Education is the key to saving money, and realizing your dream of owning a home.

The Bank of Canada is responsible for interest rate policy, which has a huge impact on mortgage interest rates.  In their publication of  The Economy, Plain and Simple , they offer explanations about their role in the economy, which includes their explanation of how they affect mortgage rates.

A

Agreement of Purchase and Sale:  A legally binding contract between a buyer and seller which offers a  certain price for a home. It includes the agreed price, amount of  deposit and other information about the deal, such as inspection and  financing clauses. When an offer of purchase is accepted by a vendor, it  becomes an Agreement of Purchase and Sale.

Amortization Period: This is the length of time it will take to pay off a mortgage based on  specified principal and interest payment.  It is normally 25 years for a  new mortgage, but can be up to a maximum of 30 years.

 Appraisal: An appraisal report attempts to determine the market value of property,  and is required by lenders in some cases as a condition of providing a  mortgage.  The appraised value may differ from the purchase price of the  home.  Appraisals are conducted by a qualified, independent appraisal  firms, which use recent sales data and other factors to estimate the  market value of a home.

Appraisal Value: The estimated market value of the property based on recent sales of  similar homes in the immediate geographical area, as well as factors  pertaining to the condition of the property, and materials such as  flooring, counter tops, etc..

Approval:  This is normally a term used when all financing conditions in a mortgage commitment have been satisfied (see commitment).

B

Blended Payments:  An  amortized mortgage payment consists of a principal, and an interest  portion.  As the mortgage is paid down, the principal portion of the  payment becomes larger, while the interest portion becomes smaller (see  amortization).

Bridge Financing:  Also called a Bridge Loan, Bridge Financing is a short term loan  provided by lenders to cover the down payment on a home purchase when  the closing date of a home purchase occurs before the sale of the  purchaser's current home.  In order to be approved for Bridge Financing,  the borrower must have an Unconditional Sale Agreement on the home they  are selling, so that the term length of the Bridge Loan can be  confirmed.

C

Cashback Mortgage:  A  cashback mortgage, as it is called, is actually not a cashback, but  more of a cash advance.  Cashback mortgages normally come with rates  which are slightly higher than non-cashback mortgages.  This surplus in  the interest rate is made to be sufficient to recover the amount of the  cashback in additional interest cost over the term.  If a cashback  mortgage is broker early, a clawback is applied.  This clawback is equal  to the amount of the cashback, divided the number of years remaining in  the term in comparison to the original term length, so for example; if  there are 2 years remaining of a 5 year cashback term when the mortgage  is broker, 2/5 of the cashback will be charged in addition to regular  penalties.

CMHC (Canada Mortgage and Housing Corporation):   Although CMHC has many roles, when it comes to mortgages, it is one of  the 3 default insurers in Canada.  The National Housing Act (NHA)  authorizes CMHC to operate a Mortgage Insurance Fund which protects NHA  Approved Lenders from losses resulting from borrower default.

CMHC Insurance Premium:  A default insurance premium paid to CMHC.  Default  insurance insures  the lender against loss in case of default by the borrower. The default  insurance premium is paid by the borrower and can be added to the  mortgage rather than be paid in advance.

Closed Mortgage: A closed mortgage, unlike an open mortgage, can normally only broken  with the payment of a pre-payment penalty as outlined in the mortgage  commitment.   In most cases, the penalty to break a closed fixed rate  mortgage is the greater 3 months interest, or an interest rate  differential, but some of the lowest rate closed mortgages come with  heavy pre-payment penalties and some financial institutions, like major  banks, have less favourable interest rate differential calculations than  non-major bank lenders.  It is important to know the details of a  pre-payment penalty of mortgage before agreeing to the terms of the  mortgage.  Closed variable rate mortgages normally require the payment  of 3 months interest when broken.

Closing Costs: These are expenses associated with purchasing a home, such as property  land transfer taxes, legal/notary fees and disbursements,  as well as  adjustments for prepaid property taxes or condominium common expenses,  if any.  It is important to speak with your lawyer or notary to  determine the total closing costs required before the closing date of a  purchase.

