Mortgage Glossary
Adjustments on Closing
There are two types of adjustments for which a buyer can be charged on closing:
Prepaid services. Where the sellers
have prepaid property taxes or certain utilities, the buyers can be charged
for the amount of prepayment on a pro-rata basis, depending on the date
of occupancy. For example, if the sellers have paid the property taxes to
the end of the year, and the sale closes on October 15th, the purchasers
will be charged with an adjustment of 77/365'ths (the number of days remaining
in the year) of the total paid for the year.
Interest. This is the amount of interest required
to be prepaid up to the Interest Adjustment Date (IAD). IAD is the point
at which the mortgage interest starts accumulating "in arrears".
In Canada all mortgage interest is calculated and paid after the period
to which it applies. This differs from the way in which rental and lease
payments are calculated, which is "in advance". The good news
on this one is that if you prepay for say 3 weeks you won't have to make
your first payment for almost two months. Also, if you take a biweekly payment
term, the longest interest adjustment period is less than two weeks, by
definition.
Amortization
The process of paying off the principal balance owed of the mortgage through
scheduled, systematic repayments of principal and extra payments of principal
at irregular intervals. Usually associated with a target period (the standard
being 25 years) over which the initial blended payment is calculated. The
maximum amortization period available in Canada is 40 years.
Appraisal
This is an estimate of the current value of the property for the lender
(the 'subject property'), using one or both of the following techniques;
Market value comparison approach:
The majority of residential appraisals use this technique, comparing recent
sales of similar properties ('comparables' or 'comps' in real estate jargon)
and adding and subtracting the differences in value of the same features
in the subject property. For example, if a house of the same size on the
same street and in the same condition as the subject property recently sold
for $200,000, but this 'comparable' had a triple garage and a finished basement
and the 'subject' does not; the appraiser calculates the market value of
these features (say, $12,000 in total) and deducts this amount from $200,000,
giving an 'adjusted value' of $188,000. This is usually done with at least
three 'comparables' and either averaged or the middle ('median') value used.
Depreciated cost approach: This technique is a
supporting measurement of value used by many appraisers, whereby the land
value is estimated and added to an estimate of the depreciated building
value. Where there are few comparables available, relatively more weight
might be given to this method.
Assessment
The "assessed" value of a property is a historical, static estimate
of the value of your property used by a municipal (local) government as
a basis for calculating annual property taxes. An "assessment notice"
from the municipality contains the "assessed value" and when multiplied
by the current "mill rate" the property taxes for the year can
be calculated. In some municipalities, the mill rate is provided on the
assessment notice and in others it is provided separately.
Assignment of Interest
Most Provinces allow a legal assignment of interest in a mortgage to have
full legal effect without having to discharge and re-register the existing
one. This is particularly useful in:
Switch situations, where the costs of transferring lenders would otherwise
be very high.
Second mortgage situations where a postponement may be difficult to obtain.
Assumable Mortgage
The 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), as well as saving
on the legal costs of creating and registering a whole new mortgage. "Assumption"
entails a simple amendment to the mortgage document registered on title
(see "switch").
Blend and Extend
A closed mortgage can often be "opened" for the purpose of extending
the term. Most lenders will blend the penalty for breaking (usually an Interest
Rate Differential) with the rate for the new extended term. The idea is
to get a lower rate and protect against rate increases in the future
Buy-down
"Paying down" the mortgage rate by paying the lender a premium
at time of funding. This is often used as a marketing feature by new home
builders, particularly on high ratio second mortgages.
Buyer's Agent
A Realtor who acts contractually on behalf of the buyer. Traditionally,
and still in most cases, the Realtor is the Agent of the Sellers and is
paid by them out of the proceeds of the sale. A Buyer's Agency Agreement
allows a Realtor (with full disclosure to the sellers or their agent) to
negotiate on behalf of the buyer, with no legal conflict of interest. The
seller still pays the Buyer's Agent fees, but this is always spelled out
and acknowledged in the Offer to Purchase.
Canada Mortgage and Housing Corporation (CMHC)
A federal crown corporation which administers the "National Housing
Act" (NHA), and through which all federal housing policies and programs
are implemented.
Cap Rate
The highest rate that a borrower will pay within a defined time period.
