Glossary

Agreement of Purchase and Sales (APS): This is a legally binding contract entered into by a buyer and a seller. It is advisable to have a professional realtor prepare the offer with suitable clauses and conditions to ensure satisfactory protection for the buyer.

Amortization Period: This is the time required to fully repay a loan based on fixed payments.

Appraisal: This is the process of determining the market value of a property.

Assets: Assets refer to what an individual owns or can rely on to determine net worth or secure financing.

Assumption Agreement: This is a legal document that obligates a buyer to assume the responsibilities of an existing mortgage. If someone assumes a mortgage, it is important to obtain a release from the mortgage company to avoid liability for the debt.

Blended Payments: These are equal payments that include both a principal and an interest component. Although the payment amount is fixed, the principal component increases while the interest component decreases over time.

Canada Mortgage and Housing Corporation (CMHC): CMHC is a federal Crown corporation that administers the National Housing Act (NHA) and insures mortgages for lenders above 80% of the home’s value, which borrowers pay for and is typically added to the mortgage. These mortgages are commonly referred to as ‘Hi-Ratio’ mortgages.

Closed Mortgage: A closed mortgage cannot be prepaid or renegotiated for a set period without incurring a penalty.

Closing Date: This is the date on which the buyer takes possession of the property, and the sale becomes final.

Collateral Collateral: It is an asset, such as a term deposit, Canada Savings Bond, or automobile, that is offered as security for a loan.

Conventional Mortgage: A conventional mortgage is a mortgage up to 80% of the purchase price or value of the property. A mortgage exceeding 80% is referred to as a ‘Hi-Ratio’ mortgage, and the lender will require insurance for such a mortgage.

Credit Scoring: Credit scoring is a system that assigns points to borrowers based on several criteria to determine their creditworthiness.

Demand Loan: A demand loan is a loan that must be repaid upon request.

Deposit: A deposit is a sum of money paid by a buyer as a token of commitment to purchase. When the offer is accepted, the deposit is held in trust by the real estate broker, lawyer, or notary until the sale’s closing. If the purchaser fails to comply with the terms outlined in the offer, the deposit is forfeited to the vendor as compensation for the breach of contract.

Equity Equity is the difference between the market value of a property and any outstanding mortgages registered against it. This difference belongs to the property owner.

First Mortgage: A first mortgage is a debt registered against a property that has the first claim on it.

Fixed-Rate Mortgage: A fixed-rate mortgage is a mortgage with an interest rate set for the mortgage term’s duration.

Gross Debt Service Ratio (GDS): GDS is a calculation used by lenders to determine a borrower’s ability to repay a mortgage. It considers the mortgage payments, property taxes, approximate heating costs, and 50% of any maintenance fees. This sum is then divided by the applicants’ gross income, and ratios up to 32% are acceptable.

Guarantor: A guarantor is a person with a good credit rating and sufficient earnings who guarantees to repay a loan for a borrower if the borrower fails to do so.

High-Ratio Mortgage: A high-ratio mortgage is a mortgage exceeding 80% of the property’s value. This mortgage must be insured, and to avoid the insurance cost, a 1st mortgage up to 80% is arranged, and a 2nd mortgage for the balance (up to 90% of the purchase price).

Home Equity Line of Credit (HELOC): A type of personal line of credit secured against a borrower’s property, allowing them to borrow up to 75% of the purchase price or appraised value of the property.

Interest Adjustment Date (IAD): The date on which the mortgage term begins, usually the first day of the month following the closing. Interest costs for the days from closing date to the first of the month are typically paid at closing, making it better to close deals towards the end of the month.

Interest-Only Mortgage: A mortgage where only the monthly interest cost is paid, and the full principal remains outstanding. Payment is lower than an amortized mortgage since no principal is paid.

Mortgage: A loan that uses a piece of real estate as security, which is discharged once the loan is paid off.

Mortgagee: The lender who is lending money using a mortgage.

Mortgagor: The person who borrows money using a mortgage.

Open Mortgage: A mortgage that can be repaid at any time during the term without penalty, with an interest rate 0.75-1.00% higher than a closed mortgage.

P.I.T.: Principal, interest, and property tax due on a mortgage. For a down payment greater than 25% of the purchase price or appraised value, the lender may allow the borrower to make their property tax payments.

Portable Mortgage: An existing mortgage that can be transferred to a new property, avoiding penalties or if the interest rate is much lower than current rates.

Prepayment Penalty: A fee charged by a lender when the borrower prepays all or part of a mortgage over and above the agreed-upon amount. The penalty is usually the greater of the Interest Rate Differential (IRD) or 3 months interest.

Prime: The lowest rate a financial institution charges its best customers.

Principal: The original amount of a loan before interest.

Rate Commitment: The number of days a lender will guarantee a mortgage rate on a mortgage approval, which can vary from 30 to 120 days.

Refinance: The replacement of an existing debt obligation with a debt obligation under different terms, with common reasons including to take advantage of a better interest rate, to consolidate other debts, to reduce monthly payments or alter risk, or to free up cash. Breaking a mortgage contract to renew at a new rate and term may include a prepayment charge to reimburse the financial institution for the lost interest income.

Renewal: The process of renewing a mortgage once the term has concluded, open for prepayment in part or in full, then renewing with the same lender or transferring to another lender at no cost.

Second Mortgage: A debt registered against a property secured by a second charge on the property.

Switch: Transferring an existing mortgage from one financial institution to another, typically arranged at no cost.

Term: The period of time the financing agreement covers, with terms available ranging from 6 months to 10 years, with fixed interest rates for the chosen term.

Total Debt Service (TDS) Ratio: A mathematical calculation used by lenders to determine a borrower’s capacity to repay a mortgage, taking into account mortgage payments, property taxes, heating costs, maintenance fees, and other monthly obligations. Ratios up to 40% are acceptable.

Variable Rate Mortgage: It is a type of home loan where the interest rate is subject to change in response to fluctuations in the prime rate.

Vendor Take Back (VTB) Mortgage: It is a home loan arrangement where the seller of the property provides financing to the buyer.