WHAT IS A MORTGAGE?
This Mortgage Glossary will give you a clear and easy to understand description of all the layman terminology involved in the mortgage business and the house buying process.
If you are thinking about getting a mortgage for the first time, or if you have already received a mortage offer from a lender, then you might be a little confused about the many mortage terms being used.
Fear not! This comprehensive mortgage glossary will answer you questions.
MORTGAGE GLOSSARY – In Alphabetical order.
What is a Mortage?
Agreement of Purchase and Sale – A legal agreement that offers a certain price for a home. The offer may be firm (no conditions attached), or conditional (certain conditions must be fulfilled before the deal can be closed).
Amortization Period – 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 30 years.
Appraisal – The process of determining the value of property, usually for lending purposes. This value may or may not be the same as the purchase price of the home.
Appraisal Value – An estimate of the market value of the property.
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.
Canada Mortgage and Housing Corporation (CMHC) – The National Housing Act (NHA) authorized Canada Mortgage and Housing Corporation (CMHC) to operate a Mortgage Insurance Fund which protects NHA Approved Lenders from losses resulting from borrower default.
Certificate of Location or 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.
Certificate of Search or Abstract of Title – A document setting out instruments registered against the title to the property, e.g. deed, mortgages, etc.
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.
Closing Date – The date on which the sale of a property becomes final and the new owner usually takes possession.
CMHC or GEMICO Insurance Premium – Mortgage insurance insures the lender against loss in case of default by the borrower. Mortgage insurance is provided to the lender by CMHC or GEMICO and the premium is paid by the borrower.
Conditional Offer – An offer to purchase subject to conditions. These conditions may relate to financing, or the sale of an existing home. Usually a time limit in which the specified conditions must be satisfied is stipulated.
Conventional Mortgage – A mortgage that does not exceed 80% of the purchase price of the home. Mortgages that exceed this limit must be insured against default, and are referred to as high-ratio mortgages (see below).
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.
Deed (Certificate of Ownership) – The document signed by the seller transferring ownership of the home to the purchaser. This document is then registered against the title to the property as evidence of the purchaser’s ownership of the property.
Deposit – A sum of money deposited in trust by the purchaser when making an offer to be held in trust by the vendor’s agent, broker, lawyer or notary until the closing of the transaction.
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.
Fire Insurance – Before a mortgage can be advanced, the purchaser must have arranged fire insurance. A certificate or binder from the insurance company may be required on closing.
Firm Offer – An offer to buy the property as outlined in the offer to purchase with no conditions attached.
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.
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.
Gross Household Income – Gross household income is the total salary, wages, commissions and other assured income, before deductions, by all household members who are co-applicants for the mortgage.
High Ratio Mortgage – If you don’t have 20% of the lesser of the purchase price or appraised value of the property, your mortgage must be insured against payment default by a Mortgage Insurer, such as CMHC.
Holdback – An amount of money required to be withheld by the lender during the construction or renovation of a house to ensure that construction is satisfactorily completed at every stage.
Home Equity – The difference between the price for which a home could be sold (market value) and the total debts registered against it.
Inspection – The examination of the house by a building inspector selected by the purchaser.
Interest Rate Differential Amount (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. For more information, click on compensation amounts.
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.
Maturity Date – Last day of the term of the mortgage agreement.
Mortgage Loan – A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan. However, the word mortgage alone, in everyday usage, is most often used to mean mortgage loan.
A home buyer or builder can obtain financing (a loan) either to purchase or secure against the property from a financial institution, such as a bank, either directly or indirectly through intermediaries. Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, and other characteristics can vary considerably.
Mortgage Critical Illness Insurance – Mortgage Critical Illness Insurance is available as an enhancement to Mortgage Life Insurance.1 Mortgage Critical Illness Insurance is underwritten by the Canada Life Assurance Company. Complete details of benefits, exclusions and limitations are contained in the Certificate of Insurance. It is recommended for all mortgagors. It can pay off your TD Canada Trust mortgage — up to $300,000 — if you are diagnosed with life-threatening cancer, heart attack or stroke.2
Mortgagee and Mortgagor – The lender is the mortgagee and the borrower is the mortgagor.
Mortgage Life Insurance – A form of reducing term insurance recommended for all mortgagors. If you die, have a terminal illness, or suffer an accident, the insurance can pay the balance owing on the mortgage. The intent is to protect survivors from the loss of their homes.
Mortgage Term – The number of years or months over which you pay a specified interest rate. Terms usually range from six months to 10 years.
Open Mortgage – A mortgage which can be prepaid at any time, without requiring the payment of additional fees.
Payment Frequency – The choice of making regular mortgage payments every week, every other week, twice a month or monthly.
P.I.T. – Principal, interest and taxes. Together, these make up the regular payment on a mortgage if you elect to include property taxes in your mortgage payments
Porting – This allows you to move to another property without having to lose your existing interest rate. You can keep your existing mortgage balance, term and interest rate plus save money by avoiding early discharge penalties.
Prepayment Charge – A fee charged by the lender when the borrower prepays all or part of a closed mortgage more quickly than is set out in the mortgage agreement.
Prepayment Option – The ability to prepay all or a portion of the principal balance. Prepayment charges may be incurred on the exercise of prepayment options.
Principal – The amount of money borrowed for a new mortgage.
Refinancing – Renegotiating your existing mortgage agreement. May include increasing the principal or paying out the mortgage in full.
Renewal – At the end of a mortgage term, the mortgage may “roll over” on new terms and conditions acceptable to both the lender and the borrower. This is known as renewing a mortgage. Otherwise, the lender is entitled to be repaid in full. In this case, the borrower may seek alternative financing.
Security – In the case of mortgages, real estate offered as collateral for the loan.
Term – The length of the current mortgage agreement. A mortgage may be amortized over a long period (such as 30 years) with a shorter term (six months to five years or more). 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 the then current interest rates. Visit our Renewal site.
Total Debt Service (TDS) Ratio – The percentage of gross income needed to cover monthly payments for housing and all other debts and financing obligations. The total should generally not exceed 37% of gross monthly income.
Variable Rate Mortgage – A mortgage for which the rate of interest may change if other market conditions change. This is sometimes referred to as a floating rate mortgage.
1 Mortgage Critical Illness and Life Insurance provides life and critical illness coverage, underwritten by the Canada Life Assurance Company, and accidental coverage, underwritten by TD Life Insurance Company. Complete details of benefits, exclusions and limitations are contained in the Certificate of Insurance.
2 Refer to Definitions of Critical Illness in the Certificate of Insurance.
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