Mortgage Glossary

Here I've compiled an ever-growing list of common mortgage and homebuying terms to help you better understand the process of buying a home.

MORTGAGE TYPES

Closed mortgage

This type of mortgage must usually remain unchanged for whatever term you agree to. Prepayment costs will apply if you payout, renegotiate, or refinance before the end of term.

Convertible mortgage

This is a mortgage which offers the same security as a closed mortgage, but which can be converted to a longer, closed mortgage at any time without prepayment costs. Typically associated with fixed rate mortgages.

High-ratio mortgage

The mortgage you obtain when you have less than 20% of the total purchase price to put down as your downpayment. This type of mortgage must be insured (through sources such as CMHC or Genworth Financial Canada).

Open mortgage

This type of mortgage may be repaid, in part or in full, at any time during the term without any prepayment costs.

RATE TYPES

Fixed rate mortgage

An interest rate that does not change during the entire mortgage term.

Variable rate mortgage

An interest rate that will fluctuate in accordance with the prevailing market prime rate during the mortgage term.

Mortgage rate

The percentage interest that you pay on top of the loan principal. For example, you may take out a mortgage of $100,000 at a rate of 3.9%. Your monthly payments will consist of a portion of the original $100,000, plus 3.9% interest.

CLOSING COSTS

Appraisal

The process of determining the lending value of a property. There is usually a fee to have an appraisal done.

Interest adjustment

The amount of interest due between the date your mortgage starts and the date the first mortgage payment is calculated from. Sometimes there is a gap between the closing date of your home purchase and the first payment date of your mortgage. Let's say that the closing date on your new house is August 10th - but your mortgage payments are on the 15th of each month (so your first payment is calculated from August 15th and paid on September 15th). That leaves five days (August 10th to 14th) that aren't accounted for in your first mortgage payment. You have to make an extra payment to make up for these five days; the payment is generally due on your closing date. You can avoid all this by arranging to make your first mortgage payment exactly one payment period (e.g., one month) after your closing date.

Legal fees and disbursements

Some of the legal costs associated with the sale or purchase of a property. It's in your best interest to engage the services of a real estate lawyer or notary public.

Prepaid property tax and utility adjustments

The amount you will owe if the person selling you the home has prepaid any property taxes or utility bills. The amount to reimburse them will be calculated based on the closing date.

Property survey

A legal description of your property and its location and dimensions. An up-to-date survey is usually required by your mortgage lender. If not available from the vendor, your lawyer can obtain the property survey for a fee.

Property Transfer Tax

A tax that is levied (in some provinces) on any property that changes hands.

Sales taxes

Taxes applied to the purchase cost of a property. Some properties are sales tax exempt (GST and/or PST), and some are not. For instance, residential resale properties are usually GST exempt, while new properties require GST. Always ask before signing an offer.

 

GENERAL MORTGAGE TERMS

 

Amortization

The number of years that you take to fully pay off your mortgage (not the same as your mortgage term). Amortization periods are often 15, 20, or 25 years long.

Assuming a mortgage

Taking over the obligations of the previous owner's (or builder's) mortgage when you buy a property.

Buy down rate

The portion of the interest rate on a buyer's mortgage that you assume when they buy your home. If you're selling your home and the prospective buyer doesn't like the interest rate on their mortgage, you can offer to add a certain percentage of it onto your existing mortgage. You can add a maximum of 3%.

Canada Guaranty

A private mortgage insurance company. One potential source of mortgage insurance for high-ratio mortgages.

Canada Mortgage and Housing Corporation (CMHC)

A Crown corporation that administers the National Housing Act for the federal government and encourages the improvement of housing and living conditions for all Canadians. One potential source of mortgage insurance for high-ratio mortgages.

Closing costs

Costs that are in addition to the purchase price of a property and which are payable on the closing date. Examples include legal fees, land transfer taxes, and disbursements.

Closing date

The date on which the sale of a property becomes final and the buyer takes possession of the property.

Downpayment

The money that you pay up front for a house. Downpayments typically range from 5%-20% of the total value of the home, but can be as much as you choose. A larger downpayment generally means a better chance of getting the mortgage you are after as it shows your dedication to owning a home.

GDS

Gross Debt Servicing Ratio. The percentage of your gross earning which goes to paying for your home/housing needs. Should not exceed 35% in most cases, but there can be exceptions.

Genworth Financial Canada

A private mortgage insurance company. One potential source of mortgage insurance for high-ratio mortgages.

