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Glossary
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- Adjustments
on Closing
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There are two adjustments a buyer can
be charged on closing;
- Prepaid
services. Where the sellers have prepaid property
taxes or certain utilities, the buyers can be charged
for the amount of prepayment on a pro-rata basis, depending
on the date of occupancy. For example, if the sellers
have paid the property taxes to the end of the year,
and the sale closes on October 15th, the purchasers
will be charged an adjustment of 77/365'ths (the number
of days remaining in the year) of the total paid for
the year.
- Interest.
This
is the amount of interest required to be prepaid up
to the Interest Adjustment Date (IAD). IAD is the point
at which the mortgage interest starts accumulating "in
arrears". In Canada all mortgage interest is calculated
and paid after the period to which it applies. This
differs from the way rental and lease payments are calculated,
which is "in advance". The good news on this
one is that if you prepay for say 3 weeks you won't
have to make your first payment for almost two months.
- Amortization
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The process of paying off the principal balance owed of
the mortgage through scheduled, systematic repayments of
principal and extra payments of principal at irregular intervals.
Usually associated with a target period (the standard being
25 years) over which the initial blended payment is calculated.
The maximum amortization period available in Canada is 40
years.
- Appraisal
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This is an estimate of the current value of the property
using one or both of the following techniques;
- Market
value comparison approach: The majority of residential
appraisals use this technique, comparing recent sales
of similar properties and adding and subtracting the
differences in value of the same features in the subject
property. For example, if a house of the same size on
the same street and in the same condition as the subject
property recently sold for $200,000, but this 'comparable'
had a triple garage and a finished basement and the
'subject' does not; the appraiser calculates the market
value of these features (say, $12,000 in total) and
deducts this amount from $200,000, giving an 'adjusted
value' of $188,000. This is normally done with at least
three 'comparables' and either averaged or the middle
('median') value used.
- Depreciated
cost approach: This
technique is a supporting measurement of value and often
used in conjunction with comparative values by many
appraisers,whereby the land value is estimated and added
to an estimate of the depreciated building value. Where
there are few comparables available, relatively more
weight might be given to this method.
- Assessment
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The "assessed" value of a property is a historical,
static estimate of the value of your property used by a
municipal (local) government as a basis for calculating
annual property taxes. An "assessment notice"
from the municipality contains the "assessed value"
and when multiplied by the current "mill
rate" the property taxes for the year can be calculated.
In some municipalities, the mill rate is provided on the
assessment notice and in others it is provided separately
- Assignment
of Interest
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Most Provinces allow a legal assignment of interest in a
mortgage to have full legal effect without having to discharge
and re-register the existing one. This is particularly useful
in:
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Switch situations, where the costs of transferring lenders
would otherwise be very high.
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Second mortgage situations where a postponement may
be difficult to obtain.
- Assumable
Mortgage
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A mortgage which a qualified buyer can take over from the
current owner of a property upon its sale. Assuming a mortgage
can provide a buyer with a below market interest rate, (if
rates are now higher), as well as saving on the legal costs
of creating and registering a whole new mortgage. "Assumption"
entails a simple amendment to the mortgage document registered
on title (see "switch").
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- Blend
and Extend
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A closed mortgage can often be
"opened" for the purpose of extending the term. Most lenders
will blend the penalty for breaking (usually an Interest
Rate Differential) with the rate for the new extended
term. The idea is to get a lower rate and protect against
rate increases in the future
- Buy-down
- "Paying
down" the mortgage rate by paying the lender a lump sum
premium at time of funding. This is often used as a marketing
feature by new home builders, particularly on high ratio
second mortgages.
- Buyer's
Agent
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A Realtor who acts contractually on behalf of the buyer.
Traditionally, and still in most cases, the Realtor is the
Agent of the Sellers and is paid by them out of the proceeds
of the sale. A Buyer's Agency Agreement allows a Realtor
(with full disclosure to the sellers or their agent) to
negotiate on behalf of the buyer, with no legal conflict
of interest. The seller still pays the Buyer's Agent fees,
but this is always spelled out and acknowledged in the Offer
to Purchase.
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- Canada
Mortgage and Housing Corporation (CMHC)
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A federal crown corporation which administers the "National
Housing Act" (NHA), and through which all federal housing
policies and programs are implemented.
