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Dictionary of Mortgage Terms
This section provides brief explanations
of mortgage related terms. If you require further information please
contact us.
Amortization Period
The actual number of years it will take to repay the mortgage loan in
full. Most mortgages are amortized over 25 years. Making the set monthly
payments for 25 years will pay back the principal and interest in full.
It is possible to select shorter amortization periods. Choosing a shorter
amortization of 15 or 20 years for example, will mean higher monthly
payments, but a significantly lower interest cost. Amortization is not
the same as term. BACK TO TOP
Appraisal
The process of determining the value of a home, usually for lending
purposes. This value may differ from the purchase price of the home.
BACK TO TOP
Appraised Value
An estimate of the market value of a home and property that the borrower
pledges as security for the mortgage. This value may differ from the
purchase price of the property. BACK TO TOP
Assets
Items of value owned by an individual, such as vehicles, property and
investments. BACK TO TOP
Assumable mortgage
A loan that lets the new buyer of a home take over the existing mortgage.
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Balance
The amount of the loan owing or outstanding at any time. BACK TO TOP
Blended Mortgage Payments
Portions of each mortgage loan payment are applied toward both the principal
and the interest of the loan. Over the term of the
mortgage the principal portion of the payment increases, while the interest
portion decreases. This is the norm for mortgage payments. Blended payments
are separate from the concept of a blended-rate mortgage.
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Blended-Rate Mortgage
A mortgage that combines an existing mortgage held by a borrower with
an additional mortgage. The interest rate for the combined mortgage
amount is a "blend" (or combination) of the interest rate of the "old
mortgage" and the interest rate for the additional amount borrowed.
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Canada Mortgage and Housing Corporation
(CMHC)
The Canada Mortgage and Housing Corporation is the national housing
agency of the Government of Canada. CMHC's provide housing information
and assistance to consumers as well as mortgage default
insurance for high-ratio mortgages. BACK TO TOP
Carrying Costs
The expenses of living in, and maintaining a home and property. Carrying
costs include mortgage payments, property taxes, heating, repairs and
so on. BACK TO TOP
Certificate of Location (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. BACK TO TOP
Certificate of Search (Abstract of Title)
A document detailing out instruments registered against the title to
the property. For example, a deed or mortgage
may be registered against the title. BACK TO TOP
Closed Mortgage
A conventional mortgage agreement in which the interest
rate is fixed for a term and cannot be prepaid, renegotiated or refinanced
before maturity, except upon payment of a pre-payment
penalty. Some lenders may allow limited pre-payment
privileges. BACK TO TOP
Closing Date
The date on which the sale of a property becomes final and the new owner
takes possession. BACK TO TOP
Collateral Mortgage
A mortgage which secures a loan by way of a promissory note. The money
borrowed can be used for the purchase of a home, or more commonly for
another purpose such as a vacation, or home renovations. BACK TO TOP
Conditional Offer (Conditions of Sale)
An Offer to Purchase subject to conditions. These conditions often relate
to financing, home inspection, or the sale of an existing home. Usually
a time limit is stipulated in which the specified conditions must be
satisfied. BACK TO TOP
Conventional Mortgage
A mortgage that does not exceed 75% of the appraisal value or purchase
price of the property, whichever is lower. Mortgage loan
insurance is not required for this type of mortgage. BACK TO TOP
Convertible Mortgage
A mortgage that gives the borrower the flexibility to change from a
short-term to a longer-term mortgage if it appears advantageous to do
so, most often when interest rates appear to have reached the lowest
point possible. BACK TO TOP
Debt-Service Ratio
see Gross Debt Service Ratio
Deed (Certificate of Ownership)
A legal document signed by the seller transferring ownership of the
home to the buyer. This document is then registered against the title
to the property as evidence of the buyer's ownership of the property.
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Default
Failure to abide by the terms of a mortgage loan agreement. May result
in the lender taking legal action to possess or foreclose
the mortgaged property. BACK TO TOP
Deposit
A sum of money deposited in trust by the purchaser when an Offer to
Purchase is made. The deposit is held in trust by the seller's agent,
broker, lawyer or notary until the closing of the transaction, at which
time it is paid to the vendor. If the offer is later turned down by
the buyer, the deposit may or may not be returned. BACK TO TOP
Down Payment
The amount of money put forward by the buyer before securing a mortgage.
It usually ranges from 5% to 25% of the purchase price. BACK TO TOP
Encumbrance
A registered claim of debt against a property, such a mortgage. BACK TO TOP
Equity
The difference between the price for which a property could be sold
and the total amount owing on it (encumbrance). Equity
usually increases as the mortgage is paid back. Improvements and market
value can also affect the equity of a property. BACK TO TOP
Fire Insurance
The purchaser must have fire insurance before a mortgage can be advanced.
Verification of fire insurance may be required on closing. BACK TO TOP
Firm Offer
An offer to buy the property, as outlined in the Offer to Purchase,
with no conditions attached. BACK TO TOP
Fixed-Rate Mortgage
A mortgage for which the rate of interest is set at a specific level
for a certain term, ranging from six months to five
years or more. BACK TO TOP
Floating-Rate Mortgage
See Variable-rate mortgage
Foreclosure
A legal procedure whereby the lender obtains ownership of the property
after the borrower has defaulted on payments. BACK TO TOP
Gross Debt Service (GDS) Ratio
The percentage of the borrower's gross (before tax) monthly income that
can be used to pay housing costs, including monthly mortgage payments,
property taxes, heating costs, and condominium fees. Most lenders recommend
that the GDS ratio not exceed 32% of monthly gross income. The GDS is
not the same as the total debt service ratio. BACK TO TOP
High-Ratio Mortgage
A mortgage for more than 75% of a property's appraised value or purchase
price, whichever is less. This type of mortgage must be insured against
payment default by a Mortgage Insurer, such as CMHC.