Co-borrower:  Also  referred to as a co-applicant, is any borrower included in the mortgage  application in  addition to the primary applicant.  This is not the  same as a co-signer or guarantor.

Collateral Charge: There  are two types of mortgage charges in Canada, which are standard and  collateral.  This is the manner in which a mortgage or Home Equity Line  of Credit is registered against a property.  Major banks tend to prefer  collateral charges, and Home Equity Lines of Credit are also registered  as collateral charges.

Commercial Mortgage:   A  commercial mortgage is a mortgage registered on an income-producing  property. These may include multi-residential buildings, retail plazas,  shopping centres, office buildings, and industrial buildings.

Commitment:  Also  referred to as a commitment letter, is a a conditional mortgage  approval provided by a mortgage lender that details the mortgage amount,  rate, term, amortization, and required documentation.  The word  "commitment", is a commitment on the part of the lender to provide  financing should all conditions outlined in the commitment letter be  satisfied by the borrower.

Conditional Offer:  This is an offer to purchase subject to conditions, such as the buyer  obtaining mortgage financing, the sale of the buyer's existing home, and  an inspection.  Conditions in the offer are normally subject to a  period of time.

Construction Mortgage:   A  mortgage used to finance the construction of a property.  The mortgage  is normally funded in stages, known as draws, according to specified  amounts of progress in the construction.  

Conventional Mortgage:  Also know as a low ratio mortgage, is mortgage that does not exceed  80% of the purchase price or market value of the home. Conventionally  mortgages are not required to be default insured, but can be default  insured if the lender deems the property type or location to be in a  market which would cause the property to take too long to sell in the  case of default.

Convertable Mortgage:  A  mortgage which can be converted into a term differing from the current  term without being charged a pre-payment penalty.  For example; many  variable rate mortgages allow you to convert to a fixed rate term of 3  years or greater without penalty.

Co-signer:  See guarantor

Credit Score:  There  are various scores associated with a credit report, but most often a  credit score is referring to a FICO score (also referred to as a beacon  score).  Lenders require that borrower FICO scores be above a specific  threshold in order to qualify for the mortgages they provide.

D

Debt-Service Ratio:  This  is the calculation which determines the percentage of the borrower’s  gross income that may be used to pay monthly payments of principal,  interest (on all debts, including the mortgage), property taxes,  estimated heating costs and condominium fees.

Deed (Certificate of Ownership):  The document signed by the seller which confirms transfer of ownership  of the property 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  pre-determined amount of money deposited in trust by the purchaser with  an offer to purchase, which is held in trust by the seller's agent,  broker, lawyer or notary until the closing of the transaction.  The  amount of the deposit is counted as a portion of total down payment.

E

Equity: The difference between the market value of a property and the total debt registered against the property. 

F

Fire insurance:    A  certificate or binder from the insurance company confirming  fire  insurance has been arranged on the property to be mortgaged is required  by mortgage lenders before advancing funds of a mortgage. 

First Time Home Buyer:   A  borrower is considered a first-time home buyer if, in the four year  period, they did not occupy a home that you owned, or one that their  current spouse or common-law partner owned. 

First-Time Home Buyer Incentive:   The  program offers 5 or 10% of the home’s purchase price to put toward a  down payment. This addition to your down payment lowers your mortgage  carrying costs, making homeownership more affordable. 

 Firm Offer: If an offer to purchase is accepted by a vendor, and is either  unconditional or all conditions have been waived, the offer becomes a  firm offer.
 

Fixed-Rate Mortgage: A mortgage with a non-fluctuating, specified rate of interest for a specific period of time.

Foreclosure: Known as a Power of Sale in Canada, this is a legal procedure where the  lender eventually obtains ownership of the property in order to sell  the property to recoup the amount owed to them, plus legal fees, real  estate, and any other fees, after the borrower has defaulted on  payments.

G

Genworth Insurance Premium: A default insurance premium paid to Genworth Canada. Default insurance  insures the lender against loss in case of default by the borrower. The  default insurance premium is paid by the borrower and can be added to  the mortgage rather than be paid in advance.

