Real estate/mortgage terms glossary.
Adjustments on Closing: there are two adjustments a buyer can be charged on closing:
1) Prepaid services: 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. For example, if the sellers have paid the property taxes to the end of the yeasr, and the sale closes on October 15th, the purchasers will be charged 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 the point at which the mortgage interest starts accumulating "in arrears." In Canada all mortgage interest is calculated and paid after the period to which it applies. This differs from the way rental and lease payments are calculated, which is "in advance". The good news on this one is that if you prepayfor say 3 weeks you won't have to make your first payment for almost two months.
The process of paying off the principal balance owed of the mortgage through scheduled, systematic repayments of principal and extra payments of principal at irregular intervals. Usually associated
with a target period (the standard being 25 years) over which the initial blended payment is calculated. The maximum amortization period available in Canada is 40 years.
This is an estimate of the current value of the property using one or both of the following techniques:
1) Market value comparison approach: 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. For example, if a house of the same size on the same street and in the same condition as the subject property recently sold for $200,000, but this 'comparable' had a triple garage and a finished basement and the 'subject' does not; the appraiser calculates the market value of these features (say, $12,000 in total) and deducts this amount from $200,000, giving an 'adjusted value' of $188,000. This is normally done with at least three 'comparables' and either averaged or the middle ('median') value used.
2) Depreciated cost approach: this technique is a supporting measurement of value and often used in conjunction with comparative values 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.
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
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 difficultto obtain.
Assignment of Rents
Refers to a lender issued document registered on the title of your purchase at the time of mortgage registration. It entitles the lender to use rental income to make up any funds in arrears if the mortgage were ever to go into default. As long as the mortgage is in regular repayment, the lender has no cause to use the ‘assignment of rents’.
A mortgage which a qualified buyer can take over from the current owner of a property upon its sale. 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").
This is 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. At CIBC, you can add a maximum of 3%.
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.
A special short-term loan needed to cover (bridge) the gap in time between completing the purchase of one property and finalizing arrangements to pay for it.
CMHC - Canada Mortgage and Housing Corporation
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. CMHC is one potential source of mortgage insurance for high-ratio mortgages.
An interest rate with a pre-determined ceiling - usually associated with a variable-rate mortgage.
A mortgage which has a fixed interest rate (usually lower than an open mortgage rate) and a set, unchangeable term. You cannot pay off a closed mortgage before the agreed end date without paying a penalty.
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.
The date on which the sale of a property becomes final and the buyer takes possession of the property.
A mortgage that you can change from short-term to long-term, depending on your financial needs.
The ownership of a separate amount of space in a multiple dwelling or other multiple-occupancy building with proportioned tenancy in common ownership of common elements. Used jointly with other owners; however, the owner does not own his/her specific unit but he/she becomes a shareholder of the corporation which owns all the real property and occupies by way of a tenancy agreement subject to a shareholders agreement administered by an elected board of directors.
Co-ownership occurs when the ownership of the whole property is divided (not necessarily on a pro-rated basis) between two or more persons. Usually there is a written agreement between the co-owners in which the rights of each co-owner is described. Each co-owner may sell his/her right of ownership or dispose of it as he/she wishes.
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 rising interest rates, is the "rate hold", where a lender may "cap" a rate for a defined period, such as 90 or 120 days. Commitments on financing for new homes, which usually have closing dates further away, can be negotiated between the lender and the builder and be held for as long as 6 months to a year.
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.
Interest charged not only to the principal sum but also on interest amounts charged in a preceding period.
The ownership of a separate amount of space in a multiple dwelling or other multiple-occupancy building with proportioned tenancy in common ownership of common elements used jointly with other owners.
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 thefirst billing.
A first mortgage, outside the conditions of NHA (the National Housing Act), granted by an institutional lender such as a ban, mortgage, loan or trust company wherein the amount of the loan does not exceed 75% of the appraised value (or purchase price, whichever is lower).
This allows you to convert your mortgage to a new one of longer term while it is still in effect.
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.
A sum of money (in the form of cash) required to be paid with an offer to purchase as a symbol of the purchaser’s commitment. If the offer is accepted, the deposit is applied to the downpayment. If the offer is later turned down by the buyer, the deposit may or may not be returned.
Discharge of Mortgage
A document executed by the mortgagee, and given to the mortgagor when a mortgage loan has been repaid in full before, at, or after the maturity date.
This feature (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. For example, commission-based individuals such as Realtors could "double-up" with each commission cheque, and "skip" during low cash flow periods.
The difference between the value for which you could sell your property and what is owed against it. There is an important distinction from "down payment" to a lender. For example, if a buyer purchases a home without a down payment, he/ she can have "equity" if the value of the property quickly goes up.
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.
Fixed Rate Mortgage
A form of mortgage where interest rate remains the same throughout the term of the mortgage.
