Mortgage Glossary

A

Abstract of title – The recorded history of a property's ownership and of the claims registered against it, drawn from the land registry. Your lawyer and the title insurer rely on it to confirm the seller can deliver clear title.

Acceleration clause – A mortgage term that lets the lender demand the entire remaining balance at once if you default, instead of waiting for the scheduled payments.

Acceptance – The seller's signed agreement to a buyer's offer. Until the offer is accepted in writing, there is no deal.

Accrued interest – Interest that has built up on a loan but has not yet been paid. On a mortgage, the interest that accrues between payments is settled by the next payment.

Actual age and effective age – Actual age counts the years since a home was built. Effective age is an appraiser's judgement of its condition: a well-kept 40-year-old house can have an effective age of 15.

Adjustable-rate mortgage – See Variable-rate mortgage.

Agreement of purchase and sale – The written contract that sets out the price, deposit, closing date, conditions, and what is included with the home. Once accepted and firm, it binds both sides.

Amortization period – The total number of years it would take to repay the mortgage in full at the current payment. Twenty-five years is the standard maximum on an insured mortgage, with 30 years allowed in some cases, such as first-time buyers and newly built homes. A longer amortization lowers the payment and raises the total interest paid.

Appraisal – A licensed appraiser's estimate of a home's market value. Lenders use it to set the lending value and to confirm the loan is well secured.

Assumable mortgage – A mortgage a buyer can take over from the seller. Most Canadian mortgages allow it only if the new borrower qualifies with the lender first.

B

Backup offer – An offer the seller holds in reserve in case the accepted deal falls through, for example on a failed financing or inspection condition.

Balloon payment – A large lump sum due at the end of a loan whose regular payments do not retire the full balance. In Canada, the balance left at the end of a mortgage term is normally renewed rather than paid out.

Basis point – One hundredth of one percent. A rate that moves from 4.50% to 4.75% has risen 25 basis points.

Blended payment – A regular mortgage payment that combines principal and interest in one amount. Early on, most of it is interest; over time the principal share grows.

Blended rate – The rate a lender offers when it combines your existing rate with today's rate, usually so you can borrow more mid-term without paying a prepayment penalty.

Bridge financing – A short-term loan that covers the gap when you close on a new home before the sale of your current one has closed.

Buyer's market and seller's market – In a seller's market there are more buyers than listings, so homes sell quickly and near or above asking. A buyer's market is the reverse.

C

Canada Deposit Insurance Corporation (CDIC) – The federal Crown corporation that insures eligible deposits at member banks and trust companies, up to $100,000 per depositor in each insured category, if the institution fails.

Cancellation clause – A contract term that spells out the conditions under which either party can end the agreement.

Capital gain – The profit when you sell a property or investment for more than its adjusted cost. A gain on your principal residence is normally tax-free in Canada; gains on other property are partly taxable.

Closed mortgage – A mortgage that cannot be paid off in full before the end of its term without a prepayment penalty. It usually carries a lower rate than an open mortgage.

Closing costs – The one-time costs due when the purchase completes: legal fees, land transfer tax, title insurance, adjustments for prepaid taxes or utilities, and sometimes an appraisal or survey. Budget roughly 1.5% to 4% of the purchase price.

Closing date – The day ownership transfers, the money changes hands, and you get the keys.

CMHC (Canada Mortgage and Housing Corporation) – The federal agency that, among other things, insures high-ratio mortgages. Sagen and Canada Guaranty are the two private insurers that offer the same coverage.

Condition – A requirement written into an offer, such as financing, a home inspection, or the sale of the buyer's current home, that must be satisfied or waived before the deal becomes firm.

Conventional mortgage – A mortgage of 80% or less of the purchase price. It does not require mortgage default insurance.

Credit report – Your borrowing history as recorded by Equifax and TransUnion, Canada's two credit bureaus. Lenders pull it at pre-approval and again before funding.

D

Days on market – How long a listing has been for sale. A long stretch often signals an overpriced or hard-to-sell home, and gives buyers room to negotiate.