Home insurance

Insurance to cover both your home and its contents (also referred to as property insurance). This is different from mortgage life insurance, which pays the outstanding balance of your mortgage in full if you die.

Inspection

The process of having a qualified home inspector identify potential repairs to the property you are interested in and their estimated cost.

Interest Rate Differential

A calculation used by the lender to determine the amount you must pay in order to pay off your mortgage. This is usually calculated as: (Your Current Rate - Similar Term Rate)/12 X Mortgage Balance X # of Months Remaining in Your Term. This can vary from lender to lender and it is best to discuss the different options with me so you know how this can affect you in your unique situation.

Lump sum payment

An extra payment that you make to reduce the amount of your mortgage principal.

Mortgage

A loan that you take out in order to buy property. The collateral is the property itself.

Mortgage Default Insurance

This is insurance required on all mortgages in Canada with a Loan-To-Value ratio of greater and 80%. This are often referred to as "High-Ratio" mortgages and must be backed by one of the 3 mortgage default insurers: CMHC, Genworth, or Canada Gauranty. This insurance is there to cover the lender's costs and to assume some risk if a borrower were to walk away and/or default on their mortgage payments. Having this type of insurance available allows people to purchase a home with very little money down and lowers the overall risk to both the lenders and to Canada's economy if some borrowers miss their payments.

Mortgage life insurance

This form of insurance pays the outstanding balance of your mortgage in full if you die. This is different from home or property insurance, which insures your home and its contents. I am proud to offer this option in-house for my clients at a very competitive rate for an outstanding insurance program.

Multiple Listing Service (MLS)

A computerized listing of the properties available in your area, including information and sometimes pictures of each property.

Pre-approved mortgage certificate

A written agreement that you will get a mortgage for a set amount of money at a set interest rate. Getting a pre-approved mortgage allows you to shop for a home without worrying how you'll pay for it.

Offer to Purchase

A legally binding agreement between you and the person who owns the house you want to buy. It includes the price you are offering, what you expect to be included with the house, and the financial conditions of sale (your financing arrangements, the closing date, etc.).

Porting

Transferring an existing mortgage from one home to a new home when you move. This is known as a "portable" mortgage.

Pre-payment

Repaying part of your mortgage ahead of schedule. Depending on your mortgage agreement, there may be a prepayment cost for pre-paying.

Refinancing

The process of paying out the existing mortgage for purposes of establishing a new mortgage on the same property under new terms and conditions. This is usually done when a client requires additional funds. The client may be subject to a pre-payment cost.

Renewal/Renewing

Once the original term of your mortgage expires, you have the option of renewing it with the original lender or paying off all of the balance outstanding.

TDS

Total Debt Servicing Ratio. The percentage of your gross income which goes to paying all your monthly liabilities/debts. This includes all home expenses(Mortgage payment, Heat, Property Taxes) in addition to any other monthly obligations such as credit card payments, car payments, and potentially spousal or child support payments.

Term

The length of time during which you pay a specific rate on the mortgage loan (i.e., the number of years in your mortgage contract). This is different than the amortization period. A mortgage is usually amortized over 20-25 years, with a shorter term (typically 6 months to 5 years). After the term expires, the interest rate is usually renegotiated with the lender (your bank, for example).

 

General Property/Real Estate Terms

 

Common/Limited Common Property

These are terms used in strata-title properties to describe the areas which are shared or over which an owner does not have exclusive tenure or control. Common property often includes areas which are completely shared such as common hallways in buildings or outdoor gardens or the general parking area. Limited common property is under the administration of the strata, but is usually reserved for the exclusive use of a particular strata owner. An example might be a reserved parking space or an outdoor patio space which has been set aside for an owners exclusive use, as per an agreement with the strata corporation.

Freehold Property

Absolute control/tenure over land or property with the freedom to dispose of it or sell it at will. Most single family homes are freehold, but it is increasingly common to see bareland strata arrrangements in new developments.

Strata Property

Strata is a unique method of registering property title in which your title allows you tenure over your unit along with shared usage/tenure of the common properties such as outdoor spaces, common hallways, and parking areas. This can be advantageous as it allows owners to divide the cost of areas from which everyone receives shared benefits.

 

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Our office can be found at:

Ryan W. Smith - Mortgage Broker
Mortgage West
242 Victoria Street, Suite 207, Kamloops BC.
Phone: 250.682.0908
Fax:250.374.2219

Our regular office hours are:

Monday - Friday, 8:30AM - 5:00PM