During the mortgage process, you may encounter unfamiliar words and phrases that can make getting a mortgage seem complicated. You may find it useful to refer to this glossary explaining a full range of terms you may encounter:
Agreement of Purchase and Sale: A contract by which one party agrees to sell and another agrees to purchase.
Amortization: The process of paying off the principal balance owed on the mortgage through scheduled, systematic repayments of principal and extra payments of principal at irregular intervals. Amortization is up to 25 years for high-ratio mortgages; longer for conventional mortgages.
Appraisal: The estimate of the current value of the property for the lender.
Bridge Financing: Interim financing to bridge between the closing date on the purchase of a new home and the closing date on the sale of the current home.
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.
Closing Costs: One time costs incurred.
Closing Date: The date of which the sale of the property becomes final and the new owner takes possession.
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.
Conditional Offer: An offer to purchase subject to specified conditions. These conditions could be the arranging of a mortgage, or the selling of a present home. Usually the time limit in which the specified conditions must be met is stipulated.
Conventional Mortgage: A mortgage usually amounting to 80% (Loan to Value ratio) or less of the value of the property.
Credit Report: A record of an individual’s payment history available at a credit bureau. Individuals can order a copy of their own report by contacting their local bureau.
Credit Bureau: Credit reporting agency that compiles your credit history. In Canada the main ones are Trans Union and Equifax.
Deposit: A portion of your down payment that is offered at the time of offer.
Gross Debt Service Ratio (GDS): 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 39% for a particular application, while others allow higher limits. This is also the maximum qualifying GDS for most default insurance applications.
Land Transfer Tax (LTT): A tax payable to the Provincial Government by the purchaser upon the transfer of title from a seller.
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”) For example, if the property value is $200,000, the down payment available is $20,000 and the required mortgage is $180,000. The LTV is $180,000/$200,000 or 90%.
Mortgage Insurance: If your down payment is less than 20% of the purchase price of the property, the lender is going to require either private mortgage insurance or public mortgage insurance through Genworth 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. (Please note that Mortgage Intelligence will calculate this amount for you automatically if your mortgage falls into this category.)
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.
Prepayments: The right to repay periodically more than the scheduled principal payment.
Principal: The amount of money owing on your mortgage, including accrued unpaid interest.
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”. If the taxpayer has already paid tax on personal income, then the RRSP contribution (which can be made until March 1st of the year following the year in which the income was earned and taxed) can result in a significant tax rebate.
Since RRSP contributions can be made up retroactively, this facility and the large cash refunds it can generate are central to numerous Realtor-driven programs designed for first time buyers.
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. For example, most lenders require that this ratio be no more than 44% for a particular application, with some as low as 37%. 44% is also the maximum qualifying TDS in most applications for default insurance.
Variable Rate Mortgage (VRM): The interest rate is usually compounded monthly and fluctuates with the prime rate at the chartered banks.