Debt consolidation – Replacing several debts with one loan, usually at a lower rate and with a single payment. Refinancing a mortgage to pay off higher-interest debt is a common form.

Deed (transfer) – The registered document that moves ownership from the seller to the buyer.

Default – Failing to meet the terms of the mortgage, most often by missing payments. Default lets the lender use its remedies, up to and including power of sale or foreclosure.

Delinquency – A mortgage on which a payment is past due.

Demand loan – A loan the lender can call for repayment in full at any time. Lines of credit are usually demand loans.

Deposit – Money the buyer pays with the offer to show it is serious. It is held in trust and credited to the purchase price at closing. A buyer who walks away without a valid condition can lose it.

Discharge – The registered release of a mortgage once it has been repaid in full.

Down payment – The part of the purchase price you pay from your own funds. The minimum is 5% of the first $500,000 and 10% of the portion above that, up to the insured price limit. With less than 20% down, the mortgage must be insured.

E

Early occupancy – An arrangement that lets the buyer move in before closing, normally under a written agreement covering rent, insurance, and who bears the risk.

Easement – A registered right that lets someone other than the owner use part of the property, such as a utility's right to run lines across the back yard. Easements pass with the land.

Equity – See Home equity.

F

Fair market value – The price a willing buyer and a willing seller, neither under pressure, would agree on in an open market.

Fee simple – Outright ownership of the land and the buildings on it, the most complete form of ownership. Most Canadian homes are held in fee simple; a condominium adds shared ownership of the common elements.

Finance charge – The total cost of borrowing over the life of a loan: the interest plus any fees and insurance premiums attached to it.

Firm deal – An accepted offer with every condition satisfied or waived. From this point both sides are committed to close.

Firm commitment – The lender's written promise to advance a stated amount on stated terms by a stated date.

First mortgage – The mortgage registered first against a property. It is paid out ahead of any later mortgage if the property is sold or the borrower defaults.

Fixed-rate mortgage – A mortgage whose rate and payment stay the same for the whole term.

Fixed instalment – A loan payment that stays the same amount each period.

G

Gifted down payment – Money an immediate family member gives toward the down payment, which the borrower is not expected to repay. Lenders ask for a signed gift letter and proof that the money has been deposited.

Gross debt service ratio (GDS) – The share of your gross monthly income that would go to housing costs: mortgage principal and interest, property taxes, heat, and half of any condo fees. Lenders generally cap it near 39% on an insured mortgage.

Gross income – Income before deductions. Lenders qualify you on gross income, and count overtime or bonuses only when you have a two-year history of earning them.

Guarantor – Someone who signs to take responsibility for the mortgage if the borrower fails to pay.

H

High-ratio mortgage – A mortgage of more than 80% of the purchase price. It must carry mortgage default insurance.

Hold-back – Money the lender keeps back on a construction or renovation mortgage until each stage of the work has been inspected and approved.

Home equity – The part of the home's value you own outright: its market value minus everything owed against it.

Home equity line of credit (HELOC) – A revolving line of credit secured by your home. You draw and repay as you like and pay interest only on what is outstanding. The line itself is limited to 65% of the home's value, and 80% in combination with the mortgage.

Home equity loan – A second mortgage or a refinance that turns equity into a lump sum, often for renovations or to consolidate debt.

Home inspection – A professional examination of the visible structure and systems of a home, arranged by the buyer before the deal goes firm. The written result is the inspection report.

Home insurance – Coverage against damage to the home and its contents, plus liability. Lenders require it, and the policy or a binder confirming it must be in place before the mortgage is funded.

Household income – The combined income of everyone on the application.

I

Income property – Real estate bought to earn rent rather than to live in. Lenders treat it differently: a larger down payment is required and only part of the rent counts as income.

Instalment – A regular scheduled loan payment.

Interest adjustment date – The date your first regular payment period starts. Interest from the closing date to that date is charged separately, often by deducting it from the mortgage advance.

