Mortgage Financing Glossary

20/20

A condition that refers to repaying 20% of the mortgage balance OR increasing your payment by 20%, without incurring a penalty.

Agreement of Purchase and Sales

The legal contract a purchaser and a seller go into. 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 clauses and conditions.

Amortization Period

This is the number of years it will take to repay the entire mortgage in full and is determined when you are approved. A longer amortization period will result in lower payments but more interest overall as it will take longer to pay off. The typical amortization range is 15 to 30 years.

Appraisal

The process of determining the market value of a property.

Appreciation

An increase in the value of a home or other possession from the time it was purchased.

Assets

What you own or can call upon. Often used in determining net worth or in securing financing.

Assumption Agreement

A legal document signed by a buyer that requires the buyer assume responsibility for the obligations of an existing mortgage. If someone assumes your mortgage, make sure that you get a release from the mortgage company to ensure that you are no longer liable for the debt.

Blended Payments

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

Bona-fide Sales Clause

Means you cannot pay off your mortgage during the term unless you sell your property.

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 generally added to the mortgage amount. These mortgages are often referred to as 'Hi-Ratio' mortgages.

Closed Mortgage

This is any mortgage where you have agreed to pay the lender for a specified period of time. This means that you cannot pay it off, refinance or renegotiate before the mortgage term ends without incurring a penalty. Depending on the lender, there may be options for accelerated payments but it depends on your particular mortgage contract. While these mortgages tend to be a lot stricter, they can often provide lower interest rates.

Closing Date

The date when the sale of the property becomes final and the new owner takes possession of the home OR if a Refinance, the date when you receive the requested funds and if applicable, have the agreed upon debts paid off.

Collateral

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

Collateral Charge Mortgage

Also referred to as a collateral loan, this is a “type” of registration. Collateral mortgages are registered in place of a first mortgage and can be one charge or a 1st with a Line of Credit (LOC). In many cases collateral mortgages are registered for more than the mortgage loan amount.

Commitment Letter

A mortgage commitment letter is a formal document from your lender stating that you’re approved for the loan based on certain conditions being satisfied, referred to as a Conditional Approval. Lenders issue a mortgage commitment letter after an applicant successfully completes the pre-approval process.

Condition on Financing (COF)

A Condition on Financing is an optional (but often included) clause submitted with your Offer to Purchase that gives us a window of time, typically 3 to 5 business days to:
• submit your live offer to a lender,
• satisfy the conditional requirements of the mortgage commitment, and
• secure your financing.
If you cannot secure financing during this window, for whatever reason, you can safely withdraw your Offer to Purchase and have your initial deposit returned to you.

Conditional Approval

A conditional approval is offered to you by the lender in a commitment letter and means the lenders mortgage underwriter is mostly satisfied with your mortgage application. They are willing to approve your mortgage so long as you can meet their pending conditions outlined in your commitment letter.

Conditions

Conditions are borrower obligations to deliver supporting documents or take actions specified by your lending institution. Mortgage purchase (or Refinance) conditions are the sum of all the agreements made between a person selling a home, the person buying it and/or the lender providing the necessary funds. Whether you are buying someone else’s home, putting money down on a home that is under construction, or refinancing in order to access money from property you already own, conditions are written into a mortgage to protect everyone.

Conventional Mortgage

In the case of a conventional mortgage, the loan covers no more than 80% of the purchase price or the value of the property. This means, the buyer has put 20% (or more) down on the property. These mortgages do not require default insurance due to the amount contributed towards the down payment and are classified as Uninsurable (explained in greater detail below). A mortgage loan exceeding 80% is referred to as a 'Hi-Ratio or Insured' mortgage and the lender will require default insurance.

Credit Scoring

A system that assesses a borrower on a number of items, assigning points that are used to determine the borrower's credit worthiness.