Gross Debt Service (GDS) Ratio: This is the percentage of gross income required to cover monthly  payments associated with housing costs. The amount a borrower qualifies  to borrow is in part determined by the GDS.

Gross Household Income: This is the total income earned by a household from all sources prior  to the deduction of income taxes. Income earned from undeclared tips and  under-the-table jobs is not included in this amount.

Guarantor: Sometimes  referred to as a co-signer, is an individual which places a personal  guarantee of repayment of the mortgage, but is not considered a  borrower, or placed on title as an owner of the property used as  security.

H

High Ratio Mortgage: A high ratio mortgage is a mortgage which has an initial balance  greater than 80% of the market value or purchase price of a home. I high  rate mortgage is normally insured with CMHC, Genworth, or Canada  Guaranty, unless it is with a non-federally regulated lender such as a  private lender or Mortgage Investment Company (MIC).

Holdback: This is an amount of money required to be withheld by the lender during  the construction or renovation of a house which ensures that  construction is completed at every stage. Normally this amount is held  in trust by the lawyer or notary, and funded to the borrower after an  appraiser confirms that the work has been completed properly, as per the  building plans.

Home Buyer's Amount (HBA):   The federal HBA may provide a non-refundable tax credit for  first-time home buyers. The federal tax credit rate is 15%, so claiming  the $5,000 HBA could lower your income tax by $750. You can generally  claim the HBA if you or your spouse or common-law partner acquired a  qualifying home, provided you didn't live in a home that either of you  owned in the year the home was acquired or the prior 4 years. 

Home Buyer's Plan (HBP):   The  HBP is a program that allows an individual to withdraw funds from their  Registered Retirement Savings Plan (RRSP), with no immediate tax  consequences, to buy or build a qualifying home for themselves or for a  related person with a disability. The individual (or the related person  with a disability) must have a written agreement to buy or build the  qualifying home before the time of the withdrawal. 

Amounts  withdrawn under the HBP must be repaid on a non-deductible basis to an  RRSP over a period not exceeding 15 years, beginning the second calendar  year following the calendar year in which the withdrawal was made. Any  amount that is not repaid in a year will be included in the individual’s  income for that year. A special rule denies an RRSP deduction for  contributions that are withdrawn under the HBP within 90 days of being  contributed.

 Home Equity: The difference between the market value of a property and the total debt registered against the property. 

I

Inspection: A property inspection is often entered as a condition in an offer of  purchase. This allows a building inspector chosen by the purchaser to  examine the property to look for issues and confirm that everything is  in working order.

Interest Rate Differential Amount (IRD): An IRD Amount is a prepayment 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  equivalent to the difference between your annual interest rate and the  posted interest rate on a mortgage that is closest to the remainder of  the term (in some cases, less any rate discount you received),  multiplied by the amount being prepaid, and multiplied by the time that  is remaining on the term. 

Interim Financing: See Bridge Financing.

M

Maturity Date: This is the last day of the term of the mortgage agreement.

MLS (Multiple Listing Service):    cooperative  selling systems operated by real estate Boards and Associations in  Canada. They are accessible to REALTOR® Members of those Boards and  Associations who have agreed to represent your interests and share  remuneration from the transaction with a cooperating REALTOR® Member.  MLS® Systems contain detailed information and numerous search tools, all  designed to match people with the properties that fit their exact  requirements. 

Mortgage Assumption:  When the buyer of a property assumes, or takes over, the existing mortgage on the property from the existing owner/seller.

Mortgage Disability Insurance: An  optional form of insurance where premiums are paid by a borrower. In  the event that a borrower becomes disabled, and is unable to continue to  earn income, disability insurance will pay all or a portion of the  principal and interest payment (and is some cases property taxes) on  behalf of the borrower until such time that the borrower returns to work  or begins to receive permanent disability payments from another source.

Mortgagee: The lender.

