Mortgage Glossary
Amortization: The gradual
elimination of a liability such as a mortgage in regular payments
over a specified period of time. Such payments must be sufficient
to cover both principal and interest.
Blended Interest Rate: An
interest rate offered by a lender that is blended between the
previous rate and the new interest rate.
Blended Payment – A mortgage payment
that includes principal and interest. It is paid regularly
during the term of the mortgage. The payment total remains
the same, although the principal portions increases over time
and the interest portion decreases.
Bridge/Interim Financing: Financing
that “bridges the gap,” usually used between the sale
of current home and the purchase of another. When down payment
is coming from the sale of current home and the possession date
of the new home precedes the sale date, interim financing may
be required.
Building Permit – A certificate that
must be obtained from the municipality by the property owner
or contractor before a building can be erected or repaired. It
must be posted in a conspicuous place until the job is completed
and passed as satisfactory by a municipal building inspector.
Closing Costs – Costs, in addition to
the purchase price of the home, such as legal fees, transfer
fees and disbursements, that are payable on the closing date. Closing
costs typically range from 1.5% to 4% of a home’s selling
price.
Closing Date: The date
on which the property legally changes hands, or when the charge
is registered against the property and money changes hands.
CMHC: Canada Mortgage
and Housing Corporation is a Crown Corporation which provides
mortgage insurance to lenders to grant high ratio mortgage loans.
Collateral Mortgage – A mortgage which
secures a loan by way of a promissory note. The money which
is borrowed can be used to buy a property or for another purpose
such as home renovation or for a vacation.
Commitment Letter/Mortgage Approval – Written
notification from the mortgage lender to the borrower that approves
the advancement of a specified amount of mortgage funds under
specified conditions.
Compound Interest: Interest
charged not only to the principal sum but also on interest amounts
charged in the preceding period.
Conventional Mortgage: A mortgage in which
the amount of the loan does not exceed 75% of the value of the
property.
Default – Failure to abide by the terms
of a mortgage loan agreement. A failure to make mortgage
payments (defaulting on the loan) may give cause to the mortgage
holder to take legal action to possess (foreclose) the mortgaged
property.
Deposit – Money placed in trust by the
purchaser when an offer to purchase is made. The sum is
held by the real estate representative or lawyer until the sale
is closed, and then paid to the vendor.
Downpayment – The portion of the house
price the buyer must pay up front from personal resources, before
securing a mortgage. It generally ranges from five to 25%
of the purchase price.
Easement – A right acquired for access
to or over, or for use of, another person’s land for a
specific purpose, such as a driveway or public utilities.
Encumbrance – A registered claim for
debt against a property, such as a mortgage, an easement or a
caveat.
Equity – The difference between the price
for which a home could be sold and the total debts registered
against it. Market values and improvements to the property
also affect equity.
Gross Debt Service (GDS):The ratio of the borrower’s annual income relative to annual mortgage payments, property taxes, condo fees and allowance for heat. Most lenders prefer this not to be higher than 35%.
High Ratio Mortgage: Usually a mortgage that exceeds 80% of the value of the property and is usually CMHC, GENWORTH, or AIG insured.
Holdback – An amount of money withheld
by the lender during the progress of construction of a house
to ensure that construction is satisfactory at every stage. A
standard holdback amount is 10% of the total cost of the building
project.
Interest – The cost of borrowing money. Interest
is usually paid to the lender in instalments along with repayment
of the principal loan amount.
Interest Adjustment Date (IAD) – A date
from which interest on the mortgage advanced is calculated for
your regular payments. This date is usually one payment
period before regular mortgage payments begin. Interest
due from the date your mortgage is advanced to the IAD is due
on closing.
Lending Value – The purchase price or
market value of a property, whichever is less.
Loan to Value Ratio(LVR):
The ratio of the amount of the mortgage relative to the
value of the property.
Maturity Date:
The final day in the term of the mortgage.
Mortgage Broker: The mortgage
broker is an intermediary who matches the needs of a borrower
with the requirements of a lender. A mortgage broker is usually
able to negotiate more favourable rates and terms on your behalf.
Mortgage Life Insurance – This insurance
guarantees that if you die your mortgage will be paid in full.
Mortgage Payment – A regularly scheduled
payment that is blended to include both principal and interest.
Net Worth – Your total financial worth,
calculated by subtracting your total liabilities from your total
assets.
Offer to Purchase – A written contract
setting out the terms under which the buyer agrees to buy. If
accepted by the seller, it forms a legally binding contract subject
to the terms and conditions stated in the document.
Open Mortgage: A mortgage
that can be repaid prior to the term due date.
P.I.T. – Principal, interest, and taxes.
Port: Taking an existing
mortgage with you and applying it to your new property when you
move. This is done in place of applying for a new mortgage.
Prepayment Privilege: A
clause inserted in a mortgage which give the borrower the privilege
of paying off all or part of the mortgage debt ahead of the maturity
date.
Prepayment Penalty: The
sum of money a lender may require from the borrower to compensate
a loss of interest if the mortgage is paid out early. Usually
either 3 months interest or the interest rate differential, whichever
is greater.
Principal – The amount of money actually
borrowed.
Qualifying: The process
of qualifying a borrower to ensure they respectfully have the
ability and inclination to undertake the mortgage.
Refinance – To pay off a mortgage or
other registered encumbrance and arrange for a new mortgage,
sometimes with a different lender.
Second Mortgage – An additional mortgage
on a property that already has a mortgage.
Sweat Equity: Equity created
by an owners work on the property. May also be used as a form
of down payment.
Switch Mortgage: Occurs
when a borrower moves their mortgage from one institution to another
keeping current amortization and loan amounts the same.
Term: The actual length of time for which the money is borrowed. The term can go anywhere between one month to 40 years. At the end of the term, the loan may be renegotiated as to the interest rate, payments and amortization period.
Title – A freehold title gives the holder
full and exclusive ownership of land and buildings for an indefinite
period of time.
Total Debt Service Ratio (TDSR): The ratio of total annual income relative to a borrowers total payments. GDS payments plus other debts such as bank loans, finance company loans, credit card payments, car payments etc; most lenders prefer this not to exceed 42%. If your credit score is above a 680 beacon score however, you are eligible for a 44% TDSR, without having to factor in a Gross Debt Service (See GDSR).
Transfer – A legal document which is
signed by both the vendor and purchaser, transferring ownership. This
document is registered to change ownership, and a certificate
of title is issued, by the Land Titles Office.
Variable Rate Mortgage:
A mortgage strategy where interest rate is based on the prime
rate. Payments may fluctuate when prime changes unless they are
set at a specified amount that is higher than the minimum payment
required. Rates are usually lower than that of the fixed rates,
with greater flexibility within the mortgage.
Vendor Take Back Mortgage – Mortgage
financing arranged between the seller of the property and the
buyer. The title is transferred to the buyer. Often
this type of loan is a second mortgage which the seller is willing
to arrange at below market rates to ensure the buyer can purchase
the house. Most of these arrangements are not renewable
or transferable to the next owner of the house.
Zoning Bylaws – Municipal or regional
laws that specify or restrict land use.
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