Triston Rans - Calgary Mortgage Associate

Glossary of Canadian Mortgage Terms

Acceleration Clause

A provision in a mortgage that gives the lender the right to demand payment of the entire principal balance if a monthly payment is missed.

Additional Principal Payment

A payment by a borrower of more than the scheduled principal amount due in order to reduce the remaining balance on the loan.

Amortization Period

The actual number of years it will take to repay the mortgage loan in full. Mortgages can be amortized up to 40 years. Making the set monthly payments for the full amortization period will pay back the principal and interest in full. It is possible to select shorter amortization periods. Choosing a shorter amortization of 15 or 20 years, for example, will mean higher monthly payments, but a significantly lower interest cost. Amortization is not the same as term.

Appraisal

The process of determining the value of a home, usually for lending purposes. This value may differ from the purchase price of the home.

Appraised Value

An estimate of the market value of a home and property that the borrower pledges as security for the mortgage. This value may differ from the purchase price of the property.

Assets

Items of value owned by an individual, such as vehicles, property and investments.

Assumable mortgage

A loan that lets the new buyer of a home take over the existing mortgage.

Biweekly Accelerated Mortgage

A mortgage that requires payments to reduce the debt every two weeks (instead of the standard monthly payment schedule). The 26 (or possibly 27) biweekly payments are each equal to one-half of the monthly payment that would be required if the loan were a standard 30-year fixed-rate mortgage, and they are usually drafted from the borrower’s bank account. The result for the borrower is a substantial savings in interest.

Blended Mortgage Payments

Portions of each mortgage loan payment are applied toward both the principal and the interest of the loan. Over the term of the mortgage the principal portion of the payment increases, while the interest portion decreases. This is the norm for mortgage payments. Blended payments are separate from the concept of a blended-rate mortgage.

Blended-Rate Mortgage

A mortgage that combines an existing mortgage held by a borrower with an additional mortgage. The interest rate for the combined mortgage amount is a “blend” (or combination) of the interest rate of the “old mortgage” and the interest rate for the additional amount borrowed.

Canada Mortgage and Housing Corporation (CMHC)

The Canada Mortgage and Housing Corporation is the national housing agency of the Government of Canada. CMHC provides housing information and assistance to consumers as well as mortgage default insurance for high-ratio mortgages.

Carrying Costs

The expenses of living in, and maintaining a home and property. Carrying costs include mortgage payments, property taxes, heating, repairs and so on.

Closed Mortgage

A mortgage agreement in which the interest rate is fixed for a term and cannot be prepaid, renegotiated or refinanced before maturity, except upon payment of a pre-payment penalty. Some lenders may allow limited pre-payment privileges.

Closing Date

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

Collateral Mortgage

A mortgage which secures a loan by way of a promissory note. The money borrowed can be used for the purchase of a home, or more commonly for another purpose such as a vacation, or home renovations.

Conditional Offer (Conditions of Sale)

An Offer to Purchase subject to conditions. These conditions often relate to financing, home inspection, or the sale of an existing home. Usually a time limit is stipulated in which the specified conditions must be satisfied.

Conventional Mortgage

A mortgage that does not exceed 80% of the appraisal value or purchase price of the property, whichever is lower. Mortgage loan insurance is not required for this type of mortgage.

Convertible Mortgage

A mortgage that gives the borrower the flexibility to change from a short-term to a longer-term mortgage if it appears advantageous to do so, most often when interest rates appear to have reached the lowest point possible.

Debt-Service Ratio

see Gross Debt Service Ratio

Default

Failure to abide by the terms of a mortgage loan agreement. May result in the lender taking legal action to possess or foreclose the mortgaged property.

Deposit

A sum of money deposited in trust by the purchaser when an Offer to Purchase is made. The deposit is held in trust by the seller’s agent, broker, lawyer or notary until the closing of the transaction, at which time it is paid to the vendor. If the offer is later turned down by the buyer, the deposit may or may not be returned.

Down Payment

The amount of money put forward by the buyer before securing a mortgage. It usually ranges from 5% to 25% of the purchase price.

Encumbrance

A registered claim of debt against a property, such as a mortgage.

Equity

The difference between the price for which a property could be sold and the total amount owing on it (encumbrance). Equity usually increases as the mortgage is paid back. Improvements and market value can also affect the equity of a property.

Fire Insurance

The purchaser must have fire insurance before a mortgage can be advanced. Verification of fire insurance may be required on closing.

Firm Offer

An offer to buy the property, as outlined in the Offer to Purchase, with no conditions attached.

Fixed-Rate Mortgage

A mortgage for which the rate of interest is set at a specific level for a certain term, ranging from six months to five years or more.

Floating-Rate Mortgage

See Variable-rate mortgage.

Foreclosure

A legal procedure whereby the lender obtains ownership of the property after the borrower has defaulted on payments.

Gross Debt Service (GDS) Ratio

The percentage of the borrower’s gross (before tax) monthly income that can be used to pay housing costs, including monthly mortgage payments, property taxes, heating costs, and condominium fees. Most lenders recommend that the GDS ratio not exceed 32% of monthly gross income. The GDS is not the same as the total debt service ratio.

High-Ratio Mortgage

A mortgage for more than 80% of a property’s appraised value or purchase price, whichever is less. This type of mortgage must be insured against payment default by a Mortgage Insurer, such as CMHC, Genworth or AIG.

