Glossary
Adjustments on Closing – There are usually two types of adjustments for which a buyer can be charged on closing:
1. Utilities & Property Taxes: the amount of prepayment on a pro-rata basis, depending on the date of occupancy; and
2.Interest: the amount of interest required to be prepaid up to the Interest Adjustment Date, which is the point at which the mortgage interest starts accumulated ‘in arrears’. See also ‘Interest Adjustment Date’.
Amortization Period – The actual number of years it will take to repay a mortgage loan in full. This may go beyond the term of the loan. For example, mortgages often have five-year terms but 25-year amortization periods.
Annual Percentage Rate (APR) – The contractual interest rate, PLUS any non-interest finance charges. This rate is used for disclosure purposes as required by the Business Practices and Consumer Protection Act.
Appraised Value – The estimated of the value of the property offered as security for a mortgage loan. This appraisal is done for mortgage lending purposes and may be less than the purchase price of the property.
Appreciation – The amount by which real property (or any other asset) has increased in value.
Assessment – The ‘assessed’ value of a property is a historical, static estimate of the value of the property used by a municipal government as a basis for calculating annual property taxes. The Assessment Notice comes from the municipality annually and contains the ‘assessed value’ upon which the property taxes are calculated.
Assumable Mortgage – 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 have risen), as well as saving on the legal costs of creating and registering a whole new mortgage.
Balance Due On Completion – The amount of money the purchaser will be required to pay to the vendor to complete the purchase, after all adjustments have been made.
Blanket Mortgage – A single mortgage registered against two or more individual parcels of real property.
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’ the closed term with the rate for the new extended term. The idea is to get a lower rate and protect against rate increases in the future.
Brokerage Fee – A fee charged by a mortgage broker for arranging a loan.
Building Scheme – Refers to a scheme of development which comes into existence where defined land is laid out in parcels and intended to be sold to different purchasers , each of whom enters into a restrictive covenant with the common vendor agreeing that each particular parcel should be subject to certain restrictions as to either use or appearance.
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 Seller and is paid by them out of the proceeds of the sale. A Buyer’s Agency Agreement allows a Realtor to negotiate on behalf of the buyer, with no legal conflict of interest.
Canada Mortgage and Housing Corporation (CMHC) – The Corporation of the Federal Government that administers the National Housing Act (NHA) and provides mortgage insurance to lenders.
Caveat – A notice registered against the title to land warning those looking at the title that a claim has been made.
Chattel Mortgage – A document evidencing a debt owed by the borrower to the lender. The mortgage is secured by the lender against personal property owned by the borrower as collateral to ensure the repayment of the debt. These mortgages are governed by the Personal Property Security Act.
Chattels – Articles of personal property (i.e. car, television, computer) as opposed to real property.
Closed and Open Mortgages – A closed mortgage agreement does not provide for payout before maturity. A lender may permit payout under certain circumstances but will levy a penalty charge for doing so. An open mortgage permits for prepayment/repayment at any time without penalty.
Closing Date – The date on which the sale of the property becomes final and the new owner takes possession.
Closing Statement – A statement prepared for a purchaser or vendor, showing the amounts to be received and paid out. The difference between these amounts represents either the balance payable (by the purchaser) or the cash proceeds from sale (to the vendor) upon completion of the transaction.
Condition – A fundamental term of a contract, a breach of which allows the injured party to terminate the contract and/or sue for damages or ‘specific performance’.
Condominium – A form of ownership in which the owner has title to a dwelling unit and owns a share of the common elements (such as elevators, hallways and the land).
Contract of Purchase and Sale – A contract of purchase or sale of land which contains the obligations of the vendor and purchaser with respect to the purchase and sale. You may also find that this type of contract is referred to as an Interim Agreement.
Conventional Mortgage – A mortgage loan that does not exceed 75% of the lesser of the appraised value or the purchase price of the property. A mortgage that exceeds that limit must be insured.
Convertible Mortgage – This allows the mortgage holder to convert their mortgage to a new one of longer term while it is still in effect.
Conveyance – The process of transferring an interest in land from one person to another by way of a transfer document. Conveyancing usually refers to the transfer of title to land but also includes dealings such as assignments, leases and mortgages.
Counter Offer – A statement by the recipient of the offer which has the legal effect of rejecting the offer and of proposing a new offer to the offeror (who then becomes the recipient of the ‘new’ offer).
Covenant – A promise contained within an agreement. The person making the covenant is called the covenantor and the person in whose favour it is made is called the covenantee.
Credit Analysis – An investigation of a loan applicant’s ability to repay.
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.
Date of Valuation – In appraisal, the date for which the value of the subject property is established, not to be confused with the date at which the appraisal takes place.
