Mortgage Glossary
Let us help explain . . .
A
Agreement of Purchase and Sales
The legal contract a purchaser and a seller go into. One party agrees to sell and another agrees to purchase. 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. If you are writing a private sale, consult wit your solicitor to ensure it is properly worded and covers all 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 by which the mortgage lending value of a property is determined.
Assets
What you own or can call upon. Often used in determining net worth or in securing financing.
Assumtion 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.
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B
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.
Bridge Financing
Interim financing to bridge between the closing date on the purchase of the new home and the closing date on the sale of the current home.
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C
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.
Commitment
A notice from a mortgage lender to a prospective borrower that the lender will advance mortgage funds of a specified amount under certain conditions.
Condition
A clause in a contract that calls for the happening of a certain event, or performance of some act before the agreement becomes binding.
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 credit worthiness.
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D
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).
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E
E&O
Errors and Omissions.
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.
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F
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.
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G
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 for most lenders. Some lenders will consider a higher ratio depending on the situation, borrower's credit score and mortgage product.
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.
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H
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, less the down payment.
Hold-Back
An amount of money withheld by the lender during the process of construction of a house to ensure that the construction is satisfactory at every stage. The amount of hold-back is generall equivalent to the estimated cost to complete construction.
Home Equity Line of Credit
A personal line of credit secured against the borrower’s property. Generally, up to 80% of the purchase price or appraised value of the property is allowed to be borrowed with this product. There are a few lenders that will loan at a higher loan to value ratio, but these mortgages are insured.
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I
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.
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M
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 Broker
An intermediary between a lender and borrower who is licensed in British Columbia to carry out such activities.
Mortgage Plus Improvements
A mortgage plus improvements that lets you add the cost of the improvements to your home onto your 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.
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O
OAC
On approved credit.
Open Mortgage
A mortgage that can be repaid at any time during the term without any penalty. For this convenience, the interest rate is generally 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.
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P
P.I.T.
Principal, interest, and property tax due on a mortgage. If your down payment is greater than 20% of the purchase price or appraised value, the lender will allow you to make your own property tax payments.
Penalty
A sum of money paid to a lender for the privilege of prepaying a mortgage in part or full.
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. Every lenders has their own formula as to exactly how the IRD is calculated.
Prime
The lowest rate a financial institution charges its best customers.
Principal
The original amount of a loan, before interest.
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R
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.
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. You can then renew with same lender or transfer to another lender at usually no cost. Contact us to review your mortgage at least 120 days prior to renewal. Do not just sign the renewal back, let us negotiate it on your behalf. We usually can get better rates than what the lender will offer directly to you. Possibly saving you thousands of dollars!
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S
Second Mortgage
A debt registered against a property that is secured by a second charge on the property.
Secured Credit Card
A credit card that is secured by a deposit. It is commonly used to establish a credit history. A Home Trust Secured VISA Card is a good example of this.
Survey
The accurate mathematical measurement of land and building there on. It is usually requested by the lender went granting a mortgage.
Switch
To transfer an existing mortgage from one financial institution to another. We can have this arranged for you usually at no cost to you.
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T
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.
Title
Evidence of ownership.
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 in most cases. Lenders may consider to go up to a 44% ratio in certain cases.
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V
Variable Rate Mortgage
A mortgage for which the interest rate fluctuates based on changes in prime.
Vendor Take Back (VTB) Mortgage
A mortgage provided by the vendor (seller) to the buyer.
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