Holdback

A sum of money withheld by the lender during the construction or renovation of a house to ensure that construction is satisfactorily completed at every stage. The standard holdback is 10% of the total cost of the project.

Inspection

The examination of the condition of a house by an expert selected by the purchaser.

Interest

Interest is the cost of borrowing money for a given period of time. It is represented as an annual percentage rate applicable to the mortgage. Interest is usually paid to the lender in installments along with the repayment of the principal loan amount.

Interest Adjustment Date

Most lenders prefer to have mortgage payments come due on the first of the month. However, if your home purchase closes on another date, the funds are disbursed on that date. In order to keep your regular payment date on the first of the month, lenders ask you to make an interest adjustment payment. It is paid on the closing date by cheque or by deduction from the mortgage advance and covers the interest owed for the number of days between the closing date and the last day of the month.

Interim Financing

A loan granted for a short term, to cover the time gap between completing the purchase of one property and finalizing payment arrangements. The need for this type of financing often results from mismatched closing dates of the sale of an existing house and the purchase of a new one.

Liabilities

Your personal debt, for example, mortgages, car loans and credit balances.

Maturity Date

Last day of the term of the mortgage agreement. The mortgage agreement must be renewed, or paid in full, by this date.

Mortgage

A mortgage is a loan used to purchase or refinance a home. The property that is being purchased is used as security for the loan.

Mortgage Disability Insurance

Insurance that pays the mortgage installments in the event that the borrower becomes ill or disabled and unable to work.

Mortgage Insurance

see Mortgage Default Insurance

Mortgage Life Insurance

Insurance that pays the mortgage debt in full should the insured borrower die.

Mortgage Payment

The regular installments made towards paying back the principal and paying interest on a mortgage.

Mortgagee

The lender.

Mortgagor

The borrower.

Multiple Listing Service (MLS)

A computer-based system providing information by real-estate agents about properties for sale.

Open Mortgage

A mortgage that allows the borrower to pay off, renew or refinance as much of the outstanding balance as desired, without penalty, at any time.

Pre-Approved Mortgage

Preliminary approval granted by the lender of the borrower’s application for a mortgage to a certain maximum amount and rate. Often arranged prior to home-shopping, this option can help the purchaser establish an affordable price range.

Pre-Payment Options

These options allow the borrower to prepay a portion, or all of the principal balance, with or without penalty. These options are typically restricted to specific amounts and times and vary from lender to lender.

Pre-Payment Penalty

A fee charged by the lender when the borrower prepays all or part of a closed mortgage more quickly than as stipulated in the mortgage agreement.

Principal

The mortgage amount initially borrowed from the lender. Does not include interest costs.

Rate (Interest)

The annual percentage amount charged in return for borrowing funds.

Rate Commitment

The length of time a lender is willing to offer you the prevailing interest rate. Rate commitments can vary from 30 to 180 days.

Realtor

A real estate professional who is a member of a local real estate board, such as the Canadian Real Estate Association, that is engaged in the business of buying and selling real estate.

Refinance

To pay off your mortgage or other registered encumbrance and arrange for a new mortgage.

Renewal

At the end of a mortgage term, new terms and conditions acceptable to both the lender and the borrower must be agreed upon. This is known as renewing a mortgage. If satisfactory terms cannot be agreed upon, the borrower may seek alternative financing to repay the lender in full.

Second Mortgage

An additional mortgage on a property that already has a registered mortgage. If the borrower defaults and the property is sold, the second mortgage is paid after the first.

Security

Assets offered as collateral for a loan. In the case of mortgages, the property being purchased or refinanced forms the security for the loan.

Survey

A document describing 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.

Tax Hold Back

When your property taxes are included with your mortgage payments, your lender will withhold funds from your disbursement to cover interim or final taxes payable to the municipality. The amount depends on the month that the mortgage was funded and the dates when interim and final taxes are due. Tax hold backs are used to pay for the current year’s taxes while your monthly tax installments are accumulated in an account to pay the tax bills for the following year.

Term

The length of the current mortgage agreement, usually from 6 months to 5 years. It can be thought of as the length of the contract entered into by the borrower and the lender. Technically speaking, at the end of the term the mortgage amount must be paid in full. However, in practice the outstanding balance of the mortgage is simply renegotiated at the current rate of interest. Borrowers may approach any financial institution when their current term has expired. Term is not the same as amortization.

Title

The legal evidence of ownership of a property.

Title Search

A detailed search of the registered title documents to ensure there are no liens or other encumbrances (claims) on the property, establishing the seller’s statement of ownership.

Total Debt Service (TDS) Ratio

The percentage of a borrower’s gross monthly income needed to cover monthly payments for housing and all other debts and financing obligations. The total should generally not exceed 40% of gross monthly income.

Variable-Rate Mortgage

also called Floating-Rate Mortgage. A mortgage for which the rate of interest fluctuates as money market rates change. Payments on a variable-rate mortgage generally do not rise and fall. If interest rates go down, more of the monthly payment goes to pay off the principal; if rates go up, more money goes towards paying the interest charges.

Vendor

The seller in a real estate transaction.

Vendor-Take-Back Mortgage

Mortgage financing arranged between the seller of a property and the buyer. Usually this type of loan is in the form of a second mortgage that the seller is willing to arrange at below market values in order to allow the buyer to purchase the house.

Weekly and Bi-Weekly Payments

You can usually choose to make your mortgage payments once a week or once every two weeks. This accelerates the reduction of your mortgage because you are making the equivalent of one extra monthly payment per year.

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