Agreement of Purchase and Sale
The legal contract a purchaser and a seller of a property. 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.
Amortization Period
The number of years it will take a borrower to pay off both the principal and interest on your mortgage. The longer the amortization period, the more interest the borrower will pay over time. Also, if your amortization is stretched out, your monthly payments will be lower in comparison to a shorter amortization period.
Annual Percentage Rate (APR)
APR is a broader measure of the cost to the borrowerwho is borrowing money. The APR reflects not only the interest rate but also the charges associated with receiving the specified loan amount. For that reason, your APR is usually higher than your interest rate.
Appraisal
An appraised value is an evaluation of a property’s value based on a given point in time that is performed by a professional appraiser during the mortgage origination process. The appraiser is usually chosen by the lender, but the appraisal is paid for by the borrower.
Assets
What you own or can call upon. Often used in determining net worth or in securing financing.
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 ‘High-Ratio’ mortgages.
Closed Mortgage
A mortgage that cannot be prepaid or renegotiated for a set period of time without penalties. Closed mortgages have lower rates when compared to their ‘open’ counter parts. Closed mortgages can come in fixed and variable form, but place a restriction on the amount of principal you can pay down each year. If you pay off the entire principal in a closed mortgage before the set term, you will face a penalty, such as an interest rate deferential (IRD) or 3‐month interest charge.
Closing Date
The date on which the new owner takes possession of the property and the sale becomes final.
Collateral Charge
A collateral charge allows you to use your home as security for one or more loans. Because the lender may register the charge for an amount that is more than your initial loan, you may be able to borrow more funds without having to register a new charge (with the same lender), provided the total amount owing is no more than the principal amount of the collateral charge. If you wish to switch your existing mortgage loan to another lender at the end of the term, the new lender may not accept a transfer of your registered collateral charge. In that case, you will need to pay fees to discharge your registered collateral charge and pay legal fees to register a new charge with the new lender.
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 ‘High-Ratio’ mortgage and the lender will require default insurance for that mortgage.
Co-Applicant/Co-Signer
Essentially a co-owner, meaning that the individual is registered on the title of the property and is equally responsible for mortgage payments. Usually used if the main applicant has issues with their credit and does not have enough income to qualify on their own.
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.
Debt Consolidation
This is when a client would like to combine all of their debts together and put it all as one mortgage, with one payment. This option usually provides clients with greater monthly cash flow and peace of mind instead of having to make multiple payments to each individual creditor.
Default Insurance
Mortgage default insurance protects lenders in the event a borrower defaults on their mortgage. It does not protect the borrower or a guarantor. If a borrower defaults, the insurer may oversee all legal proceedings and payment enforcement. The client is the one who pays the premium which is usually financed with the Mortgage but the provincial tax is added as a closing cost and the client needs to pay out of pocket for it. The 3 default insurers in Canada are: Canadian Mortgage and Housing Corporation (CMHC), Canada Guaranty and Genworth.
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).
Discharge Fees
The fee for preparing and executing a discharge document to release a client’s property which was used to secure a loan.
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.
Fixed-Rate Mortgage
A mortgage for which the interest is set for the term of the mortgage. With a fixed mortgage you can “set it and forget it” as you are protected against interest rate fluctuations, so your payment stays constant over the duration of your term. This is for client who would like piece of mind. A fixed mortgage offers stability as your mortgage rate and payment will remain the same each month, but that security is the reason why fixed interest rates are greater than their variable interest rate counterparts.
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.
Guarantor
A guarantor personally guarantees mortgage payments will be made if the original applicant defaults, but he has no claim to the property because he/she is not on title. A guarantor is usually used if the main applicant has issues with their credit and not enough income to qualify. In most cases, the guarantor would need to have a higher total income than the applicants on the file.
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 by one of the three default insurers in Canada.
Home Equity Line of Credit (HELOC)
A personal line of credit secured against the borrower’s property. The term is usually similar as an open mortgage and the client can pay down the debts anytime without any penalty.
Home Insurance
Homeowners insurance is a form of property insurance designed to protect an individual’s home against damages to the house itself, or to possessions in the home. Homeowners insurance also provides liability coverage against accidents in the home or the property.
Interest Adjustment Date (IAD)
The interest adjustment date for your mortgage is the date the amortization period begins. You will be required to pay an interest adjustment amount if the mortgage funds are advanced before the interest adjustment date.
For example, your mortgage payments may be due on the 1st day of each month. If you buy your home on March 15, your lender will advance the mortgage funds on that date. You will be required to pay an interest adjustment amount to cover interest from March 15 to March 31. The amortization period of your mortgage will begin on April 1 (the interest adjustment date), and your first mortgage payment will be due on May 1, for interest from April 1 to April 30.
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.
Legal Fees
Real estate lawyer fees paid by the client for preparing legal documents, giving advice and other services to the client (varies from one lawyer to another).