Mortgage Life Insurance: Mortgage  insurance pays the balance owing on a mortgage in the event that the  insured becomes deceased. Premiums are determined based on the original  mortgage balance, as well as the age and medical history of the insured.  Monthly premiums on mortgage life insurance remain static as the  mortgage is paid down, yet it most cases, the premium will never  increase over time unless the mortgage is increased.

Mortgage Pre-approval:  A  pre-approval is when an application is reviewed by an underwriter, and a  credit report for the borrower is obtained by the lender to confirm the  amount of mortgage that the applicant will qualify for.  A pre-approval  does not guaranty approval.

Mortgage Pre-qualification:  A  determination of what a borrower will qualify for based on the  applicants income and debt repayment amounts.  No credit report is  obtained in this case, and the pre-qualification is not as much of a  guaranty of approval as a pre-approval.

Mortgage Term: The time in years or months over which a borrower pays a specific  interest rate. In the case of a fixed rate, the rate remains the same  for the entire term, but in the case of a variable rate, the rate will  fluctuate equal to changes in the Prime rate of lending. 

Mortgagor: The borrower. 

Mortgage Qualifying Rate (MQR):  A  rate set by the Bank of Canada or Ministry of Finance which is used to  determine how much a borrower will qualify for.  This differs for  insured mortgages and uninsured mortgages, but in both cases is at a  higher rate than the contract rate (the actual rate of the mortgage).

O 

Open Mortgage: A mortgage that can be prepaid completely without the charging of a prepayment penalty.

P 

Payment Frequency: The frequency at which payments are made. These are normally every week  (weekly), every other week (bi-weekly), twice a month (semi-monthly) or  monthly.

P.I.T.: Principal, Interest and Taxes. Every amortized mortgage requires a  principal and interest payment. Many lenders will collect property taxes  on your behalf, and allow you to include this payment amount with your  regular principal and interest payment.

Porting: If  you have sold your home and are purchasing another, rather than break  your mortgage and be charged a pre-payment penalty, most lenders will  allow you to port the existing mortgage to the next property. Often the  mortgage is increased or decreased with a port. If decreased,  contractual pre-payments may apply, and if increased, the lender may  allow you to port, with a blend and increase.

 Prepayment Charge:  A penalty charged for breaking a closed mortgage, or making a  prepayment which exceeds the allowable annual lump sum payment amount in  the mortgage contract.

Prepayment Option: The ability to prepay all or a percentage of the principal balance,  without being charged a prepayment penalty.  On closed mortgages,  lenders often allow annual prepayment amounts equaling 15%-20% of the  original mortgage balance.

Principal: The amount of money borrowed or owing on new mortgage.

R

Refinancing: A renegotiation of an existing mortgage agreement.  May include  increasing the mortgage using a blend and increase (see Porting) or  breaking the mortgage, and paying off the existing mortgage with  another, often including an increase to the mortgage.

Renewal:  When a mortgage term ends, the existing offer will most often offer  specified interest rates for a new term since the current term has  ended.  This is called a "renewal offer".  Renewing a mortgage with an  existing lender does not allow for an increase to the mortgage.

Reverse Mortgage:  A  mortgage where no principal payment is made on the mortgage, and  interest charges are added to the mortgage rather than paid by the  borrower. 

 S

Security:  The asset used as collateral for a loan or mortgage.  In the case of a mortgage, the asset is the property.

Second Mortgage:  A  mortgage which is registered in second place to an existing mortgage.  
Survey: describes the exact location of the building on the property, as well  as the type and size of the building including additions, if any.

Term: (see Mortgage Term)

Title Insurance:   Most  lenders require that a property have title insurance.  This protects  both buyers, and lenders from defects on title discovered after closing.  This can include title fraud, survey errors, municipal work orders,  zoning violations and encroachments. 

Total Debt Service (TDS) Ratio: The percentage of gross income needed to cover monthly cost of housing  and all other debts and financing obligations.  The amount a borrower  qualifies to borrow is in part determined by the TDS. 

U

Underwriter:  An  employee of a lender who reviews applications and documents in order to  determine whether and application is approved or declined.

V

Variable Rate Mortgage: A mortgage rate which fluctuates, normally with the Prime rate of lending.