Mortgage terms

There is a lot of jargon in the world of Mortgages and Credits. For consumers seemingly simple words can feel daunting. The following is a list of common terms with their definitions that should help you get informed.

A-D

E-H

I-L

M-P

Q-Z

A

Ability to Pay Rule

The ability to pay rule focuses on evaluating the borrower’s current and future financial condition, income, and existing debt obligations to determine if they have the financial capacity to meet the loan repayment requirements. Lenders use this rule to mitigate the risk of default and ensure that borrowers have the means to honour their loan obligations.

Adjustable-Rate-Mortgage

It is a type of home loan where the interest rate can change over time. Contrary to a fixed-rate mortgage, where the interest rate remains the same for the entire loan term, an ARM has a variable interest rate that adjusts periodically according to a specified index.

Amortization Period

The time over which all regular payments would pay off the mortgage. This is usually 30 years for a new mortgage, however can be greater, up to a maximum of 40 years.

Annual Income

Annual income is the total amount of money earned by an individual, household, or business in a given year. It is a measure of the financial inflow derived from various sources, such as employment, self-employment, investments, rental income, or any other form of earnings.

Appraisal

The process of determining the value of property, usually for lending purposes. This value may or may not be the same as the purchase price of the home.

Assumable Mortgage

A type of financing arrangement in which the outstanding mortgage and its terms can be transferred from the current owner to a buyer. By assuming the previous owner’s remaining debt, the buyer can avoid having to obtain his or her own mortgage.

B

Blended Payments

Payments consisting of both a principal and an interest component, paid on a regular basis (e.g. weekly, biweekly, monthly) during the term of the mortgage. The principal portion of payment increases, while the interest portion decreases over the term of the mortgage, but the total regular payment usually does not change.

Bi-Weekly Payment

A bi-weekly mortgage payment is a payment plan in which the borrower makes payments towards their mortgage every two weeks instead of monthly. This arrangement allows borrowers to make an extra payment each year, helping to pay off the mortgage faster and save on interest costs.

C

Canadian Mortgage and Housing Corporation – CMHC

A division of the Government of Canada that acts as Canada’s national housing agency. The CMHC’s mandate is to help Canadians access a variety of affordable housing options. It also researches housing and real estate trends in Canada and around the world, providing research to consumers, businesses and other government divisions. The major activity of the CMHC, and the one for which it is best known, is mortgage loan insurance, which insures approved lenders (such as Canada’s chartered banks) against borrower default. Mortgage loan insurance provides approved borrowers access to low-cost mortgage rates. CMHC approved buyers may purchase property with as little as 5% down payment.

Credit Score

A credit score is a numeric display of an individual’s credibility based on their credit history. It is a three-digit number that helps lenders determine the risk associated with extending credit to a borrower. The scores are generated by credit reporting agencies or credit bureaus, which gather and analyze data from various sources, including financial institutions, creditors, and public records.

CMHC Insurance

CMHC (Canada Mortgage and Housing Corporation) insurance, also known as mortgage default insurance, is a form of insurance provided by CMHC and other approved insurers in Canada. It is designed to protect lenders in case borrowers default on their mortgage payments. CMHC insurance is required for homebuyers who cannot put down a minimum of 20% of a home’s purchase price, often referred to as a high-ratio mortgage.

Certificate of search or abstract of title

A document setting out instruments registered against the title to the property, e.g. deed, mortgages, etc.

Closed Mortgage

A mortgage agreement that cannot be prepaid, renegotiated, or refinanced before maturity, except according to its terms.

Collateral

Properties or assets that are offered to secure a loan or other credit. Collateral becomes subject to seizure on default.

Conventional Mortgage

A mortgage that does not exceed 80% of the purchase price of the home. Mortgages that exceed this limit must be insured against default, and are referred to as high-ratio mortgages.

Co-Signer or a Co-Borrower

A co-signer or co-borrower refers to an individual who assumes shared responsibility for a loan or financial obligation alongside the primary borrower. When someone applies for a loan or credit but lacks sufficient credit history, income, or collateral to meet the lender’s requirements, a co-signer or co-borrower can help strengthen the application by adding their own financial credibility and becoming legally obligated to repay the debt if the primary borrower fails to do so.

Credit History

Credit history refers to a record of an individual’s borrowing and repayment activities. It represents a comprehensive summary of their past interactions with credit, including loans, credit cards, mortgages, and other forms of credit. A credit history provides lenders and financial institutions with valuable information about a person’s financial behaviour, responsible use of credit, and ability to repay debts.

D

Debt Consolidation

Debt consolidation is a financial tactic consolidating numerous debts within one easier-to-manage payment arrangement. This can be accomplished by obtaining a loan or using a debt consolidation program. By decreasing the total number of installments and decreasing the interest rates on the loans being combined, debt consolidation aims to enhance the repayment process.

Debt-to-Equity Ratio

The debt-to-equity ratio provides insights into financial leverage and risk profile by comparing the individual’s debt to its equity. A high debt-to-equity ratio suggests that the individual relies heavily on borrowed funds to finance its operations, which can indicate a higher level of financial risk. Conversely, a low debt-to-equity ratio indicates a greater proportion of equity financing, which may imply a lower risk profile.

Debt-to-Income Ratio

The debt-to-income ratio (DTI ratio) is a financial measure that compares an individual’s total monthly debt payments to their gross monthly income. It is used by lenders to assess a borrower’s ability to manage additional debt and make timely payments.

Debt-Service Ratio

The percentage of the borrower’s gross income that will be used for monthly payments of principal, interest, taxes, heating costs and condominium fees.