Examples are; the rate committed on a commitment letter or a mortgage pre-qualification
(also known as a "rate hold"); or the maximum rate that will be
paid by the borrower during the term of a "protected variable rate
mortgage". A lender will usually have to incur a cost to insure against
rate increases during the capping period. This insurance is called a "hedge".
Closing
The final exchange of consideration and legal completion of a transaction,
involving either a house purchase, a mortgage registration, or both.
Closed Mortgage
A mortgage whose terms state that it cannot be paid out, even with a penalty,
unless the lender agrees. In some cases, a closed mortgage may be discharged
at a defined cost, usually Interest Rate Differential (IRD), but sometimes
with a punitive penalty such as full interest to maturity.
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. A key component of the commitment, particularly in a period of
volatile interest rates, is the "rate hold", where a lender may
"cap" a rate for a defined period, such as 60 days or 90 days.
Commitments on financing for new homes, which usually have longer closing
dates, can be negotiated between the lender and the builder and be held
for as long as 6 months, and even a year.
Compliance Letter
Required in many municipalities throughout Canada before a property transfer
can take place. This is an acknowledgement from the building department
that the property either has, or is clear of outstanding work-orders. Work-orders
are specific clean-up or fix-up requirements that the owner must complete,
particularly before a transfer of ownership.
Connection Charges
Some local utility companies (hydro, gas, oil) charge a fee on closing to
connect new buyers up to their service. More normal, however, is an extra
charge on the first billing.
Conventional Mortgage
A mortgage usually amounting to 80% (Loan to Value ratio) or less of the
value of the property.
Convertible Mortgage
This allows you to convert your mortgage to a new one of longer term while
it is still in effect.
Credit Report
A record of an individual's payment history available at a credit bureau.
Individuals can order a copy of their own report by contacting their local
bureau.
Default
Failure to make monthly mortgage payments as agreed, or to meet certain
other terms of a mortgage agreement.
Double-Up
This feature (not offered by all lenders) allows you to double up your mortgage
payments anytime without penalty. This feature is often associated with
the ability to "skip" an equivalent number of payments. This can
be used either to accelerate the pay-off of a mortgage (as it is an enhanced
prepayment privilege) or to manage a volatile cash flow. For example, commission-based
individuals such as Realtors could "double-up" with each commission
cheque, and "skip" during low cash flow periods.
Down Payment
The amount of cash paid towards the purchase transaction by the buyer of
a home. This is also known as the purchaser's initial "equity"
in the property.
Equity
The difference between the value for which you could sell your property
and what is owed against it. There is an important distinction from "down
payment" to a lender. For example, if a buyer purchases a home without
a down payment, he/ she can have "equity" if the value of the
property quickly goes up.
First Mortgage
First Mortgage A mortgage registered before all others on title. Gives the
lender a primary lien/charge against your house and property that has precedence
over all other mortgages. Priority is determined by the date and time registered,
so a first mortgage was literally and legally registered "first".
A new first mortgage can therefore only be registered as a "first"
mortgage upon the discharge of an existing one if the holder of a second
mortgage "postpones" (i.e., "puts back in time") to
a time immediately following the registration of the new first mortgage.
Five-Percent Down Program
This allows buyers to obtain up to 95% financing on properties up to a certain
value. The loan must be insured against default by GE Capital Mortgage Insurance
Corporation or CMHC (Canada Mortgage and Housing Corporation). This maximum
home value will vary according to location (local Realtors should know the
applicable limit) and eligibility can vary with personal circumstances.
GE Capital Mortgage Insurance Corporation
Canada's only private mortgage insurer. For more details see Mortgage Insurance.
Gross Debt Service Ratio (GDS)
The percentage arrived at by dividing your monthly shelter costs (principal,
interest, property taxes, heating and half of condo fees) by your gross
monthly income and multiplying by 100. This is used by all lenders as a
yardstick by which to measure the ability of a borrower (or borrowers) to
make mortgage payments. For example, most lenders require that this ratio
be no more than 32% for a particular application, while others allow higher
limits. This is also the maximum qualifying GDS for most default insurance
applications.
High-Ratio Mortgage
A mortgage which is greater than 75% (Loan To Value ratio) of the value
of the property. Normally requires insurance to be paid to protect the lender.
