mortgage glossary
Agreement of Purchase and Sale
The legal contract entered into by a purchaser and a seller. It is recommended that you have your offer prepared by a professional realtor who possesses the knowledge and experience to protect you effectively with the most appropriate clauses and conditions.
Amortization Period
The number of years it takes to repay the entire amount of the financing, based on a fixed set of payments.
Appraisal
The process of determining the market value of a property.
Assets
Items that you own or have access to. These are often used when determining net worth or securing financing.
Canada Mortgage and Housing Corporation (CMHC)
CMHC is a federal Crown corporation that administers the National Housing Act (NHA). In addition to other services, they insure mortgages for lenders that exceed 80% of the purchase price or appraised value of the home. The borrower pays for the cost of this insurance, which is typically added to the mortgage. These types of mortgages are often referred to as 'Hi-Ratio' mortgages.
Closing Date
The date when the new owner takes possession of the property and the sale is finalized.
Collateral
An asset, such as a term deposit, Canada Savings Bond, or automobile, that is pledged as security for a loan.
Credit Scoring
A system that evaluates a borrower based on various factors, assigning points that are used to determine the borrower's creditworthiness.
Deposit
A sum of money placed in trust by the purchaser when making an offer to purchase. Once the vendor (seller) accepts the offer, the deposit is held in trust by the listing real estate broker, lawyer, or notary until the sale closes, at which time it is transferred to the vendor. If the sale does not close due to the purchaser's failure to comply with the terms of the offer, the deposit is forfeited and given to the vendor as compensation for the breach of contract.
Equity
The difference between the market value of the property and any outstanding mortgages registered against it. This difference belongs to the property owner.
Mortgage
A loan in which real estate serves as collateral. Once the loan is fully repaid, the lender provides a discharge for the mortgage.
Mortgagee
The financial institution or person (lender) who lends money secured by a mortgage.
Mortgagor
The borrower who secures a loan with a mortgage.
First Mortgage
A debt registered against a property that holds the primary claim on the property.
Prime
Prime is the base rate lenders use — your variable mortgage rate moves up or down with it.
Fixed-Rate Mortgage
A mortgage where the interest rate is set for the entire term of the mortgage.
Variable Rate Mortgage
A mortgage where the interest rate fluctuates in response to changes in the prime interest rate.
Blended Payments
Equal payments consisting of both principal and interest components. Although the total payment remains the same, the portion going towards the principal increases while the portion going towards interest decreases.
Closed Mortgage
A mortgage that cannot be prepaid or renegotiated for a fixed period of time without incurring penalties.
Guarantor
A person with an established credit rating and sufficient income who agrees to repay the loan if the borrower defaults.
High-Ratio Mortgage
A mortgage that exceeds 80% of the purchase price or appraised value of the property. Such mortgages must be insured. To avoid the cost of this insurance, a first mortgage up to 80% is arranged, with a second mortgage for the balance, up to 90% of the purchase price.
Conventional Mortgage
A mortgage that covers up to 80% of the purchase price or value of the property. Mortgages exceeding 80% are known as 'Hi-Ratio' mortgages, which require insurance.
Home Equity Line of Credit
A personal line of credit secured against the borrower’s property. Typically, up to 75% of the purchase price or appraised value can be borrowed through this product.
Interest Adjustment Date (IAD)
The date on which the mortgage term begins, usually the first day of the month following the closing. The interest cost for the days between closing and the first of the month is typically paid at closing. Closing near the end of the month is often recommended.
Interest-Only Mortgage
A mortgage where only the monthly interest is paid, leaving the principal amount outstanding. The payment is lower compared to an amortized mortgage because no principal is being paid.
Open Mortgage
A mortgage that can be repaid at any time during the term without penalty. Due to this flexibility, the interest rate is typically 0.75-1.00% higher than that of a closed mortgage. It’s an ideal option if you plan to sell your property or fully pay off the mortgage. *Some conditions may apply.
Portable Mortgage
An existing mortgage that can be transferred to a new property. Porting your mortgage can help avoid penalties, particularly if the interest rate is significantly lower than current rates.
Prepayment Penalty
A fee charged by the lender if the borrower repays part or all of the mortgage before the agreed-upon terms. The typical penalty is the greater of the Interest Rate Differential (IRD) or three months' interest.
Principal
The original amount of a loan before interest is applied.
Refinance
The replacement of an existing debt with a new debt under different terms. Commonly, this involves refinancing a home mortgage. Refinancing can be done for several reasons:
1.) To take advantage of a better interest rate (leading to lower monthly payments or a shorter term).
2.) To consolidate multiple debts into one loan (which results in a longer term).
3.) To reduce monthly payments (resulting in a longer term).
4.) To adjust risk (e.g., switching from a variable-rate to a fixed-rate loan).
5.)To release cash (resulting in a longer term).
Breaking your mortgage contract to refinance at a new rate and term may incur a prepayment charge to cover lost interest income for the financial institution. The prepayment charge is typically based on three months' interest or the interest rate differential (the difference between your current mortgage rate and the new refinancing rate), whichever is higher.
Renewal
When the mortgage term ends, it’s time to renew. You may prepay part or all of the mortgage and either renew with the same lender or transfer to a new lender. Banks typically offer only posted rates during renewal. They may try to offer you a higher rate, knowing many homeowners are reluctant to shop around. You may need to negotiate for a better rate.
Second Mortgage
A debt registered against a property that holds a secondary claim on the property.
Switch
Transferring an existing mortgage from one financial institution to another. We can arrange this for you at no cost.
Term
The length of time covered by the financing agreement. Available terms include 6 months, 1 year, 2 years, 3 years, 4 years, 5 years, 6 years, 7 years, or 10 years, with interest rates fixed for the selected term.
