Glossary of terms
A
amortization: The time over which all regular payments would pay off the mortgage. This is usually 25 years for a new mortgage, however can be greater, up to a maximum of 35 years in Canada.
asset – Something that you own that has value, such as RRSP’s, vehicle, savings, property, etc.
assumable mortgage: This used to mean that an existing mortgage could be assumed by someone else just by putting it into the new person’s name. Today, this means something completely different. With the exception of a few, rare cases, the person wanting to assume an existing mortgage must fully qualify to do so in the same way that they would if they were getting their own, brand new mortgage.
B
bridge or interim financing: 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.
blended payments: 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.
C
closed mortgage – A mortgage agreement that cannot be prepaid, renegotiated or refinanced before maturity, except according to its terms.
closing costs: 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.
cosigner: A person or persons who agree to be a part of the financing application in order to boost the original applicant’s credit, income or both. In the case where this financing is for the purchase of property, the cosigner is on both the mortgage and title of that property.
credit score (or beacon score): This is a 3-digit number that measures how well you manage your existing debts. As a guideline, consumer debt should be no more than 7-8% of income
D
debt service ratio: The percentage of the borrower’s gross income that will be used for monthly payments of principal, interest, taxes, heating costs and condominium fees.
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
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
hard money lenders – lending companies offering a specialized type of real-estate backed loan. Hard money lenders provide short-term loans that provide funding based on the value of real estate that has been collateralized for the loan. Hard money lenders typically have much higher interest rates than banks because they fund deals that do not conform to bank standards. Hard money lenders will offer a range of requirements on the loan-to-value percentage, type of real estate and minimum loan size.
heloc – This is lingo for a ‘home equity’ or secured line of credit, that is registered against your property. Typically, rates for secured lines of credit are lower than those for unsecured lines of credit because there is more security for the lender.
I
interest rate differential (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 an interest rate 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 remaining term of the mortgage.
L
liability – A financial obligation of an individual, such as credit card debt, car payments, mortgage payments, etc.
line of credit: A line of credit can be secured or unsecured. An unsecured line of credit will usually have a higher interest rate as it is not secured by collateral (a property). For a secured line of credit, see the definition for ‘heloc’.
loan to Value: The ratio of the value of the mortgage loan to the appraised value or purchase price of the property (whichever is less). For example, if someone purchased a home for $100,000 and had $20,000 as a down payment, the mortgage would be $80,000, or 80% of the value of the home (therefore an 80% LTV).
M
maturity Date – Last day of the term of the mortgage agreement.
mortgagee: The party that advances the funds for a mortgage loan; the lender.
mortgagor: The party that uses their home as a security for a mortgage; the borrower.
O
open mortgage – A mortgage which can be prepaid at any time, without penalty.
P
payment frequency: Choosing a more frequent payment type can reduce your amortization period and reduce the amount of interest you will pay in the long run. For example, if you choose the accelerated bi-weekly payment type, you will make payments every two weeks such that you will make a total of 26 payments per year – the equivalent of one extra month of payments per year. Lenders may not offer all payment types.
payout penalty: If you “break” (or pay off) your mortgage before your term is up, you’ll have to pay a prepayment penalty. The penalty is generally three months’ interest payments, or the interest rate differential – whichever is the higher amount of the two.
prepayment privileges – The ability to prepay all or a portion of the principal balance. These privileges depend on the policies of each specific lender, and usually range between allowing a lump sum payment per year of 10-20% of the original principal.
prime rate – The prime rate of interest is a rate of interest that serves as a benchmark for most other loans in a country. This is determined by the Bank of Canada.
principal – The amount of money borrowed or still owing on a mortgage.
R
refinancing – Renegotiating your existing mortgage agreement. This may include increasing the principal or paying out the mortgage in full, and is done for a variety of different reasons.
reverse mortgage: A reverse mortgage allows an elderly individual to take out between 10 – 40% of the home’s current appraised value. The money is given to the customer in one lump sum. The client is free to use the funds for whatever purpose they want – pay off debt, invest, renovate the home, or take a vacation. The mortgage need not be repaid for as long as the individual or spouse continue to live in the home.
T
term: The number of years or months over which you pay a specified interest rate, or the length of the current mortgage agreement. Terms usually range from six months to 10 years. The length of the term can vary separate from the amortization period. 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 whatever interest rates that are available at that time.
V
variable rate mortgage – A mortgage for which the rate of interest may change if other market conditions change, such as the prime rate. This is sometimes referred to as a floating rate mortgage.