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Holdback
A sum of money withheld by the lender during the construction or renovation
of a house to ensure that construction is satisfactorily completed at
every stage. The standard holdback is 10% of the total cost of the project.
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Inspection
The examination of the condition of a house by an expert selected by
the purchaser. BACK TO TOP
Interest
Interest is the cost of borrowing money for a given period of time.
It is represented as an annual percentage rate applicable to the mortgage.
Interest is usually paid to the lender in installments along with the
repayment of the principal loan amount. BACK TO TOP
Interim Financing
A loan granted for a short term, to cover the time gap between completing
the purchase of one property and finalizing payment arrangements. The
need for this type of financing often results from mismatched closing
dates of the sale of an existing house and the purchase of a new
one. BACK TO TOP
Liabilities
Your personal debt, for example taxes, mortgages, car loans and credit
card balances. BACK TO TOP
Maturity Date
Last day of the term of the mortgage agreement. The mortgage agreement
must be renewed, or paid in full, by this date. BACK TO TOP
Mortgage
A mortgage is a loan used to purchase or refinance
a home. The property that is being purchased is used as security for
the loan. BACK TO TOP
Mortgage Default Insurance
Insurance required by lenders on high-ratio mortgages
It is available from CMHC or other private insurers
and usually costs between 0.5% and 3.75% of the principle amount of
the loan. The insurance premium is paid by the borrower. BACK TO TOP
Mortgage Disability Insurance
Insurance that pays the mortgage installments in the event that the
borrower becomes ill or disabled and unable to work. BACK TO TOP
Mortgage Insurance
see Mortgage Default Insurance
Mortgage Life Insurance
Insurance that pays the mortgage debt in full should the insured borrower
die. BACK TO TOP
Mortgage Payment
The regular installments made towards paying back the principal and
paying interest on a mortgage. BACK TO TOP
Mortgagee
The lender. BACK TO TOP
Mortgagor
The borrower. BACK TO TOP
Multiple Listing Service
(MLS)
A computer-based system providing information to real-estate
agents about properties for sale. BACK TO TOP
Open Mortgage
A mortgage that allows the borrower to pay off, renew
or refinance as much of the outstanding balance as
desired, without penalty, at any time. BACK TO TOP
Pre-Approved Mortgage
Preliminary approval granted by the lender of the borrower's application
for a mortgage to a certain maximum amount and rate. Often arranged
prior to home-shopping, this option can help the purchaser establish
an affordable price range. BACK TO TOP
Pre-Payment Options
These options allow the borrower to prepay a portion, or all of the
principal balance, with or without penalty. These
options are typically restricted to specific amounts and times and vary
from lender to lender. BACK TO TOP
Pre-Payment Penalty
A fee charged by the lender when the borrower prepays all or part of
a closed mortgage more quickly than as stipulated in the mortgage agreement.
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Principal
The mortgage amount initially borrowed from the lender. Does not include
interest costs. BACK TO TOP
Rate (Interest)
The annual percentage amount charged in return for borrowing funds.
Realtor
A real estate professional who is a member of a local real estate board,
such as the Canadian Real Estate Association, that is engaged in the
business of buying and selling real estate. BACK TO TOP
Refinance
To pay off your mortgage or other registered encumbrance
and arrange for a new mortgage. BACK TO TOP
Renewal
At the end of a mortgage term, new terms and conditions acceptable to
both the lender and the borrower must be agreed upon. This is known
as renewing a mortgage. If satisfactory terms cannot be agreed upon,
the borrower may seek alternative financing to repay the lender in full.
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Second Mortgage
An additional mortgage on a property that already has a registered mortgage.
If the borrower defaults and the property is sold, the second mortgage
is paid after the first. BACK TO TOP
Security
Assets offered as collateral for a loan. In the case
of mortgages, the property being purchased or refinanced
forms the security for the loan. BACK TO TOP
Survey
A document describing details of a property's boundaries, measurements
and structures. It will also describe any easements, rights-of-way,
or encroachments made by either your property or by adjoining properties.
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Term
The length of the current mortgage agreement, usually from 6 months
to 5 years. It can be thought of as the length of the contract entered
into by the borrower and the lender. Technically speaking, at the end
of the term the mortgage amount must be paid in full. However, in practice
the outstanding balance of the mortgage is simply renegotiated at the
current rate of interest. Borrowers may approach any financial institution
when their current term has expired. Term is not the same as amortization.
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Title
The legal evidence of ownership of a property. BACK TO TOP
Title Search
A detailed search of the registered title documents
to ensure there are no liens or other encumbrances
(claims) on the property, establishing the seller's statement of ownership.
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Total Debt Service (TDS)
Ratio
The percentage of a borrower's gross monthly 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. BACK TO TOP
Variable-Rate Mortgage
also called Floating-Rate Mortgage. A mortgage for which the rate of
interest fluctuates as money market rates change. Payments on a variable-rate
mortgage generally do not rise and fall. If interest rates go down,
more of the monthly payment goes to pay off the principal;
if rates go up, more money goes towards paying the interest
charges. BACK TO TOP
Vendor
The seller in a real estate transaction. BACK TO TOP
Vendor-Take-Back Mortgage
Mortgage financing arranged between the seller of a property and the
buyer. Usually this type of loan is in the form of a second mortgage
that the seller is willing to arrange at below market values in order
to allow the buyer to purchase the house. BACK TO TOP
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