Maturity Date
Refers to the final payment date of a loan or other financial instrument, at which point the principal (and all remaining interest) is due to be paid. For mortgage purposes, this is when the client’s mortgage is matured and it is time to renew with the same lender or switch over to a new one offering a better product.
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.
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.
Open Mortgage
A mortgage that can be repaid at any time during the term without any penalty. The drawback of a ‘open’ mortgage when compared to a ‘closed’ mortgage is that you pay a premium for the flexibility of paying off your mortgage whenever the borrower wants. People opt for open mortgages if they are planning to move in the short future, or if they are expecting a lump sum of money through an inheritance or bonus, that would allow them to pay off their entire mortgage.
P.I.T.
Principal, interest, and property tax of the property (monthly).
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 Options
Prepayment options outline the flexibility you can have to increase your scheduled mortgage payments or pay down your mortgage principal as a whole.
The monthly prepayment option is a percentage increase allowance on your original monthly mortgage payment. For example, if your monthly mortgage payment is $1,000 and your prepayment allowance is 20%, then you can increase your monthly payments up to $1,200. The lump sum prepayment option on the other hand, applies to the original mortgage amount. So, if your lump sum prepayment allowance is 20% on a $100,000 mortgage amount, then you can pay $20,000 off the principal every year with no penalty.
Prepayment Penalty
A fee charged to the borrower by the lender when the borrower prepays all, or part of a mortgage over and above the amount agreed upon limit. 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.
Prime Rate
The rate that is suggested by the Bank of Canada where most banks base their prime mortgage lending rate.
Principal
The original amount of a loan, before interest.
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.
Refinance
Refers to the replacement of an existing debt obligation with a debt obligation under different terms. The most common consumer refinancing is for a home mortgage.If the replacement of debt occurs under financial distress, it is also referred to as debt restructuring.
A loan can be refinanced for various reasons which include:
1) to take advantage of a better interest rate (which will result in either a reduced monthly payment or a reduced term);
2) to consolidate other debt(s) into one loan(this will result in a longer term)
3) to reduce the monthly repayment amount (this will result in a longer term)
4) to reduce or alter risk (e.g. changing from a variable-rate to a fixed-rate loan)
5) to free up cash (this will result in a longer term)
Renewal
When the mortgage term has concluded, your mortgage is up for renewal. In this period of time, a borrower can prepay their mortgage partially or in full, then renew with same lender or transfer to another lender depending on how their mortgage was registered.
When renewing your mortgage, the banks often only offer the posted rates. You have to push a little harder for them to give you a break. They know that most homeowners don’t want to have to shop around, so, they offer you a higher rate and hope that you will take it.
Standard Charge
A standard charge is registered on title in a document that includes the important terms of your mortgage loan, such as the principal amount, interest rate, term, payment amount, etc. A standard charge is registered for the actual amount of the mortgage, securing only the one mortgage loan. Most lenders will accept a transfer or assignment of another lender’s standard charge mortgage loan, which permits you to switch lenders without discharging the existing charge from title and registering a new one.
Switch/Transfer
A transfer of an existing mortgage from one financial institution to another upon the maturity of the term of the mortgage with that specific lender.
Term
A contract with your lender that can range from six months to ten years. The most popular term in Canada is a five-year term, but it’s important to understand the implications of being in five-year term as opposed to shorter terms. When the term expires, you can choose to renew your mortgage with the same lender, or we can compare products and rates with other lenders to ensure you are receiving the best product.
Title Insurance
Title insurance is a unique form of insurance. It protects your ownership or title against losses incurred as a result of undetected or unknown title defects, for as long as you own your home. Even if you are the rightful owner of a home, there are instances such as real estate fraud, when your title can come into question. Title insurance continues to protect your ownership from the day of closing to the day you sell your home. Coverage is also extended to heirs who receive your home in the event of your death.
Total Debt Service (TDS) Ratio
TDS is another mathematical calculation 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.
Variable Rate Mortgage
Variable mortgage rates are typically lower than fixed rates, but can vary over the duration of the term. Variable mortgages are prone to market behavior (via the prime rate) which affects your payments. That means your payment amounts can change over time.
Two Types of Variable Rates:
Adjustable Rate Mortgage (ARM): Mortgage payments automatically adjust with changes in the prime rate of the lending institution your mortgage is with to ensure that you maintain the original amortization schedule of your mortgage. The rate varies during the term of the adjustable rate mortgage.
Variable rate Mortgage (VRM): Mortgage payments with the variable product remains fixed for the duration of the term; as the interest rate changes with any fluctuations in the prime rate. If the prime rate decreases, more of the mortgage payment will go towards paying off the principal; if the prime rate increases, more of the mortgage payment will go towards interest costs. Please note if in the future the prime rate keeps increasing and if too much monies are going towards the interest portion, then the lender will increase the mortgage payments. Your amortization period (number of years to repay the mortgage) may vary and be longer if rates have risen or be shorter if rates have fallen since the start of the term.
Vendor Take Back (VTB) Mortgage
A mortgage provided by the vendor (seller) to the buyer.
