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Mortgage Terms Explained

Here are a few definitions of commonly used mortgage terms.*

Amortization: The number of years it will take to repay the mortgage in full. (This is usually longer than the term of the mortgage.) For instance, you may have a five-year term amortized over 25 years. A shorter amortization period means higher monthly payments but you will be paying less interest in the long run.

Assumability: This feature enables the buyer to take over or "assume" your mortgage. If your mortgage has a fixed interest rate lower than current rates, it could be an attractive selling feature.

Closed or Fixed Mortgage: This type of mortgage offers borrowers the security of locking in the interest rate for the term of your mortgage, so monthly principal and interest payments will remain constant. Terms typically range from 6 months to 5 years. Should you wish to pay off some or the entire mortgage prior to the end of the term you will have to pay a penalty. The penalty is usually 3 months interest or the interest rate differential.

Conventional mortgage: Offered to buyers who make a down payment of 20% or more of the appraised value or purchase price. Conventional mortgages may be insured but are not required to be.

Down payment: The portion of the purchase price that you pay initially as a lump sum; the rest is financed by your financial institution. Lenders will require at least 5% down payment.

Equity: The difference between the value of your property and the amount you still owe on the mortgage.

High ratio mortgage: For buyers with a down payment of less than 20%. This type of loan must be insured against default by the federal government through the Canada Mortgage and Housing Corporation (CMHC) or an approved private insurer such as Genworth. The borrower pays a one-time insurance premium to the insurer; the amount depends on the size of the loan, value of the home and other factors. The premium is typically added to the principal amount of the mortgage. It should be noted that mortgage insurance protects the lender NOT the borrower in case of default.

Interest: This is added to the amount you have borrowed to compensate the lender for the use of their money. Your mortgage is repaid in regular payments which are applied toward the principal and interest.

Mortgage: A personal loan used to purchase a property. The property being purchased is used as security for the loan. In Alberta, the lender is given an interest in your property on the mortgage title; there is no transfer of title involved.

Open Mortgage: This type of mortgage allows the borrower to prepay some or the entire mortgage before the end of the term. Contrary to popular belief, an open mortgage is sometimes subject to prepayment penalties, unless otherwise stated. Interest rates are usually higher and are tied to the bank prime rate.

Portability: If you are selling your home and buying another, this option allows you to take your mortgage - with the same term, rate and amount — and apply it to your new house. If your mortgage isn't portable, don't sign for a longer term than you're likely to stay in the house or you could wind up paying a penalty to break the mortgage agreement. Porting a mortgage is attractive if you have a lower rate than what is currently on the market.

Principal: The amount of your loan.

Term: The number of months or years the mortgage contract covers (typically six months to five years), during which you pay a specified interest rate.

Variable Rate Mortgage: This type of mortgage allows borrowers to take advantage of the Prime Rate. Most variable rate products are set either at Prime or slightly below. Payments vary depending on the product or lender you choose. Your monthly payments will fluctuate depending on how the Prime Rate changes during your term.

Expanded Glossary of Terms

Adjustment Date: Date agreed to by both parties to a real property transaction for the adjustment of property taxes, rent, interest, and other items.

Affidavit: A written statement of facts, the contents of which are sworn under oath to be true by the person making the statement. An affidavit is sometimes used in court proceedings as evidence in place of oral testimony.

Agreement for Sale: A contract by which the owner of land (vendor) agrees to sell land to another (purchaser) who agrees to purchase it. The purchaser's interest is registered in the Land Titles Office as a charge against the vendor's certificate of title.

Appraisal: The estimation of the value of a legal interest in land.

Arms-Length Transaction: Transaction in which the parties involved do not have a conflict of interest. In any transactions where there is not an arms-length distance (i.e. a realtor is selling his own home), the parties of the transaction must be immediately notified.

Assessment: Appraisal, usually for real property taxation purposes.

Asset: Items of value owned by an individual or business. Contrast to Liability.

Balance Sheet: A snapshot listing Assets, Liabilities, and Owner's Equity at a specific point in time; a type of financial statement.

Brokerage Fee: Fee charged by a mortgage broker for arranging a loan. In most cases, their services are free of charge.

Builders Lien: A claim registered against the title of land by a contractor, supplier of materials or workman with respect to work done or materials supplied to improve that land.

Caveat: A notice registered against the title to land warning those looking at the title that a claim has been made.

CCA: Abbreviation of Capital Cost Allowance.

