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.
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).
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.
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.
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.
Equity: The difference between the market value of a property and the total debt registered against the property.
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.
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.
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.
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.
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).
Open Mortgage: A mortgage that can be prepaid completely without the charging of a prepayment penalty.
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.
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.
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.
Underwriter: An employee of a lender who reviews applications and documents in order to determine whether and application is approved or declined.
Variable Rate Mortgage: A mortgage rate which fluctuates, normally with the Prime rate of lending.