| Glossary |
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Please click on a term below to be taken directly to the definition: Appraised Value: The appraised value is the value assigned to a home by a qualified appraiser, or an automatic appraisal. The appraised value can change often as it is usually based on comparable sales in your immediate area for the last 90 days. Banks always ask for the appraised value of a home when they are providing a mortgage on the property as it is the security for the loan.
Assumption of Mortgage: Is the process of a purchaser taking over the existing mortgage on the property being purchased. The purchaser is usually required to qualify with the bank that holds the mortgage.
Automatic Appraisal: This is a service provided by CMHC and GE when determining the value of a home. They will often be able to determine the value of a home based on the comparable sales in their database. On occasion, people assume the bank does not require an appraisal for their mortgage. However, this is usually because the insurer has performed an automatic appraisal to determine the value of their home.
Blended Mortgage: If you are porting a mortgage to a new house or you are refinancing to take out extra cash, the bank will sometimes add the new mortgage to the old one and blend the interest rate and/or term.
CMHC: The acronym for The Canada Mortgage and Housing Corporation, they are a corporation of the Federal Government that makes it possible for people to purchase a home with less than 20% down payment. They supply mortgage insurance to the lenders to protect the banks in the case of borrower default. The Bank Act in Canada stipulates that a bank cannot mortgage a property with less than 20% down unless it is CMHC or GE insured.
Closed Mortgage: A closed mortgage does not allow the borrower to payout the entire mortgage amount before the maturity date without a penalty. Closed mortgages offer much better interest rates than open mortgages and usually provide provisions for people to prepay large sums onto the mortgage without a penalty.
Closing Date: The closing date refers to the actual date on which the sale of a house is concluded and the new owner takes possession.
Compound Interest: It is when interest is charged on not only the principal amount of the loan, but also on the interest from the previous period. Mortgages are compounded two ways, either monthly or semi annually (semi annually is cheaper). PLEASE NOTE that you should be aware of how your mortgage is compounded. Some banks will offer a slightly lower interest rate to get your business, but in the agreement, they are compounding the interest monthly rather than semi annually. This means that the mortgage with the lower rate is actually costing you more money! Interest charged not only on the principal sum but also on interest amounts charged in a previous period.
Condominium: Commonly referred to as a condo. It is a manner of ownership where the owner has title to their particular unit and owns a portion of the mutual areas, such as elevators, hallways and the land.
Conventional Mortgage: A conventional mortgage is a mortgage loan where the borrowers have at least a 20% down payment for the purchase of a home. GE or CMHC must insure any mortgage that exceeds that limit and that type of mortgage is referred to as a high ratio mortgage.
Default: Occurs when the borrower fails to make the monthly instalment of their mortgage that was agreed upon in the commitment.
Down Payment: The amount of money that the borrower intends to put down on the purchase of a home. The down payment is usually cash but can also come from an RRSP, current equity, or a gift. The bank will verify where the down payment comes from.
Equity: Equity is the difference between the appraised value or purchase price of a house and the total mortgages against that property.
Fixed Rate: A fixed rate mortgage is a mortgage where the interest rate stays the same for the entire term of the mortgage. The most common is a five year fixed rate, this guarantees the borrower that their mortgage payment and interest rate will not change for the entire five year term.
GDS: This is an acronym for Gross Debt Service Ratio. It is how the banks determine the affordability of a mortgage payment. What they do is take your mortgage payment, property taxes, heat and condo fees, they divide into your income and this is your GDS. The bank usually likes your GDS to stay under 32%, however, there is some exceptions to this number.
GE: This is the short form used for Genworth Financial Canada. However, unlike CMHC, Genworth is a private mortgage insurance company that provides mortgage default insurance to the lenders and allows people to buy houses with less than 20% down payment.
High Ratio Mortgage: Unlike a conventional mortgage, a mortgage loan where the borrower puts less than 20% down as their down payment. Either GE or CMHC must insure this type of mortgage, and the total premium is added to the mortgage and extended over the amortization. In a high ratio mortgage GE and CMHC has the final decision on whether the mortgage application is approved.