(see Mortgage Insurance)
Home Inspection Report
A report commissioned by a property owner or purchaser, usually to verify
the condition of a property prior to the "firming up" of a Real
Estate transaction. The scope and detail may vary, but most reports indicate
the specific problem and the cost to repair. Unfortunately, no licensing
is required, and this service is not specifically regulated other than by
general consumer protection legislation. The best safeguard against inadequate
work is to ask for the resume of the Inspector, and if possible check references
from previous customers.
Interest Rate Differential
A penalty for early prepayment of all or part of a mortgage outside of its
normal prepayment terms. This is usually calculated as "the difference
between the existing rate and the rate for the term remaining, multiplied
by the principal outstanding and the balance of the term".
Example:
$100,000 mortgage at 9% with 24 months remaining.
Current 2 year rate is 6.5%.
Differential is 2.5% per annum.
IRD is $100,000 * 2 years * 2.5% p.a. = $5,000.
Land Transfer Tax (LTT)
A tax payable to the Provincial Government by the purchaser upon the transfer
of title from a seller.
Lien
This is a claim made against a property for the payment of a debt or obligation
related to the property or its owners.
Loan-to-Value Ratio (LTV)
The percentage of the value of the property for which a mortgage is required.
This ratio is important in determining whether or not default insurance
is required, and if so, what the cost of that insurance will be (see "Mortgage
InsuranceM") For example, if the property value is $200,000, the down
payment available is $20,000 and the required mortgage is $180,000. The
LTV is $180,000/$200,000 or 90%.
Mill Rate
A rate that multiplies by each one thousand dollars of property assessment
to give the annual real estate taxes.
Mortgage Broker
A registered agent who negotiates with lenders on behalf of a borrower to
obtain the best overall mortgage for that borrower's circumstances. Mortgage
Brokers are particularly useful in financing "non standard" situations
which cannot be funded by a major national lender. This is possible because
a Mortgage Broker has access to lenders who do not advertise nationally
or operate retail locations.
Mortgagee
Also known as the "lender" — the funder and holder of the
mortgage.
Mortgage Insurance
If your down payment is less than 25% of the purchase price of the property,
the lender is going to require either private mortgage insurance or public
mortgage insurance through GE Capital Mortgage Insurance Corporation or
Canada Housing and Mortgage Corporation (CMHC). The fee is calculated as
a percentage of your mortgage. This is known as default insurance. (Please
note that INVIS will calculate this amount for you automatically if your
mortgage falls into this category.)
Multiple Listing Service (MLS)
A service of a local Real Estate Board which publishes and exchanges details
of properties registered with them. While this used to be for the exclusive
use of registered Realtors, it is now possible for a private individual
to "list" a property without committing to pay a Realtor a "listing
commission" if the property sells. The majority of properties sold
in Canada are sold through the local MLS.
Municipal Levies
Special levies can be charged by municipalities to recover the cost of special
services, if these services cannot, for some reason, be funded out of general
revenues, or apply primarily to home buyers. Examples: Water meter installation;
road improvements, sewer improvements.
Open Mortgage
This allows you to pay back the borrowed funds without notice or penalty.
There are two types of open mortgages:
Fixed rate mortgages: the term is usually fairly short (6 months to a year) and the interest rate will be higher than on a closed mortgage.
Variable Rate Mortgages: (VRM's) are usually open (and are "collateral" type mortgages) but recently, several institutions have introduced closed versions.
PITH
Principal, Interest, Taxes, Heating and half of Condo Fees, if applicable.
Otherwise known as your "shelter expenses". This is a basic component
of the ratios used to determine whether or not you qualify.
Portable Mortgage
A mortgage which allows you to transfer the amount and terms over to a new
property without cost or penalty. The mortgage will, of course, have to
be registered on title of the new property, so strictly speaking it is not
identical in all respects. While most mortgages have a portability feature,
in the event you might need more money when you transfer the mortgage over
to the new property, make sure you either have the right to blend in any
new funds required, or can arrange the additional funds separately.
Prepayment Privilege(s)
The right to repay periodically more than the scheduled principal payment.
