Mortgage A-Z’s

Adjustable Rate Mortgage (ARM): A mortgage with a variable interest rate, which adjusts monthly, biannually, or annually, as rates change.

Agreement of Purchase and Sale: The legal contract a home purchaser and home seller enter into. Having your offer prepared by a professional realtor that has the knowledge and experience to satisfactorily protect you with the most suitable clauses and conditions will ensure the transaction flows more smoothly.

Amortization Period: The actual number of years it will take to completely pay off a mortgage loan, provided the payment schedule is adhered to. Amortization is technically, the life of the mortgage. The standard amortization is 25 years, but the maximum amortization period available in Canada is 35 years with some lenders.

Appraisal: A valuation done on a home by a qualified appraiser to determine the market value of the property.

Assumption Mortgage Agreement: A legal agreement between the buyer and the seller that requires the buyer to assume responsibility for the obligations of an existing mortgage. If a buyer assumes a mortgage from a seller, the seller should try to get a release from the mortgage company to ensure that they are no longer liable for the debt in the even the buyer defaults. This type of mortgage agreement can be risky.  

Blended Payments: Payments including both a principal and interest component. Typically, mortgage payments are blended. At the beginning of your payment schedule more of your payment goes towards paying the interest, but nearing the end of your mortgage life, more of the payment is applied towards the principal.

Closed Mortgage:  A mortgage product that locks you into a specific payment schedule. A penalty will usually apply if you make a payment over and above what is allowed according to the terms of the agreement, or if you repay the loan in full before the end of a closed term. A closed mortgage can also be referred to as a fixed-rate mortgage.

Compound Period: The number of times per year in which the interest rate is compounded. In Canada, mortgages are generally compounded semi-annually, which is twice per year.

Condominium Fee: A common payment that condo owners are required to pay to the Condominium Holding Company, that covers common expenses associated with the condominium maintenance and development (i.e. snow removal, building maintenance, landscaping, etc.)

Conventional Mortgage: A loan issued for up to 80% of the property’s appraised value or purchase price, whichever is less.

Credit Score: An system that evaluates the credit worthiness of a borrower, assigning points based on their credit payment habits and other factors. The higher the score the better.

Deposit on Purchase: A sum of money submitted at the time an offer to purchase is made, which supports the integrity and validity of the offer.

Down Payment: An upfront payment to the seller of a property for a portion of the sale price, usually a minimum of 5%. The remainder of the sales price determines the amount of the mortgage.

Equity: The value of a property less any and all existing liens, debts, or mortgages registered against it. If a borrower owns a property worth $500,000 and has liens, debts, or mortgages registered against it totalling $400,000, equity is $100,000.

First Mortgage: A debt registered against a property by the lender giving them first call on that property. 

Gross Debt to Service Ratio (GDS): A mathematical calculation used by lenders to determine a borrower’s ability to repay a mortgage. It takes into account the mortgage payments, property taxes, and an estimated heating cost, and this sum is then divided by the gross income of the applicant(s). The result must be within certain predetermined guidelines in order for an applicant to be approved.

Guarantor: A person with an established credit rating and sufficient earnings who may be added to a mortgage application to increase the chances of an approval. The guarantor guarantees to repay the loan for the borrower if the borrower does not. A guarantor may be removed from the property title and mortgage after a period of time.

High-Ratio Mortgage: A mortgage that exceeds 80% of the home’s appraised value or the purchase price, whichever is lower. High-ratio mortgages must be insured by a mortgage insurer (such as CMHC, Genworth, Canada Guaranty), who will guarantee [to the lender] that the mortgage will not go into default. In cases where mortgage insurance is required, the mortgage application must also be reviewed by the mortgage insurer as well as the mortgage lender.

Home Equity Line of Credit: A personal line of credit that is secured against the borrower’s property.

Interest Adjustment Date (IAD): Typically, the IAD is the date interest costs are paid for the days between closing and the beginning of the pay cycle.

Interest Rate: A rate that is charged or paid for the use of money. An interest rate is often expressed as an annual percentage of the principal. It is calculated by dividing the amount of interest by the amount of principal. An interest rate may be fixed, which means it is constant for the duration of the mortgage term despite fluctuations in the marketplace, or variable, which means that it changes in accordance with the rates in the marketplace.