Interest Adjustment Date: The payment due for the time you live in your home after it closes, until your first mortgage payment is known as the interest adjustment date. It is an interest only payment and is due on the Interest adjustment date.
LTV: This is an acronym for loan to value ratio, it refers to the ratio of the mortgage loan compared to the value of the purchase price, or appraised value of the house. For instance, if you put 5% down payment on the purchase of your house the LTV is 95%.
Maturity Date: The maturity date is the last day of your agreed upon term of your mortgage loan. By the maturity date you must either allow the bank to renew your mortgage, or you must either pay it in full or arrange for financing through another lending institution (this is called a switch).
Mortgagee: Thisis the term in your agreement that refers to the lender.
Mortgage Insurance: This is the insurance provided by CMHC or GE that protects the lender against default. Do not confuse this insurance with mortgage life insurance, or home insurance.
Mortgagor: This is the term in you agreement with the lender that refers to the borrower.
Offer to Purchase: This is a legal agreement between the purchaser and the seller of a home. It is where the buyer offers a price for a property and the seller either rejects or accepts that price. The offer is either firm or conditional. A firm offer is when the buyer presents an offer to the seller that has no conditions attached to it. A conditional offer is when the buyer presents an offer to the seller that has certain conditions attached to it. For instance, unless you have the cash to buy a property outright, you should always put a condition for financing in your offer, it will give you a specified amount of time to secure your financing. PLEASE NOTE it is important to put a financing condition in an offer, even if you have a pre-approval the bank has the right to reject a property that they don’t like.
Open Mortgage: An open mortgage allows the borrower to pay out the entire amount of the mortgage before the maturity date without a penalty. This is an excellent option for anyone who needs a mortgage but thinks it may be necessary to break his or her mortgage before the maturity date. The rates are usually a little higher than a closed mortgage. Nevertheless, if it is necessary for someone to break a mortgage before the maturity date it usually works out less expensive than paying a penalty to break a closed mortgage.
P.I.T: This is an acronym for Principal, interest, and taxes, it refers to your mortgage payment and taxes.
Prepayment Penalty: This is a fee that the borrower must pay to the lender if they want to prepay all, or a higher portion of the mortgage than what is set out in the mortgage agreement, before the maturity date.
Refinance: A refinance is the process of breaking your existing mortgage agreement in order to secure different terms whether for a lower interest rate, or increasing the mortgage to take out your equity. Your current mortgage is discharged and paid out (including any penalties), and a new mortgage is registered with whichever bank you choose.
Renewal: A renewal is what happens when you reach the maturity date on your existing mortgage and your bank offers to renew that mortgage. At this time, the bank can change the terms and conditions of the mortgage. PLEASE NOTE if you want to negotiate your rate or shop around at different lenders for the best rate, you should start at least one month before the maturity date. If you wait for your renewal letter from your bank, it could be too late.
Second Mortgage: A mortgage is referred to as a second mortgage when it is registered against the title of a property in second position. In the case of default, the bank will sell a property to pay out any remaining money that they are owed. By law the mortgages are paid out in the order by which they are registered, the first mortgage is paid first and if there is enough money left the second mortgage is paid out after that. A second mortgage is a higher risk for the bank so the mortgage rates are usually much higher on a second.
TDS: This is an acronym for Total Debt Service Ratio. It is how the banks determine the affordability of a mortgage payment. What they do is take your mortgage payment, property taxes, heat and condo fees, and any other debt you owe, they divide into your income and this is your TDS. The bank usually likes your TDS to stay under 40%, however, there some exceptions to this number.
Term: The term of your mortgage is different from the amortization. The term is the length of time that the payment, interest rate, and mortgage conditions are set. The end of the term is referred to as the maturity date and the mortgage is due in full unless renewed by your bank.
Variable Rate Mortgage: A variable rate is unlike a fixed rate, in that it does not remain the same throughout the term, the interest changes when the prime rate changes (once per month at most). What does remain the same is the relation to the prime rate, for instance, if you have a rate such as prime minus 0.5%, that discount will remain the same but the interest rate you pay will change. |