Historically this was limited to a single annual payment on the anniversary
date of no more than 10% of the original principal. In recent years, however,
prepayment privileges have become more lenient, reflecting peoples' desire
to pay their mortgages off on an accelerated basis. See also Double-Up.
Prepayment Penalty
If your mortgage is not fully open, you may be charged a penalty if you
want to pay off all or part of your mortgage before the end of the fixed
term. The normal prepayment penalty is the greater of three months' interest
or the Interest Rate Differential (IRD) on the amount to be prepaid. CMHC
(for insured mortgages) and a few of the major lenders set the maximum penalty
at 3 months interest after the mortgage has been in effect for three years,
regardless of the number of times it has been renewed.
Principal
The amount of money owing on your mortgage, including accrued unpaid interest.
Refinance
Obtaining a new mortgage on an existing property. You might be looking for
more money, a better rate, or different prepayment terms.
Registration Fees
Fees paid to the provincial government for recording a title transfer, mortgage
registration or other instrument such as an Assignment or Lien with the
local authorities.
Registered Retirement Savings Plan (RRSP)
A Federal Plan which allows a taxpayer to contribute approximately 18% of
earned income — to a maximum of $13,500 into a retirement plan "tax
free". If the taxpayer has already paid tax on personal income, then
the RRSP contribution (which can be made until March 1st of the year following
the year in which the income was earned and taxed) can result in a significant
tax rebate.
Since RRSP's can be caught up retroactively, this facility and the large
cash refunds it can generate are
Simple Interest
Interest which is computed only on the principal balance. It is not compounded
by calculating interest payable on accrued interest.
Survey
The legal written and/ or mapped description of the location and dimensions
of your land. The survey should also show the dimensions and placement on
the lot of any structure, including additions such as pools, sheds and fences.
An up-to-date survey is often required by a lender as part of the mortgage
transaction.
Switch
This is the term almost universally applied to changing lenders at the end
of a term, when the mortgage becomes "open". Most lenders will
now pay all of the costs of a "switch." (as well as giving them
a reduced rate to lure them away from a competitor).
Tax Certificate
At the time of a sale, the lawyer for the buyer must confirm that local
taxes have been paid up to date. If they are, a Tax Certificate is issued,
from which any adjustments can be made — usually requiring the buyer
to compensate the seller for any prepaid taxes. If they are not up to date,
the municipality requires that the seller pay them off from the proceeds
of the sale. If there are insufficient proceeds, then it may fall upon the
buyer to pay them.
Title Insurance
Insurance offered by Title Companies to protect a landowner, and thus the
mortgage lender against any "clouds" or legal questions on the
title to the real estate, or of legal priority of the mortgagee.
Total Debt Service Ratio (TDS)
The percentage arrived at by dividing your monthly shelter costs (principal,
interest, property taxes, heating and half of condo fees) PLUS all other
monthly debt obligations by your gross monthly income and multiplying by
100. This is used by all lenders as the "upper limit" yardstick
by which to measure the ability of a borrower (or borrowers) to make mortgage
payments. For example, most lenders require that this ratio be no more than
40% for a particular application, with some as low as 37%. 40% is also the
maximum qualifying TDS in most applications for default insurance.
Undertaking
This is a promise by a Lawyer to ensure that certain conditions (usually
of the lender) are met (usually after closing, due to time constraints).
The best example is the undertaking to register a discharge of an old first
mortgage after the new one has been registered, because there is simply
not enough time to do so at closing. It also governs such closing dynamics
as releasing funds before a new mortgage document is officially registered.
Underwriting
The process of deciding whether or not to lend you money (or how much to
lend you) based on all the information you have given the lender. Every
lender has a different underwriting process and lending criteria which differ
to some (usually small) extent from other lenders.
Variable Rate Mortgage (VRM)
The interest rate is usually compounded monthly and fluctuates with the
prime rate at the chartered banks. In most, but not all cases, the VRM is
fully open.
Verification of Employment
The lender will sometimes contact an applicant's employer in order to verify
information provided in a mortgage application or a job letter; your income
structure, length of employment, position, and so on.
Work Orders
Municipal by-laws ("zoning" by-laws) require among other things
that residential property be maintained in a safe and habitable condition,
and that a property's use conform to specific requirements (no illegal basement
apartments, satellite antenna, etc.).