Glossary

What does all of this terminology mean?

Adjustments on Closing

There are two types of adjustments for which a buyer can be charged on closing;

  1. 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-rated 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’ths (the number of days remaining in the year) of the total paid for the year.

  2. 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 weeks 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 weeks, by definition.

Amortization

The time it takes to pay off the principal balance of the mortgage, usually by a combination of equal periodic payments 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 available in Canada is 35 years.

Appraisal

This is an estimate of the current value of the property (the ‘subject property’), using one or both of the following techniques;

  1. 1.The majority of residential appraisals use the market value comparison approach, 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.

  2. 2.A supporting measurement of value used by many appraisers is the “depreciated cost” approach, 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.

Assignment of Interest

Most Provinces allow a legal assignment of interest in a mortgage to have full legal effect without having to discharge and re-register the existing one. This is particularly useful in:

  1. Switch situations, where the costs of transferring lenders would otherwise be very high.

  2. Second mortgage situations where a postponement may be difficult to obtain.

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 are now higher), as well as saving on the legal costs of creating and registering a whole new mortgage. “Assumption” entails a simple amendment to the mortgage document registered on title.

Benchmark Rate

See Qualifying Rate.

Blend & 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 Agent

A Realtor who acts contractually on behalf of the buyer. Traditionally, and still in most cases, the Realtor is the Agent of the Sellers and is paid by them out of the proceeds of the sale. A Buyer’s Agency Agreement allows a Realtor (with full disclosure to the sellers or their agent) to negotiate on behalf of the buyer, with no legal conflict of interest. The seller still pays the Buyer’s Agent fees, but this is always spelled out and acknowledged in the Offer to Purchase.

Canada Mortgage & 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. (CMHC website)

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”.

Cash Back Option

In this type of option, the borrower receives an amount of cash on closing that represents a percentage of the total loan. The amount of the cash back option can range from 1% to 7%, depending on the lender and mortgage product. Most cash back options come with a higher rate of interest. This is designed to offset the cost of advancing additional monies that do not have to be repaid by the borrower. If the borrower decides to refinance their mortgage during the term, they will be required to repay a portion(called a clawback) of the amount received under this option.

Example:

$250,000 mortgage, 5yr term, 5% cash back. Borrower wants to refinance with different lender after 3yrs.

=$250,000 x 5% x (60 month term – 36 months already paid) / 60

=$12,500 x 24 / 60

=$12,500 x  0.4

=$5,000 (amount borrower would be required to repay)

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.

Closing

The final exchange of consideration and legal completion of a transaction, involving either a house purchase, a mortgage registration, or both.

Collateral Mortgage

A loan attached to a promissory note and backed up by the collateral security of a mortgage on a property.

Conventional Mortgage

A mortgage usually amounting to 80% (Loan to Value ratio) or less of the value of the property.

Conventional Insured/Insurable Mortgage

A mortgage amounting to 80% (Loan to Value ratio) or less of the value of the property which is insured or meets with insurer requirements. Usually has a 25 year amortization or less and needs to qualify at the benchmark rate.

Convertible Mortgage

This allows you to convert your mortgage to a new one of longer term while it is still in effect.

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.

Compliance Letter

Required in many municipalities throughout Canada before a property transfer can take place. This is an acknowledgement from the building department that the property either has, or is clear of outstanding work-orders. Work-orders are specific clean-up or fix-up requirements that the owner must complete, particularly before a transfer of ownership.

Commitment

A written commitment(or “Approval”) 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, 90 or 120 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.

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.

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

The amount of cash paid towards the purchase transaction by the buyer of a home. This is also known as the purchaser’s initial “equity” in the property, but is used by a lender to judge the personal commitment to the property. For example, a lender considers that, if a buyer saved the down payment, or received it as a gift from a loved one, they will be far more committed to maintaining the property value and making the mortgage payments than if they acquired it for “no money down”.

Equity

The difference between the value for which you could sell your property and what is owed against it. There is an important distinction from “down payment” to a lender. For example, if a buyer purchases a home without a down payment, he/ she can have “equity” if the value of the property quickly goes up.

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, 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

This allows buyers to obtain up to 95% financing on properties up to a certain value. The loan must be insured against default by one of Canada’s default insurance companies.

Genworth Financial Canada

One of Canada’s private default mortgage insurer. For more details see Mortgage Insurance.

Gross Debt Service Ratio (GDSR)

The percentage arrived at by dividing your monthly shelter costs (principal, interest, property taxes, heating and half of condo fees) by your gross monthly income and multiplying by 100. This is used by all lenders as a yardstick by which to measure the ability of a borrower (or borrowers) to make mortgage payments. For example, most lenders require that this ratio be no more than 32% for a particular application, while others allow higher limits. This is also the maximum qualifying GDSR for most default insurance applications.

Happiness

The feeling you receive by letting mortgagesbycraig handle your mortgage needs.

Hedge

A fairly complex money market instrument the simple purpose of which is essentially to insure a mortgage lender (or borrower, through a protected or split-term mortgage) against interest rate movements. In the lender’s case the price of this insurance will vary depending upon many political and economic factors, but will generally be lower when interest rates and the economy are less volatile. The buyer on the other hand can hedge at no cost, or at a reasonable rate premium by using specifically designed products.