- Cap
Rate
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The highest rate that a borrower will pay within a defined
time period. Examples are; the rate committed on a commitment
letter or a mortgage pre-qualification (also known as
a "rate hold"); or the maximum rate that will be paid by
the borrower during the term of a "protected variable
rate mortgage". A lender will usually have to incur
a cost to insure against rate increases during the capping
period. This insurance is called a "hedge".
- Closing
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The final exchange of consideration and legal completion
of a transaction, involving either a house purchase, a mortgage
registration, or both.
- Closed
Mortgage
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A mortgage whose terms state that it cannot be paid out,
even with a penalty, unless the lender agrees. In some cases,
a closed mortgage may be discharged at a defined cost, usually
Interest Rate Differential (IRD), but
sometimes with a punitive penalty such as full interest
to maturity.
- Commitment
Letter
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A written commitment from a lender to lend mortgage funds
to specific borrowers as long as certain conditions are
met within a specified time period before closing.
A key component of the commitment, particularly in a period
of volatile interest rates, is the "rate hold", where a
lender may "cap" a rate for a defined period, such as 60
days or 90 days. Commitments on financing for new homes,
which usually have longer closing dates, can be negotiated
between the lender and the builder and be held for as long
as 6 months, and even a year.
- Compliance
Letter
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Required in many municipalities throughout Canada before
a property transfer can take place. This is an acknowledgement
from the building department that the property either has,
or is clear of outstanding work-orders. Work-orders are
specific clean-up or fix-up requirements that the owner
must complete, particularly before a transfer of ownership.
- Connection
Charges
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Some local utility companies (hydro, gas, oil) charge a
fee on closing to connect new buyers
up to their service. More normal, however, is an extra charge
on the first billing.
- Conventional
Mortgage
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A mortgage usually amounting to 75% (Loan to Value ratio)
or less of the appraised value of the property or the sale
price, whichever is lower.
- Convertible
Mortgage
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This allows you to convert your mortgage to a new one of
longer term while it is still in effect.
- Credit
Report
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A record of an individual's payment history available at
a credit bureau. Individuals can order a copy of their own
report by contacting their local bureau.
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- Default
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Failure to make monthly mortgage payments as agreed, or
to meet certain other terms of a mortgage agreement.
- Double-Up
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This feature (not offered by all lenders) allows you to
double up your mortgage payments anytime without penalty.
This feature is often associated with the ability to "skip"
an equivalent number of payments. This can be used either
to accelerate the pay-off of a mortgage (as it is an enhanced
prepayment privilege) or to manage
a volatile cash flow. For example, commission-based individuals
such as Realtors could "double-up" with each commission
cheque, and "skip" during low cash flow periods.
- Down
Payment
- The
amount of cash paid towards the purchase transaction by
the buyer of a home. This is also known as the purchaser's
initial "equity" in the property.
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- Equity
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The difference between the value for which you could sell
your property and what is owed against it. There is an important
distinction from "down payment"
to a lender. For example, if a buyer purchases a home without
a down payment, he/ she can have "equity" if the value of
the property quickly goes up.
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- First
Mortgage
- First
Mortgage A mortgage registered before all others on title.
Gives the lender a primary lien/charge
against your house and property that has precedence over
all other mortgages. Priority is determined by the date
and time registered, so a first mortgage was literally and
legally registered "first". A new first mortgage can therefore
only be registered as a "first" mortgage upon the discharge
of an existing one if the holder of a second mortgage "postpones"
(i.e., "puts back in time") to a time immediately following
the registration of the new first mortgage.
- Five-Percent
Down Program
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This allows buyers to obtain up to 95% financing on properties
up to a certain value. The loan must be insured against
default by GE
Capital Mortgage Insurance Corporation or CMHC
(Canada Mortgage and Housing Corporation). This maximum
home value will vary according to location (local Realtors
should know the applicable limit) and eligibility can vary
with personal circumstances.
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- GE
Capital Mortgage Insurance Corporation
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Canada's only private mortgage insurer. For more details
see Mortgage Insurance.
- Gross
Debt Service Ratio (GDS)
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The percentage arrived at by dividing your monthly shelter
costs (principal, interest, property taxes, heating and
half of condo fees) by your gross monthly income and multiplying
by 100. This is used by all lenders as a yardstick by which
to measure the ability of a borrower (or borrowers) to make
mortgage payments. For example, most lenders require that
this ratio be no more than 32% for a particular application,
while others allow higher limits. This is also the maximum
qualifying GDS for most default insurance
applications.