Debt Service Ratios

• Gross Debt Service (GDS) Ratio: The percentage of a person or household’s gross monthly income that goes to pay the mortgage principal and interest, property taxes and heating costs, plus 50% of any condominium maintenance fees or 100% of the annual site lease for leasehold tenure if applicable. To qualify for a mortgage, the borrower’s GDS ratio must be at or below 35 or 39% (depending on the lender).
• Total Debt Service (TDS) Ratio: The percentage of a person or household’s gross monthly income that goes to pay the mortgage principal and interest, property taxes and heating costs, plus all other debt obligations such as car payments, personal loans or credit card debt. To qualify for a mortgage, the borrower’s TDS ratio must be at or below 42% or 44% (depending on the lender).

Default

Failing to make a mortgage payment on time or to otherwise abide by the terms of a mortgage loan agreement. If borrowers default on their mortgage payments, the lender can charge a penalty or even take legal action to take possession of the home.

Default Insurance

This insurance protects the lender in the event that the borrower defaults on their mortgage. This insurance is mandatory for borrowers contributing less than 20% towards their down payment.

Demand Loan

A loan where the balance must be repaid upon request.

Deposit

A deposit, which typically makes up a portion of your down payment, is an initial payment that is frequently required when your offer to purchase a home is accepted.
The money is deposited in trust by the purchaser on making an offer to purchase. When the offer is accepted by the vendor (seller), the deposit is held in trust by the listing real estate broker, lawyer, or notary until the closing of the sale, at which point it is given to the vendor. If a house does not close because of the purchaser's failure to comply with the terms set out in the offer, the purchaser forgoes the deposit, and it is given to the vendor as compensation for the breaking of the contract (the offer).
A deposit can range from 5 – 10% of the purchase price and serves as a demonstration of your commitment to the seller. By making this payment, you are showing that you are serious about following through with the purchase and intend to fulfill the terms of the agreement.

Derogs

Short for ‘derogatory’. Derogs refers to an overdue account or late payments on your credit report.

Down

Short for down payment. In Canada, the minimum down payment is 5% on a home purchase up to $500,000 and 10% down is required on the amount over $500,000 up to $1,499,999.99. A down payment of at least 20% is required for purchases $1.5 million or more.

Equity

• The difference between the market value of the property and any outstanding mortgages registered against the property. This difference belongs to the owner of that property.
• The cash value that a homeowner has in their home after subtracting the mortgage balance and/or other debts owed on the property. Equity usually increases over time as the mortgage loan is gradually paid down. Changes in overall market values or improvements to a home can also affect the value of the equity.

First Mortgage

A debt registered against a property that has first call on that property.

Fixed-Rate Mortgage

A mortgage for which the interest is set for the term of the mortgage.

Flex Down

This refers to a borrowed down payment program, which allows homeowners to “borrow” money for the down payment from a credit card, line of credit or other loan. In this case, the repayment of the loan is included in the debt calculations.

Foreclosure

This refers to the possession of a mortgaged property by the bank or lender if a borrower fails to keep up their mortgage payments.

Gross Debt Service Ratio (GDS)

It is one of the mathematical calculations used by lenders to determine a borrower's capacity 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 gross income of the applicants. Ratios up to 32 % are acceptable.

Guarantor

A person with an established credit rating and sufficient earnings who guarantees to repay the loan for the borrower if the borrower does not.

High-Ratio Mortgage

A high-ratio mortgage is where the buyer has provided a down payment of less than 20% of the purchase price (up to $1,499,999.99) and needs to pay a premium known as Mortgage Default Insurance to one of the 3 mortgage insurers to insure the mortgage against default. This mortgage is also known as an Insured mortgage (explained in greater detail below).

Home Equity Line of Credit

A personal line of credit secured against the borrower's property. Generally, up to 75% of the purchase price or appraised value of the property is allowed to be borrowed with this product.

Home Inspection

A thorough examination and assessment of a home’s state and condition by a qualified professional. The examination includes the home’s structural, mechanical and electrical systems.

Insurable (Down payment of 20% or more)

This mortgage meets all the qualifications of an insured mortgage, however, the LTV (Loan to Value) is equal to or less than 80%.
• Maximum 25-year amortization
• Purchase price under $1.5 million
• Applies to Purchases & Eligible Switches
• Must be Owner-occupied (but can have a rental unit)
• In some circumstances when dealing with Insured applications, the down payment required may be greater than 20%. These would pertain to specific niche programs only.

