Paying
off the principal balance of the mortgage, usually by a
combination of equal periodic payments 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 available in Canada is 40 years. Back
There
are two types of adjustments for which a buyer can be charged
on closing;
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 year, and the
sale closes on October 15th, the purchasers will be
charged with an adjustment of 77 / 365'ths (the number
of days remaining in the year) of the total paid for the
year.
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 in which rental and
lease payments are calculated, which is "in
advance". The good news on this one is that if you
prepay for say 3 weeks you won't have to make your first
payment for almost two months. Also, if you take a
biweekly payment term, the longest interest adjustment
period is less than two weeks, by definition.
Back
This
is an estimate of the current value of the property (the
'subject property'), using one or both of the following
techniques;
The
majority of residential appraisals use the market value
comparison approach, comparing recent sales of similar
properties ('comparables' or 'comps' in real estate
jargon) 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 usually done with at least three
'comparables' and either averaged or the middle
('median') value used.
A
supporting measurement of value used by many appraisers
is the "depreciated cost" approach, 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. Back
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. Back
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
difficult to obtain. Back
A
closed mortgage can often be "opened" for the
purpose of extending the term. Most lenders will blend the
penalty for breaking (usually an Interest Rate Differential)
with the rate for the new extended term. The idea is to get a
lower rate and protect against rate increases in the future.
Back
"Paying
down" the mortgage rate by paying the lender a premium at
time of funding. This is often used as a marketing feature by
new home builders, particularly on high ratio second
mortgages. Back
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.
Back
A
federal crown corporation which administers the "National
Housing Act" (NHA), and through which all federal housing
policies and programs are implemented. Back
The
highest rate that a borrower will pay within a defined time
period. Examples are; the rate committed on a commitment
letter or a mortgage pre-qualification (also known as a
"rate hold"); or the maximum rate that will be paid
by the borrower during the term of a "protected variable
rate mortgage". A lender will usually have to incur a
cost to insure against rate increases during the capping
period. This insurance is called a "hedge".
Back
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.
Back
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 volatile
interest rates, is the "rate hold", where a lender
may "cap" a rate for a defined period, such as 60
days or 90 days. Commitments on financing for new homes, which
usually have longer closing dates, can be negotiated between
the lender and the builder and be held for as long as 6
months, and even a year. Back
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. Back
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 the first billing.
Back
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. Back
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. Back
The
amount of cash paid towards the purchase transaction by the
buyer of a home. This is also known as the purchaser's initial
"equity" in the property, but is used by a lender to
judge the personal commitment to the property. For example, a
lender considers that, if a buyer saved the down payment, or
received it as a gift from a loved one, they will be far more
committed to maintaining the property value and making the
mortgage payments than if they acquired it for "no money
down". Back
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. Back
This
allows buyers to obtain up to 95% financing on properties up
to a certain value. The loan must be insured against default
by CMHC (Canada Mortgage and Housing Corporation) or GE
Capital Mortgage Insurance Corporation. This maximum home
value will vary according to location (local Realtors should
know the applicable limit) and eligibility can vary with
personal circumstances. Back
Gives
the lender a primary lien/charge against your house and
property which 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. Back
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.
Back
A
fairly complex money market instrument the simple purpose of
which is essentially to insure a mortgage lender (or borrower,
through a protected or split-term mortgage) against interest
rate movements. In the lender's case the price of this
insurance will vary depending upon many political and economic
factors, but will generally be lower when interest rates and
the economy are less volatile. The buyer on the other hand can
hedge at no cost, or at a reasonable rate premium by using
specifically designed products. Back
A
mortgage which is greater than 75% (Loan To Value ratio) of
the value of the property. Normally requires insurance to be
paid to protect the lender. (see Mortgage Insurance)
Back
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. Back
A
penalty for early prepayment of all or part of a mortgage
outside of its normal prepayment terms. This is usually
calculated as "the difference between the existing rate
and the rate for the term remaining, multiplied by the
principal outstanding and the balance of the term".
Example.
$100,000
mortgage at 9% with 24 months remaining.
Current
2 year rate is 6.5%.
Differential
is 2.5% per annum.
IRD
is $100,000 * 2 years * 2.5% p.a. = $5,000. Back
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%. Back
A
registered agent who negotiates with lenders on behalf of a
borrower to obtain the best overall mortgage for that
borrower's circumstances. Mortgage Brokers are particularly
useful in financing "non standard" situations which
cannot be funded by a major national lender. This is possible
because a Mortgage Broker has access to lenders who do not
advertise nationally or operate retail locations. Back
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 Canada
Housing and Mortgage Corporation (CMHC) or GE Capital. The fee
is calculated as a percentage of your mortgage. This is known
as default insurance. (Please note that we calculate this
amount for you automatically if your mortgage falls into this
category.) Back
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. Back
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
homebuyers. Examples: Water meter installation; road
improvements, sewer improvements. Back
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) although
Online Mortgage Explorer contains some longer open terms;
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. Back
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. Back
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 be registered 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. Back
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. Back
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. Back
Fees
paid to the provincial government for recording a title
transfer, mortgage registration or other instrument such as an
Assignment or Lien with the local authorities. Back
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's can be caught up retroactively, this facility and the
large cash refunds it can generate are central to numerous
Realtor-driven programs designed to get first time buyers to
take the plunge. Back
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. Back
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) Back
At
the time of a sale, the lawyer for the buyer must confirm that
local taxes have been 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. Back
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. This is usually considerably less
expensive than the labour-intensive and liability-fraught
process of having to have a lawyer search title, and certify
it as "clear" -- a process known as "certifying
title" or giving an "opinion of title."
Back
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. Back
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. Back
The
process of deciding whether or not to lend you money (or how
much to lend you) based on all the information you have given
the lender. Every lender has a different underwriting process
and lending criteria which differ to some (usually small)
extent from other lenders. Back
The
interest rate is usually compounded monthly and fluctuates
with the prime rate at the chartered banks. In most, but not
all cases, the VRM is fully open. Back
The
lender will sometimes contact an applicant's employer in order
to verify information provided in a mortgage application or a
job letter; your income structure, length of employment,
position, and so on. Back
Municipal by-laws
("zoning" by-laws) require among other things that
residential property be maintained in a safe and habitable
condition, and that a property's use conform to specific
requirements (no illegal basement apartments, satellite
antenna, etc.). Back
Duncan Office:
Lighthouse Mortgage Corp
Unit F - 951 Canada Avenue
Duncan, BC V9L 1V2
(Canada Ave at Beverly Street)