Debt Service Ratios (GDSR & TDSR) – The Gross Debt Service Ratio (GDSR) is the percentage of gross annual income required to cover payments associated with housing (mortgage principal and interest, taxes, secondary financing, heating, and 50% of condominium fees, if any). The GDSR should not exceed 32% of gross annual income. The Total Debt Service Ratio (TDSR) is the percentage of gross annual income required to cover payments associated with housing and all other debts and obligations, such as payments on a car loan. The TDSR should not exceed 40% of gross income. For self-employed/commission sales applicants, net income is used for GDSR and TDSR ratio calculations.
Default – Failure to make monthly mortgage payments as agreed, or to meet certain other terms of a mortgage agreement.
Deposit – An amount deposited with the brokerage by the purchaser when an offer to purchase is made.
Disclosure Statement – A statement that must be given to a borrower incurring an obligation under a credit agreement as required by Section 84 in the Business Practices and Consumer Protection Act.
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 or to manage a volatile cash flow.
Down Payment – The amount of money (usually in the form of cash) put forward by the purchaser. It represents the difference between the purchase price and the amount of the mortgage loan.
Easement – A limited right of use of another’s land by a landowner for the benefit of his land. The land receiving the benefit is called the dominant tenement and the land granting the benefit is called the servient tenement.
Effective Annual Rate – An annual interest rate which is compounded ONCE per year.
Equity – Equity is the difference between the price for which a property could be sold and the total debts registered against it.
Fiduciary – A person who holds a position of trust with respect to someone else and is obliged, by virtue of the relationship of trust, to act solely in the other person’s benefit.
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 CMHC or GE …. this insures the lender, not the mortgage holder. The maximum home value will vary according to location, and eligibility can vary with personal circumstances.
First Mortgage – Gives the lender a primary lien/charge against your house and property which has precedence over all other mortgages. Priority is determined by the date and time registered, not the amount of the mortgage.
Fixed Rate and Variable Rate Mortgages – A fixed rate mortgage is where the rate of interest is fixed for a specific term. A variable rate mortgage is where the rate of interest changes as money market conditions change, usually not more than once a month. The monthly payment stays the same for a specified period; however, the amount applied towards the principal changes according to the changes (if any) in the rate of interest.
Foreclosure – A legal action taken by a mortgagee to obtain possession of a property, by reason of the mortgagor’s default in payment of the principal and/or interest of the mortgage debt.
GEMICO – GE Capital Mortgage Insurance Company of Canada, a private mortgage insurer.
Graduated Payment Mortgage – An innovative loan arrangement in which the periodic payments made by the borrower increase in size over all, or a portion of, the term of the mortgage contract.
Gross Debt Service Ratio – The percentage of gross income which is the maximum amount a borrower is allowed to pay annually in principal, interest, and property taxes (PIT). This ratio is usually expressed as a percentage (i.e. PIT can be 29% of gross income).
Guarantor – One who becomes contingently or secondarily liable for another’s debt or performance.
High Ratio Mortgage – A mortgage loan that exceeds 75% of the lesser of the appraised value or purchase price of the property. This mortgage must be insured and borrowers must pay an application fee and the insurance premium (which may be added to the mortgage) to the insurer.
Home Inspection Report – A report commissioned by a property owner or purchaser, usually to verify the condition of a property prior to the closing of a real estate transaction (i.e. a subject on the offer). The scope and detail may vary, but most reports indicate the specific problem and the cost to repair. No licensing is required in this industry, and this service is not specifically regulated other than by general consumer protection legislation. However, it is a very useful service! Check references from previous customers, enquire with the Better Business Bureau and investigate the background of the company.
Interest Adjustment Date (I.A.D.) – A date, usually one month before monthly mortgage payments begin, when interest on monies advanced before that date is calculated and must be paid by the borrower.
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, 5 yr term, 9% with 2 yrs remaining
Current posted bank rate for 2 yr term mortgage is 6%
Differential is 3% (9% – 6%)
IRD penalty will be calculated at 3% of $100K for 24 months
Land Transfer Tax – A tax payable to the Provincial Government by the purchaser upon the transfer of title from a seller. Rates change, and vary from province to province. Often exemptions are available for first time homebuyers.
Leasehold Mortgage – A mortgage loan on a home where the building is on leased (rented) land. The lender takes an interest in the lease.
Lending Value – The estimated value of a property for lending purposes. It is a long term, conservative estimate of the value of the security as determined by the lender and, therefore, does not necessarily equal Market Value or Sales Price.
Lien – This is a claim made against a property for the payment of a debt or obligation related to the property or its owners.
Listing Agreements – A contract between an owner and a Realtor whereby the realtor agrees to try to find a purchaser for the listed property in return for the vendor paying a stipulated amount of commission should the realtor be successful.