Floating Rate of Interest
Rate of interest which fluctuates a certain number of percentage points above or below prime lending rate.
Remedial court action taken by a mortgagee when default occurs on a mortgage, to cause forfeiture of the equity or redemption of the mortgagor.
The ownership of a tract of land on which the building(s) are located. The most common type of ownership of real estate.
Genworth Capital Mortgage Insurance Corporation
Canada's only private mortgage insurer. For more details see Mortgage Insurance.
Gross Annual Income
The total personal income (from all sources) of an individual, before taxes and other deductions.
A third party person without interest in the property who agrees to assume responsibility for a debt in the event of default by the mortgagor.
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 32% for a particular application, while others allow higher limits. This is also the maximum qualifying GDS for most default insurance applications.
An amount of money retained by a construction lender or owner until satisfactory completion of the work performed by a contractor.
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.
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 four days (August 10th to 14th) that are not accounted for in your first mortgage payment. Interest adjustment is the extra payment that makes up for these four days; the payment is generally due on your closing date.
Interest Only Loan
Borrower pays back interest only on the loan and there is no amortization until later, or until the end of the term. This may occur when a purchaser wishes to resell property after a short period or if he wishes to build up enough income from the property before amortization
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 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 Premium
A premium which is charged as a percentage of the mortgage. The mortgage insurance insures the lender against loss in case of default by the borrower
so that it is not necessary for the lender to charge a higher interest rate in compensation for the increased loan to value risk incurred. The Mortgage Insurance Premiums are calculated as follows:
75.1%-80.0% financing 1.00% of the mortgage balance
80.1%-85.0% financing 1.75% of the mortgage balance
85.1%-90.0% financing 2.00% of the mortgage balance
90.1%-95.0% financing 3.25% of the mortgage balance
100% financing 3.40% of the mortgage balance
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. (Please note that HMGwill calculate this amount for you automatically if your mortgage falls into this category.)
Multiple Listing Service (MLS)
A service of a local Real Estate Board which publishes and exchanges details of properties registered with them. While this used to be for the exclusive use of registered Realtors, it is now possible for a private individual to "list" a property without committing to pay a Realtor a "listing commission" if the property sells. The majority of properties sold in Canada are sold through the local MLS.
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.
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.
Refers to a deposit equal to 3-6 months’ worth of payments held for at least 1 year in a separate, interest-bearing vehicle. It provides additional security for the loan, and is more common when financing up to 75%LTV. These funds are usually released after one year at the lender’s discretion, as long as the mortgage has been repaid as agreed.
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.
Transferring an existing mortgage from one home to a new home when you move. This is known as a "portable" mortgage.
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.
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.
A mortgage which allows you to transfer the amount and terms over to a new property without cost or penalty. The mortgage will, of course, have to beregistered on title of the new property, so strictly speaking it is not identical in all respects. While most mortgages have a portability feature, in the event you might need more money when you transfer the mortgage over to the new property, make sure you either have the right to blend in any new funds required, or can arrange the additional funds separately.
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, however, prepayment privileges have become more lenient, reflecting peoples' desire to pay their mortgages off on an accelerated basis. See also Double-Up.
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.
Taxes applied to the purchase cost of a property. Some properties are exempt from sales tax (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.
A mortgage placed on real property which is already encumbered with one mortgage. Determination of first, second, third etc., is by priority of registration (time and date).
The legal written and/ or mapped description of the location and dimensions of your land. The survey should also show the dimensions and placement on the lot of any structure, including additions such as pools, sheds and fences. An up-to-date survey is often required by a lender as part of the mortgage transaction.
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)
At the time of a sale, the lawyer for the buyer must confirm that local taxes havebeen 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.
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.
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 40% for a particular application, with some as low as 37%. 40% is also the maximum qualifying TDS in most applications for default insurance.
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). The best example is the undertaking to register a discharge of an old first mortgage after the new one has been registered, because there is simply not enough time to do so at closing. It also governs such closing dynamics as releasing funds before a new mortgage document is officially registered.
An underwriter is employed by a mortgage lender and assesses loan applications based upon the following criteria: quality of the real property, credit worthiness and ability to pay of the applicant, and guidelines of the lender with regard to ratio of mortgage loan to value of property.
Variable Rate Mortgage (VRM)
A loan where the interest rate may vary during the term of the mortgage. The variance is usually tied to Prime Bank Rate. In many cases, your actual mortgage payment may stay the same regardless of the rate.
Vendor Take Back Mortgage
A mortgage which a vendor of real property takes from the purchaser usually as part payment of the purchase price for that property. A private first or second mortgage that the vendor lends to the purchaser/borrower.
The public regulation of the character and intensity of the use of real estate. This is accomplished by the establishment of districts in each of which uniform holding restrictions related to use, height, area, bulk and density of population are imposed upon private property.