Land Transfer Tax: If you buy land, or an interest in land, in Ontario, you must pay Ontario’s land transfer tax. The amount of land transfer tax ranges from approximately 0.5% to 4% of the purchase price, and is paid by the purchaser of a property at the time of closing. It is based on the selling price of the house and is applied whenever the title of a property is transferred from one owner to another. If you are a first time homebuyer, rebates may be available to cover some or all of the cost of this tax.

Loan Term: A part of the mortgage amortization. The actual length of a mortgage contract from 6 months to 10 years at the end of which one of three things will happen: 1) The mortgage may be paid out without penalty, either with cash or with funds from a new mortgage elsewhere. 2) The lender may ask that the loan be paid out. This can happen in cases where the loan was not paid in a responsible manner and the lender no longer feels the borrower is a good credit risk. 3) The lender renews the mortgage for another term, and new payments are calculated based on the current interest rate criteria.

Loan to Value Ratio (LTV): The ratio of the loan to the appraised value or purchase price of the property, whichever is lower.

Mortgage Default Insurance: In cases where there is not a minimum of 20% down on a home, a lender will require that the borrower buys mortgage insurance, from a Mortgage Insurer such as CMHC, to protect the mortgage balance from default. Mortgage Insurance does not relate to fire or life insurance; it means that the mortgage payments or balance are guaranteed to be paid to the lender in the event of default. In other words, the mortgage insurer guarantees that the mortgage lender won’t lose money on that mortgage, providing relevant criteria are met.

Mortgage Payments: A combination of principal and interest that is paid on a regular basis towards a mortgage loan and, if paid according to a schedule, will ultimately result in paying off the mortgage. Payments schedules may be set up monthly, semi-monthly, bi-monthly, weekly, bi-weekly, or accelerated bi-weekly. Each payment frequency will alter the length of time a mortgage will take to be paid in full.

Mortgage Professional: That’s me! I am your go-to resource for any of your mortgage needs. I can help you get mortgage ready, save money on your mortgage, and get mortgage free faster. As your Personal Mortgage Coach, I am at your service from the moment you begin thinking about a mortgage. I will help strengthen your financial and credit position to maximize the approvability of your mortgage application. Then, once your mortgage has been funded, I will ensure you have access to the tools that make home ownership a positive experience.

Non-bank/ Private Lender: A mortgage lending company that originates loans for the purposes of a home purchase. Private lenders are often used for higher risk applicants.

Open Mortgage: This product allows partial or full payment of the principal at any time, without penalty. An open mortgage can also be referred to as a variable rate mortgage.

Portability: A mortgage option that enables borrowers to take their current mortgage with them to another property, without penalty, provided certain conditions are met.

Pre-approved Mortgage: Indicates the likelihood of an approval for an estimated mortgage amount before you start shopping. Not a guarantee for approval, and not to be confused with a pre-qualification.

Pre-payment Privileges:  Extra payments allowed to be paid towards mortgage principal in addition to regular mortgage payments.

Pre-qualified Mortgage:  A commitment by a lender which gives you an approval for a mortgage of a given amount. A prequalification is given only after a mortgage application is completed and all documentation is verified. If you have a pre-qualification you can feel comfortable making an offer on a home without a financing condition, knowing that you have your financing guaranteed.

Prime Rate: The interest rate banks charge to their most creditworthy customers. The rate is determined by market forces. In Canada, the prime lending rate is determined by the Governor of the Bank of Canada.

Principal: The amount borrowed or still owing on a mortgage loan. Interest is paid on the principal amount, it is not included in the principal amount.

Refinancing: Paying off the existing mortgage and arranging a new one, or renegotiating the terms and conditions of an existing mortgage. Refinances are often done to take equity out of the home for renovations, landscaping, or travelling. Refinances are also done to take advantage of lower interest rates. Penalties may apply if a mortgage is being paid out prior to the end of the term.

Renewal: A time for re-negotiation of a mortgage loan, at the end of a term, for a new term.

Total Debt to Service Ratio (TDS): A second mathematical calculation used by lenders to determine a borrower’s capacity to repay a mortgage. The TDS included payments for the mortgage, property taxes, approximate heating costs, and monthly obligations such as loans, lines of credit, credit cards, and other mortgages, and this sum is then divided by the gross income of the applicants. Like the GDS, the result of the TDS must be within certain predetermined guidelines in order for an applicant to be approved.

Vendor Take Back (VTB) Mortgage: When the seller of the home (vendor) provides the mortgage funds to the buyer of the home.