Last month we introduced some of the commonly used real estate terms and explained how these terms can make up a language of their own. This month we complete this series by introducing the commonly used Mortgage terms.
This is a schedule that outlines your loan payments for the duration of the home buying loan. It details how much of each monthly payment goes toward the principal and how much goes toward the loan interest. Initially, the bulk of your payments will be applied toward the interest.
An estimate of a property’s market value, used by lenders in determining the amount of the mortgage. Usually made by a qualified professional called an “appraiser”.
The value of a property, set by the local municipality, for the purposes of calculating property tax.
A mortgage held on a property by the seller can be taken over by the buyer, who then accepts responsibility for making the mortgage payments.
A combination of two mortgages, one with a higher interest rate than the other, to create a new mortgage with an interest rate somewhere between the two original rates.
Interim financing to bridge between the closing date on the purchase of the new home and the closing date on the sale of the current home.
When the seller reduces the interest rate on a mortgage by paying the difference between the reduced rate and market rate directly to the lender, or to the purchaser, in one lump sum or monthly installments.
Canada Mortgage and Housing Corporation (CMHC)
The National Housing Act (NHA) authorized Canada Mortgage and Housing Corporation (CMHC) to operate a Mortgage Insurance Fund which protects NHA Approved Lenders from losses resulting from borrower default.
A mortgage that cannot be prepaid, renegotiated, or refinanced during its term.
A notice from a mortgage lender to a prospective borrower that the lender will advance mortgage funds of a specified amount under certain conditions.
A mortgage loan of up to a maximum of 75% of the lending value of the property for which a lender does not require loan insurance.
Debt Service Ratio
The percentage of a borrower’s income that can be used for housing costs. Gross Debt Service (GDS) Ratio is the amount that a lender will permit a borrower to use from his/her gross income in order to qualify for a loan for housing costs, including mortgage payment and taxes (and condominium fees, when applicable). Total Debt Service (TDS) Ratio is the maximum percentage of a borrower’s income that a lender will consider for all debt repayment (other loans and credit cards, etc.) including a mortgage.
Non-payment of installments due under the terms of the mortgage.
The removal of all mortgages and financial encumbrances on the property.
The difference between the price for which a property can be sold and the mortgage(s) on the property. Equity is the owner’s “stake” in a property.
The first security registered on a property. Additional mortgages secured against the property are “secondary” to the first mortgage.
A legal process by which the lender takes possession and ownership of a property when the borrower doesn’t meet the mortgage obligations.
Gross Debt Service (GDS) Ratio
The percentage of gross income required to cover monthly payments associated with housing costs. Most lenders recommend that the GDS ratio be no more than 32% of your gross (before tax) monthly income.
Gross Household Income
Is the total salary, wages, commissions, and other assured income, before deductions, by all household members who are co-applicants for the mortgage.
An insurance policy is required by lenders to protect a property against damage or loss caused by fire, weather, etc.
High Ratio Mortgage
A mortgage that exceeds 75% of the loan-to-value ratio; must be insured by either the Canada Mortgage and Housing Corporation (CMHC) or a private insurer to protect the lender against default by the borrower who has less equity invested in the property.
An amount of money is withheld by the lender during the progress of construction of a house to ensure that construction is satisfactory at every stage. The amount of hold-back is generally equivalent to the estimated cost to complete construction.
Interest Rate Differential Amount (IRD)
An IRD amount is a compensation 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 calculated on the amount being prepaid using an interest rate equal to the difference between your existing mortgage interest rate and the interest rate that we can now charge when re-lending the funds for the remaining term of the mortgage. For more information, click on compensation amounts.
Short-term financing to help a buyer bridge the gap between the closing date on the purchase of a new home and the closing date on the sale of the current home.
Last day of the term of the mortgage agreement.
A contract between a borrower and a lender. The borrower pledges a property as security to guarantee repayment of the mortgage debt.
A licensed individual who, for a fee, brings together a borrower in search of a mortgage and a lender willing to issue that mortgage.
Mortgage Insurance Premium
A premium which is added to the mortgage and paid by the borrower over the life of the mortgage. The mortgage insurance insures the lender against loss in case of default on the part of the borrower.
Mortgage Life Insurance
A form of reducing term insurance available for all mortgagors. In the event of the death of the owner or one of the owners, the insurance pays the balance owing on the mortgage. The intent is to protect survivors from losing their homes.
The regular installments made towards paying back the principal and interest on a mortgage.
The length of time a lender will loan mortgage funds to a borrower. Most mortgage terms run from six months to five years, after which the borrower can either repay the balance (remaining principal) of the mortgage, or renegotiate the mortgage for another term.
Mortgage Prepayment Penalty
A fee paid by the borrower to the lender in exchange for being permitted to break a contract (a mortgage agreement); usually three months’ interest, but it can be higher or it can be the equivalent of the loss of interest to the lender.
The entity that lends the money.
The entity that borrows the money. The borrower pledges a property as security to guarantee repayment of the mortgage debt.
A mortgage that can be prepaid or renegotiated at any time and in any amount without penalty.
The choice of making regular mortgage payments every week, every other week, twice a month or monthly.
The mortgage amount initially borrowed or the portion still owing on the mortgage. Interest is calculated on the principal amount.
P, I & T
Principal, interest and taxes due on a mortgage.
P & I
Principal and interest due on a mortgage.