Listing Price – The value at which a property is advertised for sale.
Loan-to-Value Ratio – The ratio of the loan to the appraised value or purchase price of the property, whichever is less, expressed as a percentage.
Maturity Date – The last day of the term of the mortgage agreement. The mortgage agreement must then be renewed or the mortgage balance paid in full.
Mortgage – A document evidencing a debt owed by the borrower to the lender. Registration of the mortgage in the Land Title Office transfers the mortgagor’s interest in land to the mortgagee as security for the repayment of the debt.
Mortgage Default Insurance – If your downpayment is less than 20% of the appraised value of the property, the lender is going to require either private or public mortgage insurance , offered through CMHC (public) or GE and AIG (private). The fee is calculated as a percentage of your mortgage. This insurance is required by federal law for high-ratio mortgages and is not optional or negotiable.
Mortgagee – The lender
Mortgagor – The borrower
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.
National Housing Act (NHA) Loan – A mortgage loan insured by CMHC.
Offer – A proposal to do or refrain from doing some specified thing, usually followed by an expected acceptance, counter offer, return promise or act. The person who makes the offer is called the offeror. The recipient of the offer is called the offeree.
Offer to Purchase – A formal, legal agreement that offers a certain price for a specified real property. The offer may be firm (no conditions attached) or conditional (certain conditions must be fulfilled).
Open Mortgage – An open term (see also ‘Closed’) allows you to payback the borrowed funds without notice or penalty. Can be either fixed rate or variable rate.
Outstanding Balance – The amount owing to the lender at any specified time, whether it is to be repaid over an amortization period or in a lump sum at the end of the term.
Partial Amortization – A loan repayment scheme in which the term is shorter than the amortization period. Whereas the loan payments will be calculated as if the loan will be paid back over the full amortization period, at the end of a specified term the outstanding balance is due and payable.
P.I.T. – Principal, interest, and taxes.
PITH – Principal, Interest, Taxes, Heating (and half of condo fees, if applicable). 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, need 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.
Possession Date – Date on which the purchaser is entitled to possession of the property.
Prepayment Charge – A fee charged by the lender when the borrower pays off all or a portion of a mortgage more quickly than provided for in the mortgage agreement.
Prepayment Privileges – 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 consumers’ desire to pay their mortgages off on an accelerated basis. See also ‘Double Up’.
Principal – The amount of money owing on your mortgage, including any unpaid accrued interest. Put another way, that portion of the original amount borrowed which still has to be paid back to the lender.
Real Estate Syndicate – Any form of organization in which two or more investors share in the ownership of an interest in real estate.
Refinance – To arrange a new mortgage for an increased amount. The old mortgage(s) is paid off (discharged) from the proceeds of the new loan. This type of loan is also referred to as “equity take out.”
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.
Renew – To extend a mortgage agreement with the same lender for another term. The length of the term and the conditions (such as the rate of interest) may be changed.
Reverse Annuity Mortgage – An innovative loan arrangement in which the lender makes periodic payments to the borrower during the loan term. At the end of the term, the borrower will have to repay the balance owing by refinancing or selling the property.
Survey – The legal written and/or mapped description of the location and dimensions of the property. 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.
Term – The duration of a mortgage agreement. As the amortization period is longer than the term, mortgage payments made may not fully cover the outstanding principal by the end of the term
Title Insurance – Insurance offered by Title Companies to protect a landowner, and thus the lender, against any legal questions on the title to the real estate, or of legal priority of the mortgagee. This is usually considerably less expensive than the labour intensive and liability fraught process of having to have a lawyer search title, and certify it as ‘clear’ – a process known as ‘certifying title’ or giving an ‘opinion of title’.
Undertaking – This is a promise by a lawyer to ensure that certain conditions are met. The best example is the undertaking to register a discharge of an old 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 money (or how much to lend) based on all the information that has been given to the lender. Every lender has a different underwriting process and lending criteria which differ to some extent from other lenders.
Variable Rate Mortgage (VRM) – The interest rate is usually compounded monthly and fluctuates with the prime rate at the lending institution (which fluctuates with changes in the market). In many cases the VRM is fully open.
Vendor Take Back Mortgage – A mortgage taken back by the vendor from the purchaser to facilitate a sale, whereby the vendor becomes the mortgagee and the purchaser becomes the mortgagor.
Wrap Around Mortgage – A second mortgage, registered on title, which includes a prior existing mortgage. It may be written for an amount equal to the outstanding balance of the first mortgage or may also add additional funds for a larger loan balance than currently exists. Payments under the new mortgage include the payments under the original mortgage and the new mortgagee undertakes the responsibilities as mortgagor under the original mortgage.