Interest rate differential (IRD) – A prepayment penalty on a fixed-rate closed mortgage, roughly the interest the lender loses by re-lending your balance at today's lower rate for the rest of the term. It applies when it is larger than three months' interest.

J

Joint tenancy – Co-ownership in which each owner holds an equal, undivided interest and the survivor automatically takes the whole property when one owner dies. Common for spouses.

Junior mortgage – See Second mortgage.

L

Land titles system – The government registry that records who owns each parcel and what is registered against it. Under a land titles system the province guarantees the registered title.

Land transfer tax – A tax the buyer pays on closing, based on the purchase price. It is provincial in most provinces, and Toronto adds a municipal tax on top; a few provinces charge registration fees instead. First-time buyers get a rebate in several provinces.

Late charge – A fee for a payment received after its due date. A mortgage payment more than 30 days late also reaches your credit report.

Latent defect – A problem a reasonable inspection would not reveal, such as hidden water damage. Sellers must disclose latent defects they know about.

Leasehold – Ownership of a building or unit on land that is leased rather than owned, seen on some First Nations lands and long-term ground leases. A leasehold mortgage is secured against that lease.

Legal description – The formal identification of a parcel used in the registry (lot, plan, and property identifier), as opposed to its street address.

Lender – The bank, credit union, trust company, or monoline lender that advances the mortgage. A mortgage broker arranges the loan; the lender funds it.

Lending value – The value the lender uses to size the mortgage: the lesser of the appraised value and the purchase price.

M

Maintenance fee (condo fee) – The monthly amount condominium owners pay for upkeep of the common elements, building insurance, and reserve fund contributions. Half of it counts in your GDS ratio.

Maturity date – The last day of the mortgage term, when the balance comes due and is normally renewed, refinanced, or paid out.

Mill rate – The property tax rate, expressed per $1,000 of assessed value.

Mortgage broker – A licensed professional who shops your application to many lenders and is usually paid by the lender at funding.

Mortgage default insurance – Insurance that protects the lender if the borrower defaults, required on any mortgage with less than 20% down. The premium is a percentage of the loan and is usually added to the mortgage. It is provided by CMHC, Sagen, and Canada Guaranty.

N

Negative amortization – What happens when a payment no longer covers the interest due, so the shortfall is added to the balance and the debt grows. It can occur on a variable-rate mortgage with fixed payments when rates rise sharply; lenders set a trigger point at which the payment must increase.

Non-owner-occupied – A property the borrower does not live in as a principal residence. See Income property.

O

Open mortgage – A mortgage that can be repaid in full or in part at any time without penalty, in exchange for a higher rate. Useful when a sale or a lump sum is expected soon.

P

Payment cap – A limit on how much the payment on a variable-rate mortgage can change at each adjustment.

Payment frequency – How often you pay: monthly, semi-monthly, bi-weekly, or weekly. Accelerated bi-weekly and weekly schedules add the equivalent of one extra monthly payment a year and shorten the amortization.

Porting – Moving your existing mortgage, with its rate and terms, to a new home when you sell and buy, so you avoid a prepayment penalty.

Power of attorney – A legal document that authorizes one person to act for another, for example to sign closing documents while the buyer is away. Lenders have specific rules about when they will accept one.

Power of sale and foreclosure – The lender's remedies after default. Under power of sale, common in Ontario, the lender sells the property and returns any surplus to the borrower. Under foreclosure, common in British Columbia and Alberta, the court transfers title to the lender.

Pre-approval – A lender's conditional commitment to a mortgage amount and rate, based on your income, debts, and credit, before you have found a home. It usually holds the rate for 90 to 120 days.

Prepayment penalty – The charge for paying out or breaking a closed mortgage early: typically three months' interest on a variable-rate mortgage, and the greater of three months' interest or the interest rate differential on a fixed-rate one.

Prepayment privilege – The amount you can pay down without penalty each year on a closed mortgage, typically 10% to 20% of the original balance in lump sums, plus a payment increase of a similar percentage.

Prime rate – The benchmark rate lenders use as the base for variable-rate mortgages and lines of credit. Your rate is quoted as prime plus or minus a margin, for example prime minus 0.50%.

