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- Adjustments
on Closing
- 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.
- Amortization
- 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.
- Appraisal
- This is an estimate of the current value of the property
for the lender (the 'subject property'), using one or both of
the following techniques;
- Market value comparison approach:
The majority of residential appraisals use this technique,
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.
- Depreciated cost approach:
This technique is a supporting measurement of value used
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.
- Assessment
- 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
difficult to obtain.
- Assumable
Mortgage
- The 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").
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- Blend
and Extend
- 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
- Buy-down
- "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.
- Buyer's
Agent
- 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.
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- Canada
Mortgage and Housing Corporation (CMHC)
- A federal crown corporation which administers the "National
Housing Act" (NHA), and through which all federal housing policies
and programs are implemented.
- Cap
Rate
- 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".
- Closing
- The final exchange of consideration and legal completion
of a transaction, involving either a house purchase, a mortgage
registration, or both.
- Closed
Mortgage
- 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.
- Commitment
Letter
- 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.
- Compliance
Letter
- 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.
- Connection
Charges
- 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.
- Conventional
Mortgage
- A mortgage usually amounting to 75% (Loan to Value ratio)
or less of the value of the property.
- Convertible
Mortgage
- This allows you to convert your mortgage to a new one of
longer term while it is still in effect.
- Credit
Report
- 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.
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- Default
- Failure to make monthly mortgage payments as agreed, or to
meet certain other terms of a mortgage agreement.
- Double-Up
- 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.
- Down
Payment
- 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.
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- Equity
- 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.
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- First
Mortgage
- 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.
- Five-Percent
Down Program
- This allows buyers to obtain up to 95% financing on properties
up to a certain value. The loan must be insured against default
by GE Capital Mortgage Insurance Corporation
or CMHC (Canada Mortgage and Housing Corporation).
This maximum home value will vary according to location (local
Realtors should know the applicable limit) and eligibility can
vary with personal circumstances.
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- GE
Capital Mortgage Insurance Corporation
- Canada's only private mortgage insurer. For more details
see Mortgage Insurance.
- 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.
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- High-Ratio
Mortgage
- 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)
- 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.
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- Interest
Rate Differential
- 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.
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- Land
Transfer Tax (LTT)
- A tax payable to the Provincial Government by the purchaser
upon the transfer of title from a seller.
- Lien
- This is a claim made against a property for the payment of
a debt or obligation related to the property or its owners.
- 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 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%.
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- Mill
Rate
- A rate that multiplies by each one thousand dollars of property
assessment to give the annual real estate taxes.
- Mortgage
Broker
- 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.
- Mortgagee
- Also known as the "lender" — the funder and holder of
the mortgage.
- Mortgage
Insurance
- 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 INVIS will 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.
- Municipal
Levies
- 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.
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- Open
Mortgage
- 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) 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.
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- PITH
- 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.
- Portable
Mortgage
- 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.
- Prepayment
Privilege(s)
- 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.
- Prepayment
Penalty
- 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.
- Principal
- The amount of money owing on your mortgage, including accrued
unpaid interest.
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- Refinance
- Obtaining a new mortgage on an existing property. You might
be looking for more money, a better rate, or different prepayment
terms.
- Registration
Fees
- 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.
- Registered
Retirement Savings Plan (RRSP)
- 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 for first time buyers.
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- Simple
Interest
- Interest which is computed only on the principal
balance. It is not compounded by calculating interest payable
on accrued interest.
- Survey
- 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.
- Switch
- 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)
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- Tax
Certificate
- 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.
- Title
Insurance
- 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.
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- Undertaking
- 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.
- Underwriting
- 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.
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- Variable
Rate Mortgage (VRM)
- 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.
- Verification
of Employment
- 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.
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- Work
Orders
- 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.).
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