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- High-Ratio
Mortgage
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A mortgage which is greater than 75% (Loan
To Value ratio) of the value of the property. Normally
requires insurance to be paid to protect the lender. (see
Mortgage Insurance)
- Home
Inspection Report
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A report commissioned by a property owner or purchaser,
usually to verify the condition of a property prior to the
"firming up" of a Real Estate transaction. The scope and
detail may vary, but most reports indicate the specific
problem and the cost to repair. Unfortunately, no licensing
is required, and this service is not specifically regulated
other than by general consumer protection legislation. The
best safeguard against inadequate work is to ask for the
resume of the Inspector, and if possible check references
from previous customers.
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- Interest
Rate Differential
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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.
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$100,000 mortgage at 9% with 24 months remaining.
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Current 2 year rate is 6.5%.
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Differential is 2.5% per annum.
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IRD is $100,000 * 2 years * 2.5% p.a. = $5,000.
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- Land
Transfer Tax (LTT)
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A tax payable to the Provincial Government by the purchaser
upon the transfer of title from a seller.
- Lien
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This is a claim made against a property for the payment
of a debt or obligation related to the property or its owners.
- Loan-to-Value
Ratio (LTV)
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The percentage of the value of the property for which a
mortgage is required. This ratio is important in determining
whether or not insurance is required, and if so, what the
cost of that insurance will be (see "Mortgage
Insurance") For example, if the property value is $200,000,
the down payment available is $20,000 and the required mortgage
is $180,000. The LTV is $180,000/$200,000 or 90%.
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- Mill
Rate
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A rate that multiplies by each one thousand dollars of property
assessment to give the annual real estate taxes.
- Mortgage
Broker
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A registered agent who negotiates with lenders on behalf
of a borrower to obtain the best overall mortgage for that
borrower's circumstances. Mortgage Brokers are particularly
useful in financing "non standard" situations which cannot
be funded by a major national lender. This is possible because
a Mortgage Broker has access to lenders who do not advertise
nationally or operate retail locations.
- Mortgagee
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Also known as the "lender" — the funder and holder
of the mortgage.
- Mortgage
Insurance
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If your down payment is less than 25% of the purchase price
of the property, the lender is going to require either private
mortgage insurance or public mortgage insurance through
GE Capital Mortgage Insurance
Corporation or Canada Housing and Mortgage Corporation (CMHC).
The fee is calculated as a percentage of your mortgage.
This is known as default insurance. (Please note that HMGwill
calculate this amount for you automatically if your mortgage
falls into this category.)
- Multiple
Listing Service (MLS)
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A service of a local Real Estate Board which publishes and
exchanges details of properties registered with them. While
this used to be for the exclusive use of registered Realtors,
it is now possible for a private individual to "list" a
property without committing to pay a Realtor a "listing
commission" if the property sells. The majority of properties
sold in Canada are sold through the local MLS.
- Municipal
Levies
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Special levies can be charged by municipalities to recover
the cost of special services, if these services cannot,
for some reason, be funded out of general revenues, or apply
primarily to home buyers. Examples: Water meter installation;
road improvements, sewer improvements.
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- Open
Mortgage
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This allows you to pay back the borrowed funds without notice
or penalty. There are two types of open mortgages:
- Fixed
rate mortgages; the term is usually fairly short
(6 months to a year) and the interest rate will be higher
than on a closed mortgage.
- Variable
Rate Mortgages (VRM's) are usually open (and are
"collateral" type mortgages) but recently, several institutions
have introduced closed versions.
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- PITH
- Principal,
Interest, Taxes, Heating and half of Condo Fees, if applicable.
Otherwise known as your "shelter expenses". This is a basic
component of the ratios used to determine whether or not
you qualify.
- Portable
Mortgage
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A mortgage which allows you to transfer the amount and terms
over to a new property without cost or penalty. The mortgage
will, of course, have to be registered on title of the new
property, so strictly speaking it is not identical in all
respects. While most mortgages have a portability feature,
in the event you might need more money when you transfer
the mortgage over to the new property, make sure you either
have the right to blend in any new funds required, or can
arrange the additional funds separately.
- Prepayment
Privilege(s)
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The right to repay periodically more than the scheduled
principal payment. Historically this was limited to a single
annual payment on the anniversary date of no more than 10%
of the original principal. In recent years, however, prepayment
privileges have become more lenient, reflecting peoples'
desire to pay their mortgages off on an accelerated basis.
