Glossary





Adjustments on Closing

Note that there are two types of adjustments for which a buyer can be charged on closing ; • 1. Prepaid services. May best be defined as 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. An 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 with an adjustment of 77/365'ths (the number of days remaining in the year) of the total paid for the year. • 2. Interest. This is the amount of interest required to be prepaid up to the Interest Adjustment Date (IAD). IAD is defines as the point at which the mortgage interest starts accumulating "in arrears". Please be advised that in Canada all mortgage interest is calculated and paid after the period to which it applies. This differs from the way in which 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. Also, if you take a biweekly payment term, the longest interest adjustment period is less than two weeks, by definition.

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Amortization

Refers to the actual number of years it will take to repay the mortgage loan in full. Majority of 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. The maximum amortization period available in Canada is 40 years.

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Appraisal

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. The following techniques may be used: • 1. Market value comparison approach: Note: 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. • 2. Depreciated cost approach: This technique is a supporting measurement of value used 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.

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Assessment

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

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Assignment of Interest

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: • Switch situations, where the costs of transferring lenders would otherwise be very high. • Second mortgage situations where a postponement may be difficult to obtain.

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Assumable Mortgage

A loan that lets the new buyer of a home take over the existing mortgage. 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

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

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Buy-down

"Paying down" the mortgage rate by paying the lender a premium at time of funding. This is often used as a marketing feature by new home builders, particularly on high ratio second mortgages.

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Buyer's Agent

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)

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.

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Cap Rate

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".

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Closing

The final exchange of consideration and legal completion of a transaction, involving either a house purchase, a mortgage registration, or both.

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Closed Mortgage

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.

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Commitment Letter

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.

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Compliance Letter

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.

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Connection Charges

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.

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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.

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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.

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Credit Report

A record of an individual's payment history. The report is available at a credit bureau. Individuals can order a copy of their own report by contacting their local bureau.

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Default

Failure to abide by the terms of a mortgage loan agreement.

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Double-Up

This feature (though 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.

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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. It usually ranges from 5% to 25% of the purchase price top of page

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Equity

The difference between the price for which a property could be sold and the total amount owing on it.

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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.

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Five-Percent Down Program

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

Canada 's only private mortgage insurer. For more details see Mortgage Insurance .

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Gross Debt Ratio

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

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 )

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Home Inspection Report

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

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".

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Land Transfer Tax (LTT)

A tax payable to the Provincial Government by the purchaser upon the transfer of title from a seller.

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Lien

This is a claim made against a property for the payment of a debt or obligation related to the property or its owners.

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Loan-to-Value Ratio (LTV)

The percentage of the value of the property for which a mortgage is required. This ratio is important in determining whether or not default insurance is required, and if so, what the cost of that insurance will be (see " Mortgage Insurance ")

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Mill Rate

A rate that multiplies by each one thousand dollars of property assessment to give the annual real estate taxes.

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Mortgage Broker

A registered agent who negotiates with lenders on behalf of a borrower to obtain the best overall mortgage for that borrower's circumstances. A Mortgage Broker has access to lenders who do not advertise nationally or operate retail locations.

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Mortgagee

Also known as the "lender" the funder and holder of the mortgage.

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Mortgage Insurance

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.

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Multiple Listing Service (MLS)

A service of a local Real Estate Board which publishes and exchanges details of properties registered with them. The majority of properties sold in Canada are sold through the local MLS.

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Municipal Levies

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

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.

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Prepayment Penalty

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.

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Prepayment Privilege(s)

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 prepayment privileges have become more lenient. See also Double-Up .

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Principal

The amount of money owing on your mortgage, including accrued unpaid interest.

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Refinance

Obtaining a new mortgage on an existing property. Possible reasons for refinancing include: seeking additional funds, a better rate, or different prepayment terms.

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Registration Fees

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.

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Registered Retirement Savings Plan (RRSP)

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".

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Simple Interest

Interest which is computed only on the principal balance. It is not compounded by calculating interest payable on accrued interest.

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Survey

The legal written and/ or mapped description of the location and dimensions of your land. A survey should also show the dimensions and placement on the lot of any structure, including additions such as pools, sheds and fences. Note that an up-to-date survey is often required by a lender as part of the mortgage transaction.

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Switch

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

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.

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Title Insurance

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 .

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Total Debt Service Ratio (TDS)

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. 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

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). It also governs such closing dynamics as releasing funds before a new mortgage document is officially registered.

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Underwriting

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 which differ to some (usually small) extent from other lenders.

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Variable Rate Mortgage (VRM)

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.

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Verification of Employment

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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