Mortgage Glossary

Agreement of Purchase and Sale

An agreement of purchase and sale is a legally binding written agreement that is used between both the buyer and seller in a real estate transaction. In simplified terms, this is the document that the buyer submits to the seller when purchasing a home. 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

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

Appraisal

The process of determining the market value of a property.

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.

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

A mortgage that cannot be prepaid or renegotiated for a set period of time without penalties.

Closing Date

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

Collateral

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

Conventional Mortgage

A mortgage up to 80% of the purchase price or the value of the property. A mortgage exceeding 80% is referred to as a 'Hi-Ratio' mortgage and the lender will require insurance for that mortgage.

Credit Scoring

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

Your credit score or beacon score is a numerical expression representing your ability to repay creditors on time, as per your contractual obligations. Credit scores are calculated using your payment history, type of debt, amount of debt, and the length of your credit history.

Credit score ranges vary based on the scoring model used, but are generally similar to the following:
300-579 = Poor
580-669 = Fair
670-739 = Good
740-799 = Very good
800+ = Excellent

Many borrowers will vocalize their goal of attaining 'perfect credit', which is irrelevant. The number you should really strive for is 800. On the standard 300-850 range used by FICO, a credit score of 800+ is the unicorn of credit history. This will give you access to the best rates on the market. A score of 850 will not end up saving you more money.

Demand Loan

A loan where the balance must be repaid upon request.

Deposit

A sum of money 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).

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.

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.

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 mortgage that exceeds 80% of the purchase price or appraised value of the property. This type of mortgage must be insured. To avoid the cost of the insurance, a 1st mortgage up to 80% is arranged and a 2nd mortgage for the balance (up to 90% of the purchase price).

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.

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-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

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.

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

A mortgage that can be repaid at any time during the term without any 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 tax due on a mortgage. If your down payment is greater than 25% of the purchase price or appraised value, the lender will allow you to make your own property tax payments.

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.

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 original amount of a loan, before interest.

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 of 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 have a maximum penalty of three months of 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. This is most often done at renewal time. Lenders will reach out and offer their clients today's posted rate, which is not always their best rate. This means that the renewal rate offered can usually be beat by another lender in the broker channel.

It's a good idea to reach out to a local mortgage professional four months prior to your mortgage coming up for renewal, as we can secure you a rate hold for 120 days. If rates increase, you are locked into that lower rate, and if rates come down, we can still amend the commitment to reflect the lower rate right up to ten days before closing.

Term

The period of time the financing agreement covers. The terms available are: 6 month, 1,2,3,4,5,6,7,10 year terms, and the interest rates will be fixed for whatever term once chooses.

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.

Variable Rate Mortgage

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

Vendor Take Back (VTB) Mortgage

A vendor take-back mortgage is provided by the vendor (seller) to the buyer. This is not a run-of-the-mill type of mortgage, but this type of loan can certainly benefit both the buyer and the seller. The buyer may be able to purchase property above his or her approval amount determined by a bank or lending institution, and the seller can get his property sold. Most often, buyers will have a main source of financing lined up for the purchase, so a VTB mortgage will often take second position.

The seller keeps some equity in the property and continues to own a percentage, which is equal to the amount of the loan. This will continue until the loan amount, plus interest is paid in full. The second lien will serve as a guarantee for the repayment of the loan. If the obligations of the contract are not met, the seller can then seize the property.

Example of a vendor take-back mortgage - Tim is purchasing his first home for $600,000. He needs to make a down payment on a variable-rate mortgage of 20%, or $120,000, but he decides to go for a vendor take-back mortgage instead of paying this amount himself. The seller agrees.

The seller lends Tim $60,000 toward the mortgage down payment and agrees to pay $60,000 himself. This single property now has two separate loans. One is the mortgage with the financial institution for $480,000. The second is the vendor take-back mortgage for $120,000.