Downpayment

The amount an individual puts down when applying for a mortgage is known as a down payment on a house, or the money you first contribute to purchasing your property is a mortgage down payment. It amounts to a fraction of the cost of the home you want to buy.

E

Equity

Equity in mortgage refers to the ownership interest or stake that a homeowner holds in a property, which is used as collateral for a mortgage loan. It represents the gap in the market value of the property and the remaining mortgage debt.

Escrow

Escrow refers to a financial setup in which a neutral third party, known as an escrow agent or escrow holder, holds and manages funds, documents, or assets on behalf of two or more parties involved in a transaction. The purpose of escrow is to provide a secure and trusted mechanism that ensures the fair and timely completion of the transaction.

F

Fixed Interest Rate

It is referred to the interest rate that does not change regardless of fluctuations in market conditions or external factors. The rate is determined at the time of borrowing and remains the same until the loan is fully repaid or until the fixed period ends, depending on the terms of the loan.

Foreclosure

A mortgage foreclosure refers to a legal process in which a lender seizes ownership of the asset owned by a borrower who has defaulted on their mortgage loan payments. It is typically a last resort for the lender to recoup their investment when the borrower fails to fulfill their repayment obligations.

H

HELOC (Home Equity Line of Credit)

A HELOC is a revolving line of credit. Where the lender sets a maximum limit for the line of credit based on a percentage of the home's appraised value and the borrower's creditworthiness, the borrower can then access funds from the line of credit as needed, up to the maximum limit and only pay interest on the amount borrowed.

High Ratio Mortgage

If you don’t have 20% of the lesser of the purchase price or appraised value of the property, your mortgage must be insured against payment default by a Mortgage Insurer, such as CMHC.

I

Interest Rate Ceiling

The absolute maximum rate of interest that a financial institution can charge for an adjustable rate mortgage or loan.

L

Loan-to-Value Ratio

The loan-to-value ratio (LTV ratio) is a financial metric used by lenders to assess the risk of a mortgage loan. It is calculated by dividing the loan amount by the appraised value or purchase price of the property, whichever is lower.

M

Mortgage Appraisal Fee

A mortgage appraisal fee is a payment made by the borrower to cover the cost of a professional appraisal, which determines the fair market value of the property being considered for a mortgage loan. It serves as a crucial step in the mortgage process, helping lenders mitigate risks and ensure the property's value aligns with the loan amount.

Mortgage Amortization

Mortgage amortization refers to the entire duration required to pay off the whole mortgage amount, and it involves making regular payments towards both the principal and interest. The principal is the borrowed amount, while the interest is the cost of borrowing.

Mortgage Banker

A company, individual or institution that originates, sells and services mortgage loans.

Mortgagor

An individual or company who borrows money to purchase a piece of real property. By granting the lender an interest in the property, which allows it to lend the funds with an accurate assessment of risk, the mortgagor provides the lender with a guarantee for the full repayment of the loan. Also known as a “chargor”.

Mortgage Life Insurance

Mortgage life insurance is a form of life insurance that offers financial protection for the borrower's family in case of the borrower's death. In the tragic event of an individual's passing, this insurance coverage offers protection by covering the entire or a portion of the mortgage amount.

Mortgage Pre-Approval

A lender's initial assessment of the applicant to see if they qualify for a pre-qualification offer is known as a pre-approval. Financial institutions provide pre-approval analysis through soft inquiries, which is how pre-approvals are generated.

Mortgage

A debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses wishing to make large value purchases of real estate without paying the entire value of the purchase up front. Mortgages are also known as liens against property or claims on property.

Mortgagee

An entity that lends money to a borrower for the purpose of purchasing a piece of real property. By accepting a mortgage on the real property, the lender creates security in the full repayment of the loan in the future.

Mortgage Broker

The matchmaker between a home buyer and a lender whose goal is to originate a mortgage loan. The broker draws from a pool of various lenders to find the right match.

P

Power of Sale

The power of sale gives the mortgage lender the legal right to sell the property to recover their financial losses. Should the borrower fail to fulfill their obligations under the mortgage, the lender has the right to repossess the property and sell it. Before exercising the power of sale, the mortgage lender must notify the borrower. This notice will provide a limited amount of time, typically 35 days in Ontario and even less elsewhere, for the borrower to correct the default. Should the borrower not adhere to the conditions, the lender has the legal right to evict them and sell the property. If any money is left over after all parties have been paid, the lender will return it to the borrower. However, if everyone else has not been paid what they are owed, the lender may sue the borrower for the remaining amount.

Pre-Payment Penalties

Pre-payment penalties refer to fees or charges imposed by lenders when borrowers repay or settle a loan before the agreed-upon term or repayment schedule. These penalties are designed to compensate the lender for potential financial losses incurred due to early repayment and to discourage borrowers from refinancing or paying off loans ahead of schedule.

Principal Residence

The term "principal residence" refers to a property that an individual, family, or household primarily occupies as their main home. The concept of a principal residence carries important legal and financial implications, particularly concerning taxes and certain government benefits.

Private Mortgage

A private mortgage is a loan given by an individual or syndicate to people who are unable to secure a conventional loan from a bank or other financial institution. These loans are usually used for buying a house, remodelling a property, or consolidating debt and are secured by the property. Private mortgage interest rates and fees are higher than traditional mortgages, but they are a common option for borrowers who cannot meet traditional banks' strict lending criteria or need to secure financing quickly.

T

Total Debt Service (TDS) Ratio

The percentage of gross income needed to cover monthly payments for housing and all other debts and financing obligations. The total should generally not exceed 40% of gross monthly income. – See more at : Pegasus Quick Qualifier.