Principal – The amount borrowed, or the balance still owed, not counting interest.

Property tax – The annual tax the municipality levies on the assessed value of the home. Many lenders collect it with the mortgage payment and remit it for you.

Q

Qualifying rate (stress test) – The rate a lender must use to test whether you could still afford the payments if rates rose: the higher of your contract rate plus two percentage points and a floor rate set by the regulator. It applies to all federally regulated lenders.

Qualifying ratios – See Gross debt service ratio and Total debt service ratio.

R

Rate hold – The period a lender guarantees a quoted rate while you shop or wait for closing, commonly 90 to 120 days. If rates fall before closing, most lenders give you the lower rate.

Real estate agent, broker, and REALTOR® – Licensed professionals who represent buyers or sellers. A broker holds a higher licence and may supervise agents. REALTOR® is a trademark for members of the Canadian Real Estate Association.

Refinancing – Replacing your mortgage with a new one, mid-term or at renewal, to get a better rate, change the term, or borrow against equity, up to 80% of the home's value. Breaking a closed mortgage mid-term triggers a prepayment penalty.

Renewal – Signing a new term with your lender when the current term ends. You can also switch lenders at renewal, usually without penalty.

Rent-to-own – A lease that gives the tenant the right to buy the home at a set price within a set period, sometimes with part of the rent credited toward the purchase.

S

Second mortgage – A mortgage registered behind a first mortgage. Because it is paid out second if the property is sold under default, it carries a higher rate.

Secured loan – A loan backed by collateral the lender can claim on default. A mortgage is a loan secured by the home.

Semi-custom home – A new build where the layout is fixed but the buyer chooses finishes such as cabinets and flooring, usually as paid upgrades.

Survey – A licensed surveyor's plan showing the property's boundaries and the position of buildings, fences, and easements. Title insurance often stands in for an up-to-date survey.

T

Takeout mortgage – The long-term mortgage that replaces a construction loan once the home is complete.

Tenants in common – Co-ownership in which each owner holds a stated share, which can be unequal and which passes to that owner's estate rather than to the other owners.

Term – The length of the current mortgage contract, commonly one to five years, during which the rate and conditions are fixed. Not to be confused with the amortization, which is the time to pay the loan off entirely.

Title – The legal ownership of a property. Clear title has no undisclosed claims against it.

Title insurance – A one-time policy that protects the owner and the lender against title defects, fraud, survey problems, and unpaid liens that turn up after closing.

Total debt service ratio (TDS) – The share of your gross monthly income needed for housing costs plus all other debt payments: car loans, credit cards, lines of credit, and student loans. Lenders generally cap it near 44% on an insured mortgage.

U

Underwriting – The lender's review of the application: income, debts, credit history, the source of the down payment, and the property's appraisal. It ends in an approval, a decline, or a request for more documents.

Upside-down (negative equity) – Owing more on the mortgage than the home is worth, which can happen after a price drop on a purchase made with a small down payment.

V

Variable-rate mortgage – A mortgage whose rate moves with the lender's prime rate during the term. With a fixed-payment variable, the payment stays the same and the split between principal and interest shifts. With an adjustable-rate mortgage, the payment itself changes.

Vendor take-back (VTB) mortgage – Financing the seller provides to the buyer for part of the price, registered as a mortgage on the property. Seen in private sales and commercial deals.

Verification of employment – The lender's confirmation of your job, income, and length of service, through an employer letter, pay stubs, and sometimes a phone call.

W

Walk-through – The buyer's final visit before closing to confirm the home is in the agreed condition and the included items are still there.

Wraparound mortgage – A single mortgage that wraps an existing one: the borrower makes one payment and the wraparound lender pays the underlying loan. Rare in Canada.

Y

Year-end statement – The annual statement from your lender showing the interest and principal paid during the year, any property taxes remitted, and the closing balance.

Z

Zoning – Municipal rules on how land may be used, for example residential, commercial, or mixed. Zoning decides whether a basement apartment, a home business, or an addition is allowed.