See also Double-Up.
- Prepayment
Penalty
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If your mortgage is not fully open, you may be charged a
penalty if you want to pay off all or part of your mortgage
before the end of the fixed term. The normal prepayment
penalty is the greater of three months' interest or the
Interest Rate Differential (IRD) on the
amount to be prepaid. CMHC (for insured
mortgages) and a few of the major lenders set the maximum
penalty at 3 months interest after the mortgage has been
in effect for three years, regardless of the number of times
it has been renewed.
- Principal
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The amount of money owing on your mortgage, including accrued
unpaid interest.
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- Refinance
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Obtaining a new mortgage on an existing property. You might
be looking for more money, a better rate, or different prepayment
terms.
- Registration
Fees
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Fees paid to the provincial government for recording a title
transfer, mortgage registration or other instrument such
as an Assignment or Lien with the local
authorities.
- Registered
Retirement Savings Plan (RRSP)
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A Federal Plan which allows a taxpayer to contribute approximately
18% of earned income — to a maximum of $13,500 into
a retirement plan "tax free". If the taxpayer has already
paid tax on personal income, then the RRSP contribution
(which can be made until March 1st of the year following
the year in which the income was earned and taxed) can result
in a significant tax rebate.
Since RRSP's can be caught up retroactively, this facility
and the large cash refunds it can generate are central to
numerous Realtor-driven programs designed for first time
buyers.
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- Simple
Interest
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Interest which is computed only on the principal
balance. It is not compounded by calculating interest payable
on accrued interest.
- Survey
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The legal written and/ or mapped description of the location
and dimensions of your land. The survey should also show
the dimensions and placement on the lot of any structure,
including additions such as pools, sheds and fences. An
up-to-date survey is often required by a lender as part
of the mortgage transaction.
- Switch
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This is the term almost universally applied to changing
lenders at the end of a term, when the mortgage becomes
"open". Most lenders will now pay all of the costs of a
"switch." (as well as giving them a reduced rate to lure
them away from a competitor)
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- Tax
Certificate
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At the time of a sale, the lawyer for the buyer must confirm
that local taxes have been paid up to date. If they are,
a Tax Certificate is issued, from which any adjustments
can be made — usually requiring the buyer to compensate
the seller for any prepaid taxes. If they are not up to
date, the municipality requires that the seller pay them
off from the proceeds of the sale. If there are insufficient
proceeds, then it may fall upon the buyer to pay them.
- Title
Insurance
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Insurance offered by Title Companies to protect a landowner,
and thus the mortgage lender against any "clouds" or legal
questions on the title to the real estate, or of legal priority
of the mortgagee.
- Total
Debt Service Ratio (TDS)
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The percentage arrived at by dividing your monthly shelter
costs (principal, interest, property
taxes, heating and half of condo fees) PLUS all other monthly
debt obligations by your gross monthly income and multiplying
by 100. This is used by all lenders as the "upper limit"
yardstick by which to measure the ability of a borrower
(or borrowers) to make mortgage payments. For example, most
lenders require that this ratio be no more than 40% for
a particular application, with some as low as 37%. 40% is
also the maximum qualifying TDS in most applications for
default insurance.
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- Undertaking
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This is a promise by a Lawyer to ensure that certain conditions
(usually of the lender) are met (usually after closing,
due to time constraints). The best example is the undertaking
to register a discharge of an old first
mortgage after the new one has been registered, because
there is simply not enough time to do so at closing. It
also governs such closing dynamics as releasing funds before
a new mortgage document is officially registered.
- Underwriting
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The process of deciding whether or not to lend you money
(or how much to lend you) based on all the information you
have given the lender. Every lender has a different underwriting
process and lending criteria.
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- Variable
Rate Mortgage (VRM)
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The interest rate is usually compounded monthly and fluctuates
with the prime rate at the chartered banks. In most, but
not all cases, the VRM is fully open.
- Verification
of Employment
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The lender will sometimes contact an applicant's employer
in order to verify information provided in a mortgage application
or a job letter; your income structure, length of employment,
position, and so on.
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- Work
Orders
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Municipal by-laws ("zoning" by-laws) require among other
things that residential property be maintained in a safe
and habitable condition, and that a property's use conform
to specific requirements (no illegal basement apartments,
satellite antenna, etc.).
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