a principal and an interest component. Usually, while the amount of the payment does not change, the principal portion increases, while the interest portion decreases.

C

Canada Mortgage and Housing Corporation (CMHC):

CMHC is a federal Crown Corporation that administers the 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 the home. The cost of that insurance is paid for by the borrower and is usually added to the mortgage amount. These mortgages are often referred to as “hi ratio” mortgages. In rare cases insurance may be required on requests below 80%.

Closed Mortgage:

A mortgage that cannot be prepaid or renegotiated.

Closing Date:

The date that the new owner takes possession of the property and the sale becomes final.

Collateral:

An asset, such as an automobile, or a Canada Savings Bond that you offer as security for a loan.

Commitment Letter:

A written commitment from a lender to lend mortgage funds to specific borrowers as long as certain conditions are met within a specified time period before closing.

Conventional Mortgage:

A mortgage up to 80% of the value of the property or the purchase price. A mortgage exceeding 80% is referred to as “hi ratio” and the lender will require insurance for that mortgage.

Convertible Mortgage:

A mortgage that allows you to convert to a longer term mortgage during the existing term .

Credit Report:

A scoring system that is used to assess a borrower on a number of items and assigns points that are used to determine the borrower’s credit worthiness.

D

Default:

Failure to pay your monthly mortgage payments as agreed or to comply with other requirements of the mortgage.

Demand Loan:

A loan where the balance must be repaid upon request.

Down Payment:

The amount of funds applied by the clients toward the purchase of a home.

E

Equity:

The difference between any outstanding mortgages registered against the property and the market value or what you could sell your property for. The difference is included in the property owner’s net worth.

F

First Mortgage:

A debt that is registered against a property that has first priority on that property.

Fixed-Rate Mortgage:

A mortgage where the interest is set for a specific term of the mortgage.

G

Gross Debt Service (GDS) Ratio:

This is one of the mathematical calculations used by lenders to determine a borrower’s ability to repay a mortgage. It takes into account the mortgage payments, property taxes, approximate heating costs, and 50% of any maintenance fees, and this sum is then divided by the applicants’ gross income. Acceptable ratios vary by lender.

Guarantor:

A person who guarantees to pay the loan for the borrower should they not pay. The Guarantor has an established credit rating and sufficient earnings to repay the loan.

H

Hi-Ratio Mortgage:

A mortgage that exceeds 80% of the appraised value or purchase price of the property. This type of mortgage generally must be insured.

Home Equity Line of Credit:

A line of credit which is secured by the borrowers’ property.

I

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 on which only the monthly interest is paid each month. The full principal balance remains outstanding.

M

Mortgage:

A mortgage is a loan that uses a piece of real estate as security. Once that loan is paid off, the lender provides a discharge for that mortgage.

Mortgage Insurance:

If your down payment is less than 20% of the purchase price of the property, the lender will require mortgage insurance. The insurance fee is calculated as a percentage of your mortgage and usually added to the mortgage amount. This is known as default insurance.

Mortgagee:

The financial institution or lender who is lending the money by way of a mortgage.

Mortgagor:

The borrower or the person who borrows the money using a mortgage as security.

O

Open Mortgage:

A mortgage that is not closed may be paid during the term – partially or in full as specified by the Mortgagee.

P

P.I.T.:

Principal, interest and property taxes due on a mortgage. If your down payment is greater than 20% of the appraised value or purchase price, the lender will usually allow you to make your own property tax payments or in some cases an agreement for direct debit to your bank account by the municipality for taxes can be negotiated.

Portable Mortgage:

An existing mortgage that can be transferred to a new property. One may want to port their mortgage in order to avoid any penalties, or if the existing interest rate is much lower than the current rates.

Prime:

The lowest rate a financial institution charges its best customers.

Prepayment Penalty:

A fee charged by a lender when a borrower wants to prepay all or part of a mortgage other than the allowable prepayment options as dictated by the mortgagee. Although there is no law as to how a lender can charge you the penalty, the usual charge is the greater of the Interest Rate Differential (IRD) or three months’ interest calculated on the present mortgage balance.

Principal:

The original amount of a loan, before interest.

R

Rate Commitment:

The number of days the lender will guarantee the mortgage rate on a mortgage approval. This varies between lenders from 30 to 120 days.

Refinance:

Obtaining new mortgage financing on your existing property. You may be consolidating other debts, looking for a better rate or different repayment terms.

Renewal:

When the mortgage term has finished, your mortgage is up for renewal. It is open at this time for prepayment in part or in full. You can renew with the same lender or transfer to another lender – about three months in advance of renewal date it’s time to talk to your mortgage agent.

S

Second Mortage:

A debt registered against a property that is secured by a second charge on the property subject to an existing registered first mortgage.

Switch:

To transfer an existing mortgage from one financial institution to another. Three months in advance, talk to a mortgage agent if you would like to do this.

T

Term:

The period of time the financing agreement covers. Terms available are usually 6 months through to 5 years, but some lenders do offer longer terms.

Total Debt Service (TDS) Ratio:

This is the other mathematical calculation that is used by lenders to determine a borrower’s ability to repay a mortgage. It takes into account the mortgage payments, property taxes, approximate heating costs, and 50% of any maintenance fees, and any other monthly obligations (car payments, personal loans, credit card debts, lines of credit, other mortgages, etc.) and this sum is then divided by the gross income of the applicants. Acceptable ratios vary from lender to lender.

V

Variable Rate Mortgage:

A mortgage where the interest rate fluctuates based on changes in the prime rate.

Vendor Take Back (VTB) Mortgage:

A mortgage provided by the seller (vendor) to the buyer.