Common Mortgage Terms

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Accredited Mortgage Professional (AMP)

The Accredited Mortgage Professional (AMP) is Canada’s national designation for mortgage professionals. Launched in 2004, the AMP was developed by CIMBL as part of an ongoing commitment to increasing the level of professionalism in Canada’s mortgage industry through the development of educational and ethical standards.

Adjustments 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 (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 Ieks 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 Ieks, by definition.

Amortization

The process of paying off the principal balance oId 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.

Assumable Mortgage

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

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.

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

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

Equity

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

Genworth Mortgage Insurance Corporation

Canada's only private mortgage insurer. For more details see Mortgage Insurance.

Gross Debt Service Ratio (GDS)

High-Ratio Mortgage

A mortgage which is greater than 80% (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

Interest Rate Differential

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)

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 20% of the purchase price of the property, the lender is going to require either private mortgage insurance or public mortgage insurance through Genworth 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 I 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

Open Mortgage

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

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)

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

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)

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

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

Work Orders

 

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