Key Mortgage Terms (Glossary)

Amortization

The period of time, up to a maximum of 35 years, required to reduce the mortgage debt to zero when all regular blended payments are made on time and provided the terms (payment and interest rate) remain the same.

Appraisal

A process for estimating the market value of a particular property, usually for financing purposes.

Blended Payments

Equal payments consisting of both a principal and an interest component, paid each month during the term of the mortgage. The principal portion increases each month while the interest portion decreases. The monthly payment does not change during the term.

Closed Mortgage

A mortgage that cannot be prepaid or renegotiated before the term's end unless the lender agrees and the borrower is willing to pay an interest penalty. Many closed mortgages limit prepayment options such as increasing your mortgage payment or lump sum prepayment (usually up to 20% of your original principal amount).

Closing Costs

Costs in addition to the purchase price of the home, such as legal fees, transfer fees and disbursements, that are payable on the closing day. They range from 1.5% to 4% of a home's selling price.

Closing Date

The date at which the sale of a property becomes final and the new owner takes possession.

CMHC

Canada Mortgage and Housing Corporation. A Crown corporation that administers the National Housing Act for the federal government and encourages the improvement of housing and living conditions for all Canadians. CMHC also develops and sells mortgage loan insurance products.

Commitment Letter/Mortgage Approval

Written notification from the mortgage lender to the borrower that approves the advancement of a specified amount of mortgage funds under specified conditions.

Conditional Offer

An offer to purchase subject to specified conditions. These conditions could include the arranging of satisfactory mortgage financing, a satisfactory inspection or the selling of a present home. A time limit in which the specified conditions must be met should be stipulated in the offer to purchase.

Conventional Mortgage

A first mortgage that cannot exceed 80% of the lesser of the appraised value or the purchase price of a property.

Convertible Mortgage

A fixed-rate mortgage which offers the same security as a closed mortgage, but which can be converted to a longer, closed mortgage at any time without penalty.

Credit Report

The main report a lender uses to determine your creditworthiness. It includes information about your ability to handle your debt obligations and your current outstanding obligations.

Deed

A legal document that is signed by both the vendor and purchaser, transferring ownership. This document is registered as evidence of ownership.

Discharge Fee

An administrative fee levied by a lender when you pay out your mortgage. Typically between $200 and $300.

Down Payment

The portion of the home price that is not financed by the mortgage loan. The buyer must pay the down payment from his/her own funds or other eligible sources before securing a mortgage. It generally ranges from 5% to 20% of the purchase price but can be more.

Equity

The difference between the price for which a home could be sold and the total debts registered against it. Equity usually increases as the mortgage is reduced through regular payments. Market values and improvements to the property may also affect equity.

Genworth Financial

Canada's other major player in the mortgage default insurance market alongside CMHC. Unlike CMHC they are a private corporation.

Gross Debt Service Ratio (GDS)

The percentage of the borrower's gross monthly income that will be used for monthly payments of principal, interest, taxes and heating costs (P.I.T.H.) and half of any condominium maintenance fees.

High-Ratio Mortgage

A mortgage loan higher than 80% of the lending value of the property. This type of mortgage may have to be insured against payment default by CMHC or Genworth.

Interest

The cost of borrowing money. Interest is usually paid to the lender in regular payments along with repayment of the principal loan amount.

Interest Adjustment Date (IAD)

A date from which the accrued interest on the mortgage advance is calculated and paid in your first regular payment. This date is usually one payment period before the first regular mortgage payments begin.

Interest Rate Differential (IRD)

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 at 9% with 24 months remaining.
Current 2-year rate is 6.5%.
Differential is 2.5% per annum.
IRD is $100,000 * 2 years * 2.5% p.a. = $5,000.

Lien

A claim against a property for money owing. A lien may be filed by a supplier or a subcontractor who has provided labour or materials but has not been paid, or by a lender using the property as collateral for a loan.

Loan-to-Value Ratio

The ratio of the loan amount to the lending value of a property expressed as a percentage. For example, if there is a loan of $90,000 on a home valued at $100,000, the loan to value would be 90%.

Lump Sum Prepayment

An extra payment, made in lump sum, to reduce the principal balance of your mortgage, with or without penalty. A closed mortgage typically restricts the amount and frequency of the prepayments you can make. With an open mortgage, however, you can make a lump sum prepayment at any time without penalty. Making prepayments can help you pay off your mortgage sooner and ultimately save on interest costs over the life of your mortgage.

Maturity Date

The last day of the term of the mortgage. On this day, the mortgage loan must either be paid in full or the agreement renewed.

Mortgage Life Insurance

Mortgage life insurance provides coverage for your family should you die before your mortgage is paid off. This insurance can be purchased through your lender and the premium added to your mortgage payments. Benefits are paid to the mortgage holder.

Mortgage Loan Insurance

If you have a high-ratio mortgage (more than 80% of the appraised value of the property) your lender will require mortgage loan insurance, which is available from CMHC or Genworth.

Mortgage Payment

A regularly scheduled payment that typically includes both principal and interest.

Offer to Purchase

A written contract setting out the terms under which the buyer agrees to buy the home. If the Offer to Purchase is accepted by the seller, it forms a legally binding contract that binds those who have signed it to certain terms and conditions.

Open Mortgage

A mortgage that can be prepaid or paid off or renegotiated at any time and in any amount without interest penalty. The interest rate on an open mortgage is usually higher than a closed mortgage with an equivalent term.

Principal

The amount that you borrow for a loan. Each monthly mortgage payment consists of a portion of the principal that must be repaid plus the interest that the lender is charging you on the outstanding loan balance. During the early years of your mortgage, the interest portion is usually larger than the principal portion.

Property Taxes

Taxes charged by the city or municipality where the home is located based on its value. In some cases the lender will collect a monthly amount to cover your property taxes, which is then paid by the lender to the municipality on your behalf.

Term

The term of a mortgage is the length of time that the mortgage conditions, including the interest rate you pay, are carried out. Terms are usually between six months and ten years. At the end of the term, you either pay off the mortgage or renew it, possibly renegotiating its terms and conditions.

Title

A freehold title gives the holder full and exclusive ownership of the land and building for an indefinite period. A leasehold title gives the holder the right to use and occupy the land and building for a defined period.

Title Insurance

Insurance against loss or damage caused by a matter affecting the title to immoveable property, in particular by a defect in the title or by the existence of a lien, encumbrance or servitude.

Total Debt Service Ratio (TDS)

The percentage of gross monthly income required to cover the monthly housing payments and other debts, such as car payments.

Vendor Take Back Mortgage

This is where the vendor rather than a financial institution finances the mortgage. The title of the property is transferred to the buyer who makes mortgage payments directly to the seller. These types of mortgages, sometimes referred to as take-back mortgages, can be helpful if you need a second mortgage to by a home.