Mortgage terms explained.
Adjustable Rate Mortgage
A mortgage loan that allows the lender to periodically adjust the interest rate in accordance with a specified index. With an adjustable rate mortgage, your interest rate may change from time to time as a result of changes in the prime rate. If the interest rate decreases, your payment amount decreases and if the interest rate rises, your payment amount increases.
Agreement of Purchase and Sale
A legal agreement between the seller and the buyer of a home. The offer may be firm (no conditions attached), or conditional (certain conditions must be fulfilled before the deal can be closed).
The period of time it will take to fully pay off the principal amount of a mortgage. This is usually 25 years for a new mortgage, however can be greater, up to a maximum of 35 years.
The process of determining the value of property, usually for lending purposes, and is carried out by an appraiser. The appraiser charges a fee for the appraisal report which contains an opinion as to the value of the property and the reasoning leading to this opinion.
An estimate of the value of the property. This value may or may not be the same as the purchase price of the home.
Payments consisting of both a principal and an interest component, paid on a regular basis (e.g. weekly, biweekly, monthly) during the term of the mortgage. The principal portion of payment increases, while the interest portion decreases over the term of the mortgage, but the total regular payment usually does not change.
Canada Mortgage and Housing Corporation (CMHC)
The Corporation of the Federal Government that provides mortgage insurance to lenders and protects them from losses resulting from borrower default. The CMHC administers the National Housing Act (NHA) and encourages the improvement of housing and living conditions for all Canadians.
Certificate of Location or Survey
A document specifying the exact location of the building on the property and describing the type and size of the building including additions, if any.
Certificate of Search or Abstract of Title
A document setting out instruments registered against the title to the property, e.g. deed, mortgages, etc.
A mortgage agreement that cannot be prepaid, renegotiated or refinanced before maturity. With a closed mortgage, paying your balance before the term's end can result in prepayment charges. However, closed mortgages can offer prepayment privileges, such as the option to make a prepayment of 10-20% of your original principal balance each year without paying any charges. The opposite of a closed mortgage is an "open mortgage".
Various expenses associated with purchasing a home. These costs can include, but are not limited to, legal/notary fees and disbursements, property land transfer taxes, as well as adjustments for prepaid property taxes or condominium common expenses, if any.
The date on which the sale of a property becomes final and the new owner usually takes possession.
CMHC Insurance Premium
The amount of money required to be paid in order to obtain mortgage default insurance from CMHC. Mortgage default insurance insures the lender against loss in case of default by the borrower. Mortgage insurance is provided to the lender by CMHC and the premium is paid by the borrower.
An offer to purchase subject to conditions. These conditions may relate to financing, or the sale of an existing home. Usually a time limit in which the specified conditions must be satisfied is stipulated.
A mortgage that does not exceed 80% of the purchase price of the home. Mortgages that exceed this limit must be insured against default, and are referred to as high-ratio mortgages (see below).
The relationship between what your debt and operating liabilities are compared to your gross income (before tax).
Deed (Certificate of Ownership)
The document signed by the seller transferring ownership of the home to the purchaser. This document is then registered against the title to the property as evidence of the purchaser's ownership of the property.
A sum of money deposited in trust by the purchaser when making an offer to be held in trust by the vendor's agent, broker, lawyer or notary until the closing of the transaction. It often becomes part of the down payment if the offer is accepted or it is returned if the offer is rejected.
The amount of money that a home buyer pays towards the purchase price of the home. In many cases the buyer borrows the rest of the purchase price from a lender and the lender registers a mortgage as security for repayment. If the buyer's down payment is less than 20% of the purchase price, the mortgage will be a high-ratio mortgage.
The difference between the market value of the property and the total debts registered against it.
Before a mortgage can be advanced, the purchaser must have arranged fire insurance. A certificate or binder from the insurance company may be required on closing.
An offer to buy the property as outlined in the offer to purchase with no conditions attached.
A mortgage having an interest rate that does not change during the term. A fixed rate mortgage enables you to predict your monthly payments and it provides the security of knowing in advance how much of your mortgage principal will be paid off at the end of the term.
A legal procedure in which the lender eventually obtains ownership of the property after the borrower has defaulted on payments.
Gross Debt Service (GDS) Ratio
The percentage of a borrower's gross income (before tax) needed to cover payments for housing costs, including principal, interest, taxes, heating costs and condominium fees (if applicable).
Gross Household Income
Gross household income is the total salary, wages, commissions and other assured income, before deductions, by all household members who are co-applicants for the mortgage.
High Ratio Mortgage
A High Ratio Mortgage is a mortgage with a principal amount that is more than 80% of the property's value. The mortgage must be insured and borrowers must pay an application fee and the insurance premium (which could be added to the mortgage).
An amount of money required to be withheld by the lender during the construction or renovation of a house to ensure that construction is satisfactorily completed at every stage.
A type of insurance that would respond for certain types of damage to your home or its contents. Your lender will require that you keep adequate property insurance coverage in effect during the term of your mortgage.
The examination of the house by a building inspector selected by the purchaser to determine the condition of the home, identify any needed repairs and list the cost.
Money paid by a borrower to a lender for the use of the lender's money. The amount of interest charged by a lender is usually expressed as an annual percentage rate called the mortgage interest rate.
Interest Rate Differential Amount (IRD)
An IRD amount is a compensation charge that may apply if you pay off your mortgage principal prior to the maturity date or pay the mortgage principal down beyond the prepayment privilege amount. The IRD amount is calculated on the amount being prepaid using the IRD which is equal to the difference between your existing mortgage interest rate and the interest rate that we can now charge when re-lending the funds for the time remaining on your term.
Short-term financing to help a buyer bridge the gap between the closing date on the purchase of a new home and the closing date on the sale of the current home.
Last day of the term of the mortgage agreement. The mortgage agreement must be either renewed or the balance paid in full on or prior to the maturity date.
Mortgage payment amount
Amount that the borrower is required to pay to the lender on a regular basis during the mortgage term.
The lender of a mortgage.
The borrower of a mortgage.
A mortgage which can be prepaid at any time, without penalty. The opposite of an "open mortgage" is a "closed mortgage."
The choice of making regular mortgage payments every week, every other week, twice a month or monthly.
The process through which a borrower transfers or "ports" the remainder of their existing mortgage from one property to a new property. In most cases both the borrower and the property must meet the new lender's approval criteria.
If a borrower makes a prepayment of the mortgage in an amount greater than the Prepayment Privilege, that borrower may incur a Prepayment Charge, which is an amount that a borrower must pay in addition to any prepayment amount.
The amount of money that a borrower is allowed to pay against the principal balance of the mortgage each year without incurring additional charges.
Refinance or Renegotiate
Change the conditions of your mortgage before its maturity date. Often a mortgage is refinanced to obtain a lower interest rate or to take additional funds.
Extend the mortgage agreement with the same lender when it matures. If you decide not to renew your mortgage, it must be paid out at maturity.
Period of time over which the interest rate, payment and other conditions are set. At the end of the term, the mortgage has to be paid in full or renewed. Not to be confused with amortization period. For example, a mortgage could have a term of 5 years and an amortization period of 25 years.
Total Debt-Service Ratio
The percentage of a borrower's gross income (before tax) needed to cover payments for housing costs, including principal, interest, taxes, heating costs and condominium fees (if applicable), and all other debts and obligations, such as loans and credit cards.