Insured (High-ratio – Less than 20% down payment)

If you put less than 20% down, you will need mortgage loan default insurance. This insurance protects your lender in the event you, the borrower, default on your mortgage loan. As the perceived risk is lower for Insured loans, you the borrower are generally able to obtain the lowest rates in the market place.
The current mortgage loan insurance companies are CMHC, Sagen and Canada Guarantee.
• Maximum 25-year amortization (30-year if first-time homebuyer new construction)
• Purchase price under $1M
• Applies to Purchases & Eligible Switches
• Must be Owner-occupied (but can have a rental unit)

Interest

The fee you pay your lender for the use of their money.

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. That is why it is always better to close your deal towards the end of the month.

Interest Rate Differential (IRD)

The Interest Rate Differential (IRD) penalty is one of the pre-payment penalties that can be applied when you pay off your mortgage early. Here's a simple explanation:

The IRD penalty is based on the difference between your current mortgage interest rate and the interest rate that the lender could charge now for the remaining term of your mortgage.

To calculate it, the lender compares:

1. Your current mortgage rate - The interest rate you're paying on your existing mortgage.
2. Current market rate - The interest rate the lender would offer for a new mortgage with a term that matches the remaining time on your existing mortgage.

The IRD penalty is typically the difference between these two rates, multiplied by your outstanding mortgage balance and the number of months left in your term.

In simple terms, the IRD penalty compensates the lender for the loss they incur by not being able to lend out the remaining mortgage amount at the higher rate you were paying.

Interest-Only Mortgage

A mortgage on which only the monthly interest cost is paid each month. The full principal remains outstanding. The payment is lower than an amortized mortgage since once is not paying any principal

Land Transfer Tax

A tax charged by many provinces and municipalities (usually a percentage of the purchase price) that the buyer must pay upon closing.

LTV – Loan to Value

This is the difference between the value of the property and the amount of mortgage registered against it; Property value $100,000 vs. Mortgage Loan Amount of $80,000 equates to an 80% LTV.

Maturity Date

The last day of the term of a mortgage. The mortgage loan must either be paid in full, renegotiated or renewed on this day.

MIC

Short for a Mortgage Investment Corporation, this is a group of investors who will lend you the money for a mortgage if a traditional lender will not due to unusual circumstances.

Mortgage

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

Mortgage Protection Insurance

Protects the family of a borrower by paying off the mortgage loan if the borrower dies.

Mortgagee

The financial institution or person (lender) who is lending the money using a mortgage.

Mortgagor

The person who borrows the money using a mortgage.

Open Mortgage

An open mortgage means you can pay out the balance at any time, without incurring a penalty. For this convenience, the interest rate is between 0.75-1.00% higher than a closed mortgage. A good option if you are planning to sell your property or pay-off the mortgage entirely. *some conditions may apply

P.I.T.

Principal, interest and property taxes— a calculation representing the amount you can afford to pay monthly on your home. Heating costs are often included in this calculation (PITH).

Portable Mortgage

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

Pre-Payment Privileges

The ability to prepay a portion of the mortgage principal before it is due and without penalty. This extra payment on the mortgage would be applied directly to the principal, as your regular monthly payment covers the interest.

Prepayment Penalty

A fee charged a borrower by the lender when the borrower prepays all or part of a mortgage over and above the amount agreed upon. Although there is no law as to how a lender can charge you the penalty, a usual charge is the greater of the Interest Rate Differential (IRD) or 3 months interest.

Prime

The lowest rate a financial institution charges its best customers.

Principal

The amount a person borrows for a loan (not including the interest).

Property Taxes

These are taxes that are charged by the municipality based on the value of the home. In some cases, the lender will collect property taxes as part of the borrower’s mortgage payments and then pay the taxes to the municipality on the borrower’s behalf.

Pull

Also known as a ‘credit check’ or ‘credit inquiry’ a ‘credit pull’ refers to the act of checking a credit report to determine if the borrower is a viable investment prior to approval of the mortgage.

Rate Commitment

The number of days the lender will guarantee the mortgage rate on a mortgage approval. This can vary from lender to lender anywhere from 30 to 120 days.