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

A report commissioned by a property owner or purchaser, usually to verify the condition of a property prior to the “firming up” of a Real Estate transaction. The scope and detail may vary, but most reports indicate the specific problem and the cost to repair. Unfortunately, no licensing is required, and this service is not specifically regulated other than by general consumer protection legislation. The best safeguard against inadequate work is to ask for the resume of the Inspector, and if possible check references from previous customers.

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:

$275,000 mortgage balance at 5.95% with 22 months remaining.

Current 2-year rate is 3.5%.

Differential is 2.45% (5.95%-3.5%) per annum.

IRD is $275,000 x 2.45% /12 x 22 = $12,353

Land Transfer Tax (LTT)

A tax payable to the Provincial Government by the purchaser upon the transfer of title from a seller. In Ontario a simple formula applies:

  1. One half percent (0.5%) on the first $55,000

  2. One percent (1.0%) on the next $195,000 ($55,000 – 250,000)

  3. One and a half percent (1.5%) on the next $150,000 ($250,000-$400,000)

  4. Two percent (2.0%) on amounts over $400,000

Example:

Price = $460,000

LTT = ($55,000 x 0.5%) + ($195,000 x 1%) + ($150,000 x 1.5%) + ($60,000 x 2%)

OR $275 + $1,950 + $2,250 + $1200

= $5675.

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)

The percentage of the value of the property for which a mortgage is required. This ratio is important in determining whether or not default insurance is required, and if so, what the cost of that insurance will be (see “Mortgage Insurance”) For example, if the property value is $200,000, the down payment available is $20,000 and the required mortgage is $180,000. The LTV is $180,000 / $200,000 or 90%.

Mortgage

Also known as the “lender” – the funder and holder of the mortgage

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 arrange financing for “A+” clients as well as 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.

Mortgage Insurance

If your down payment is less than 20% of the purchase price of the property, the lender is going to require mortgage insurance. The fee is calculated as a percentage of your mortgage. This is known as default insurance.

Multiple Listing Service

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

Special levies can be charged by municipalities to recover the cost of special services, if these services cannot, for some reason, be funded out of general revenues, or apply primarily to homebuyers. Examples: Water meter installation; road improvements, sewer improvements.

Open Mortgage

This allows you to pay back the borrowed funds without notice or penalty.

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.

Principal

The amount of money owing on your mortgage, including accrued unpaid interest.

Prepayment Privilege

The right to repay periodically more than the scheduled principal payment.

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.

Portable Mortgage

A mortgage which allows you to transfer the existing amount and terms of your mortgage over to a new property without 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.

Qualifying Rate

Mortgages with variable rates or fixed terms five years and under typically require that you qualify at a higher rate (sometimes called the “benchmark rate.”). For example, if you apply for a 2.25%, 5-year variable mortgage, the lender might make you qualify at their posted 5-year rate (5.39% for example). Qualifying rates are used to ensure borrowers can handle their payments if rates go up. In practice, lenders use the qualifying rate to calculate your debt service ratios. Lenders then check to ensure your debt ratios are low enough to meet their guidelines. Here are a few things to keep in mind:

  • Your payments are typically based on the contract rate (i.e., the regular rate you are quoted), not the qualifying rate.

  • As of October 17, 2016, all insured mortgages must be qualified using the posted 5-year fixed rate, as published every Wednesday by the Bank of Canada.

  • Some lenders also apply the Bank of Canada qualifying rate to uninsured mortgages, and mortgages with a loan-to-value of 80% or less.

  • Other lenders allow lower qualifying rates if the loan-to-value is 80% or less (e.g.  they use a 3-year discounted fixed rate instead of the posted 5-year fixed rate).

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.

Refinance

Obtaining a new mortgage on an existing property. You might be looking for more money, a better rate, or different prepayment terms. As of July 9, 2012, the maximum amount you can refinance your mortgage to is 80% of current appraised value.

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. Lenders might allow the title insurance in lieu of a survey.

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.

Term

Length of time that your mortgage agreement covers & for which your interest rate is guaranteed (usually 6 months to 10 years).

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. 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.”

Transfer

This is the term almost universally applied to changing lenders during or at the end of a term, when the mortgage matures.

Total Debt Service Ratio (TDSR)

The percentage arrived at by dividing your monthly shelter costs (principal, interest, property taxes, heating and half of condo fees) PLUS all other monthly debt obligations by your gross monthly income and multiplying by 100. This is used by all lenders as the “upper limit” yardstick by which to measure the ability of a borrower (or borrowers) to make mortgage payments. For example, most lenders require that this ratio be no more than 40%.

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

The process of deciding whether or not to lend you money (or how much to lend you) based on all the information you have given the lender. Every lender has a different underwriting process and lending criteria which differ to some (usually small) extent from other lenders.

Variable Rate Mortgage

The interest rate fluctuates with the prime rate at the chartered banks.

Verification of Employment

The lender will sometimes contact an applicant’s employer in order to verify information provided in a mortgage application or a job letter; your income structure, length of employment, position, and so on.