A Glossary of Mortgage Terms - Understanding Mortgages
A
Amortization
The number of fixed payments or years it takes to pay back the entire amount of the mortgage loan.
Assumption Agreement
A legal document signed by a home buyer which requires the buyer to assume responsibility for the obligations of a mortgage made by a former owner.
B
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, but the total monthly payment does not change.
C
Canada Mortgage and Housing Corporation (CMHC)
The National Housing Act (NHA) authorized Canada Mortgage and Housing Corporation (CMHC) to operate a Mortgage Insurance Fund which protects NHA Approved Lenders from losses resulting from borrower default.
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 Title
A document setting out instruments registered against the title to the property - e.g. deed, mortgages, etc
Closed Mortgage
A mortgage agreement that cannot be prepaid, renegotiated or refinanced before maturity, except upon payment of a prepayment penalty.
Closing Date
The date on which the sale of a property becomes final and the new owner usually takes possession.
Conditional Offer
An offer to purchase subject to conditions. These conditions may relate to financing, or the sale of an existing home. Usually a time limit is stipulated in which the specified conditions must be satisfied or removed.
Conventional Mortgage (Fixed-rate mortgage)
A mortgage that does not exceed 75% of the appraised value or purchase price of the property, whichever is less. Mortgage loan insurance is usually not required for this type of mortgage.
D
Debt-service Ratio
The percentage of the borrower's gross income that will be used for monthly payments of principal, interest, taxes, space heating costs and condominium fees.
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.
Default
Non-payment of the installments due under the terms of the mortgage(s).
Deposit
A sum of money deposited in trust by the purchaser when making an offer to be held in trust by the seller's agent, broker, lawyer or notary until the closing of the transaction.
Discharge
The removal of all mortgages and financial encumbrances on a property.
E
Equity
The interest of the owner in a property over and above all claims against the property. It is usually the difference between the market value of the property and any outstanding encumbrances.
F
Fire Insurance
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.
Firm Offer
An offer to buy the property as outlined in the offer to purchase with no conditions attached.
Fixed Rate Mortgage
A mortgage for which the rate of interest is fixed for a specific period of time (the term).
Foreclosure
A legal procedure whereby the lender eventually obtains ownership of the property after the borrower has defaulted on payments.
G
Gross Debt Service (GDS) Ratio
The percentage of gross income required to cover monthly payments associated with housing costs. Most lenders recommend that the GDS ratio be no more than 32% of your gross (before tax) monthly income.
H
High Ratio Mortgage
If you don't have 20% of the lesser of the purchase price or appraised value of the property, your mortgage must be insured against payment default by a Mortgage Insurer, such as CMHC or Genworth. Today, with CMHC's new rules it is possible for some borrowers to purchase a home with as little as 5% down.
Holdback
An amount of money required to be withheld by law by the lender during the construction or renovation of a house to ensure that construction is satisfactorily completed at every stage.
I
Inspection
The examination of the house by a building inspector selected by the purchaser.
M
Mortgage Insurance Premium
A premium which is added to the mortgage and paid by the borrower over the life of the mortgage. Mortgage insurance protects the lender against loss in case of default by the borrower.
Mortgagee
The lender.
Mortgagor
The borrower.
Maturity Date
Last day of the term of the mortgage agreement.
Mortgage Life Insurance
In the event of the death, accidental dismemberment or terminal illness of the mortgagor(s), the insurance will pay the balance owing on the mortgage. The intent is to protect survivors from loss of their home.
O
Open Mortgage
A mortgage which can be prepaid at any time, without penalty.
P
P.I. (Principal & Interest)
Principal and interest due on a mortgage.
P.l.T. (Principal, Interest, & Taxes)
Principal, interest and taxes due on a mortgage.
Penalty
A sum of money paid to a lender for the privilege of prepaying a mortgage in part or in full.
Prepayment Option
The right to prepay all or a portion of the principal balance. Prepayment charges may be incurred on the exercise of prepayment options.
Pre-Approved Mortgage
Essentially a rate hold on the borrower's application for a mortgage to a certain maximum amount and rate. Generally issued for a certain time period, e.g. 90 or 120 days. Subject to limitations and final approval.
Pre-payment Penalty
A fee charged by the lender when the borrower prepays all or part of a closed mortgage more quickly than as set out in the mortgage agreement.
Principal
The mortgage amount actually borrowed.
R
Rate (interest)
The return the lender receives for loaning you the money for the mortgage.
Roll-over Mortgage
A mortgage loan where the interest rate is established for a specific term. At the end of the term, the mortgage is said to "roll over" and the borrower and lender may agree to extend to loan. If satisfactory terms cannot be agreed upon, the lender is entitled to be repaid in full. In this case, the borrower may seek alternative financing.
Refinance
Renegotiating your existing mortgage agreement. May include increasing the principal or paying out the mortgage in full.
Renewal
At the end of a mortgage term, the mortgage may "roll over" on new terms and conditions acceptable to both the lender and the borrower. This is known as renewing a mortgage. If satisfactory terms cannot be agreed upon, the lender is entitled to be repaid in full. In this case, the borrower may seek alternative financing.
S
Second Mortgage
This is usually at a higher interest rate and represents the difference between the appraised value of the house and first mortgage financing plus the downpayment.
Security
In the case of mortgages, real estate offered as collateral for the loan.
T
Term
The length of the current mortgage agreement. A mortgage may be amortized over a long period (such as 25 years) with a shorter term (six months to five years or more). After the term expires, the balance of the principal then owing on the mortgage can be repaid or a new mortgage agreement can be entered into at the then current interest rates.
Total Debt Service (TDS) Ratio
The percentage of gross income needed to cover monthly payments for housing and all other debts and financing obligations. The total should generally not exceed 40% of gross monthly income.
U
Underwriting Fees
A sum of money collected by some lenders to offset expenses incurred in the lending transaction.
V
Variable Rate Mortgage
A mortgage for which the rate of interest changes as money market conditions change. The regular payments stay the same for the term. However, the amount applied towards the principal changes according to the change (if any) in the interest rate. Also referred to as a floating rate mortgage.
Vendor Financing (Balance of Sale)
The seller sometimes takes the mortgage at a rate lower than market rates. Most of these arrangements are not renewable nor transferable to the next owner