Refinance

Refers to the replacement of an existing debt obligation with a debt obligation under different terms. The most common consumer refinancing is for a home mortgage.

If the replacement of debt occurs under financial distress, it is also referred to as debt restructuring.

A loan (debt) can be refinanced for various reasons:

1.) to take advantage of a better interest rate (which will result in either a reduced monthly payment or a reduced term);
2.) to consolidate other debt(s) into one loan(this will result in a longer term);
3.) to reduce the monthly repayment amount (this will result in a longer term)
4.) to reduce or alter risk (e.g. changing from a variable-rate to a fixed-rate loan)
5.) to free up cash (this will result in a longer term).

Breaking your mortgage contract to renew at a new rate and a new term, may include a prepayment charge to reimburse your financial institution for the lost interest income. As a rule, the prepayment charge is based on three months interest or the interest rate differential (the difference between your current mortgage rate for the balance of your term and the new rate you want to refinance at), whichever is greater.

This amount will tell you if you should refinance the mortgage. The shorter the remaining term - less than a year is best - the smaller the penalty. The longer the term left on your mortgage, the greater the prepayment penalties. I am able to calculate your information to determine if you should break your mortgage and take advantage of current lower rates.

Mortgages insured by the Canadian Mortgage and Housing Corporation, has a maximum penalty of three months interest after the third anniversary date of the interest adjustment period, or after the third anniversary date from your most recent renewal.

Renewal

When the mortgage term has concluded, your mortgage is up for renewal. It is open at this time for prepayment in part or in full, then renew with same lender or transfer to another lender at no cost (we can arrange).

When renewing your mortgage, the banks often only offer the posted rates. You have to push a little harder for them to give you a break. They know that most homeowners don't want to have to shop around, so, they offer you a higher rate and hope that you will take it.

Second Mortgage

A debt registered against a property that is secured by a second charge on the property.

Switch

To transfer an existing mortgage from one financial institution to another. We can have this arranged for you at no cost to you.

Tax Slips

Tax slips are prepared by your employer, payer, administrator or financial institution. You should receive most of your slips (including your T4, T4A, and T5 slips) and receipts by the end of February. However, T3, and T5013 slips do not have to be sent before the end of March.

Term

Term is the length of time that a mortgage agreement exists between you and the lender. Rates and payments vary with the length of the term. The most common term is 5-years, but they can be anywhere from 1 to 10 years. Generally a longer term will come at a higher rate due to the added security. At the end of the term, the mortgage loan must either be paid in full, renewed or renegotiated, usually with new conditions.

Title Insurance

Protects against losses or damages that could occur because of anything that affects the title to a property (for example, a defect in the title or any liens, encumbrances or servitudes registered against the legal title to a home).

Total Debt Service (TDS) Ratio

It is the other mathematical calculations used by lenders to determine a borrower's capacity 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 (i.e. personal loans, car payments, lines of credit, credit card debts, other mortgages, etc.), and this sum is then divided by the gross income of the applicants. Ratios up to 40 % are acceptable.

Trade Lines

This refers to any credit cards, loans, wireless phone accounts, or mortgages that appear on your credit report.

Underwriting

This refers to the process of determining any risks relating to a particular loan and establishing suitable terms and conditions for that loan.

Uninsurable (Conventional – down payment of 20% or more)

If your down payment is 20% or greater, mortgage insurance is not required, and you, the borrower have access to more flexible terms. In some circumstances where location or condition of the property is a concern, the lender may request mortgage loan insurance as a condition of financing regardless of the LTV. In these cases, you would have to follow the insurers rules. Uninsurable files follow the rules below and are subject to a potentially higher interest rate.
• Maximum 30-year amortization
• Purchase price over $1M (subject to sliding scale, lender specific)
• Purchase/Refinance/Switch
• Possibility of exceptions on qualifying ratios
• Owner-occupied/Cottages/Second Homes/Rentals

Variable Rate Mortgage (VRM)

A variable-rate refers to an interest rate that fluctuates and is adjusted periodically to reflect market conditions, based on changes in the prime rate.

Vendor Take Back (VTB) Mortgage

A type of mortgage where the seller, not a bank or other financial institution, finances the mortgage loan for the buyer.