Compound Interest: Interest which, during the life of the loan is charged or calculated at regular intervals and if not immediately paid will, in subsequent period, earn interest itself. In essence, it is interest earned on interest.

Condition: A fundamental term of a contract; a breach of which allows the injured party to terminate the contract and/or sue for damages or demand Specific Performance.

Conveyance: The process of transferring interest on land from one person to another by way of a transfer document. Conveyancing usually refers to the transfer of title to land but also includes dealings such as assignments, leases, and mortgages.

Credit Analysis: This is an investigation of a loan applicant's ability and willingness to pay as well as an assessment of their credit history.

Creditor: A person to whom a debt is owed. Contrast to Debtor.

Depreciation: The amount by which the value of improvement has decreased over time as a result of wear and tear or a loss in the ability to be used for its intended purpose. Depreciation can be classified as physical or functional and curable or incurable.

Disclosure Statement: A schedule showing the face value of the loan, all costs associated with issuing the loan to the borrower, and the effective annual rate.

Easement: A limited right to use of another's land for the benefit all. The landowner retains his/her rights, however grants permission for another party to use or access the land for a permitted purpose. For example, utility companies often require easements for piping, etc.

Fee Simple: The legal term for the highest degree of land ownership.

Fiduciary: A person (agent) who holds a position of trust with respect to someone else (principal) and is obliged, by virtue of the relationship of trust, to act solely in the best interests of the principal.

Foreclosure: A legal action taken by a mortgagee (lender) to obtain possession of a property, by reason of the mortgagor's (borrower) default in payment of the principal and or interest of the mortgage debt.

Gross Debt: The percentage of gross income which is the maximum a mortgagor is allowed to pay monthly towards the principal, interest, heat and property taxes. In Alberta, most lenders require that gross debt not exceed 32% of an individual’s monthly income.

Gross Income: The amount earned through employment or investment before taking taxes or other deductions into consideration. This amount may or may not be the same as gross income for purpose of mortgage lending.

Interest Adjustment: The process of calculating compound interest payable on the amount borrowed between the day the monies are advanced and the day the amortization period starts. An Interest Adjustment Statement is typically issued at closing.

Interest Only Loan: A loan which is serviced by interest-only payments. At the end of the term the full principal plus interest for the last payment period of the loan is still owing.

Liability: Monies owed by an individual or business. Contrast to Asset.

Lien: A claim or charge on real personal property for payment of some debt, lien obligation or duty (i.e. a builder’s lien).

Maturity: The date on which the balance owing on a mortgage becomes due; the final day of the term of a mortgage.

Mortgagee: The lender.

Mortgagor: The borrower.

Net Income: The amount which revenues exceed expenses in any given time period. Contrast to Net Loss. With regards to rentals, net income equals the difference between rental income and operating expenses.

Net Proceeds: The face value of a loan less all brokerage fees, appraisal costs and other charges.

Offer: A proposal to perform or refrain from performing a specified thing action followed by an expected acceptance, counter-offer, return promise or act. The person who makes the offer is called the offeror. The recipient of the offer is called the offeree. An example is the Offer to Purchase.

Operating Expenses: This refers to costs which must be incurred to keep a business going, including the business of renting real property.

Possession Date: Date on which the purchaser is entitled to possession of the property.

Power of Attorney: A document conferring authority to one person to act on behalf of another.

Prepayment: The act of fully or partially paying off the outstanding balance of a loan at prior to the term due date.

Principal: That portion of the original amount borrowed which still has to be paid back to the lender.

Purchaser's Statement: A closing statement in a real property transaction which indicates the balance of cash required from the purchaser to complete the transaction.

Restrictive Covenant: A covenant that restricts the use of the land of the covenantor for the benefit of land belonging to the covenantee. An example would be a restriction on the height of a building on one piece of land so that adjacent or adjoining lands are not overshadowed.

Tenants Agreement: A contract between the landlord and the tenant which pertains to the usage of residential premises.

Total Debt Service Ratio: The percentage of gross income which is the maximum amount that a mortgagor is allowed to pay annually in principal, interest, heat and property taxes including any outside debts. In Alberta, most lenders require that TDSR not exceed 40% of an individual’s monthly income.

Yield: The income and/or value appreciation of an investment expressed in terms of the purchase price of that investment.
 

*The above mortgage definitions are a brief guideline only and not intended to be relied upon. Please consult with a mortgage specialist to gain a more complete understanding.

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