Amortization Period
The number of years it would take you to pay off the mortgage by
equal monthly payment.
For new mortgage the maximum is 25 years. Recently the banking
industry is looking at extending the amortisation period to maximum 35 years.
CMHC has launched a pilot program ending 30/6/2006 for a 30 year mortgage at an
additional premium of 0.25%.
Genworth Financial Canada is offering a 30 year mortage at a 0.2% premium and
a 35 year mortgage at a 0.5% premium.
If you choose a long amortization your monthly payment will be smaller.
If you choose a short amortization your monthly payment will be higher.
Example, on a mortgage of $100,000.00 at 5% interest:
monthly payment is $581.61 on a 25 year amortisation and $657.13 on a 20 year amortization.
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Adjustable or Variable Rate Mortgage
Over the past decade Adjustable or Variable Rate Mortgage has gained significant popularity.
This is a mortgage for which interest rate may change
from time to time as other market conditions change.
In other words the interest rate is not fixed for a specified period of time.
Interest rate on adjustable or variable rate mortgage is tied to "Prime Rate" which is the rate
lenders lend to their best customers.
Lenders are currently lending at "Prime Rate minus 0.85%" (Prime Rate is
5.50% minus 0.85% = 4.65%) on a 5 year closed variable rate mortgage.
There is a significant saving of 0.9% if you compare Prime minus 0.85% to the current
5 year fixed rate mortgage at 5.50%.
If you are of the opinion that Prime Rate will not go up significantly over the five
year period, Prime minus 0.85% is a very tempting choice.
There are two types of Adjustable or Variable Rate Mortgage:
a. Open 5 year term. The interest rate is higher than the 5 year closed term but
you have the flexibility to pay off the mortgage any time without penalty.
b. Closed 5 year term. The interest rate is lower but there is a prepayment penalty
if you pay off the mortgage before maturity.
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Appraisal
For their own protection lenders like to obtain an estimate of the value of your property.
This is done by Professional Appraisers and lenders will use such appraised value to decide how much
they want to lend you.
The appraised value may or may not differ from the purchase price of your property.
Anybody can look for an appraiser to obtain an estimate of the value of a property but it is
better to let the lender arrange the appraisal in order to avoid any conflict of interest.
Also most lenders have their own list of approved appraisers and they may not accept other appraisers.
Borrowers pay for the appraisal fee which is around C$200.00 for an average property and
more for more expensive properties.
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Blended Payment
When you make a monthly payment, a portion is to pay for interest and the rest
to pay for the principal.
Although you are paying the same amount each month, the interest and principal portion
varies from month to month.
The interest portion decreases and the principal portion increases
with each payment.
For all conventional mortgages and high ratio mortgages, your monthly payments are likely
to be blended payments.
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Canada Mortgage Housing Corp(CMHC)
CMHC is a Canada Government Crown Corporation which can provide insurance coverage on your mortgage
in case of default. That is if you can no longer service your mortgage and the lender
incurred a loss as a result, CMHC will compensate the lender for the loss.
CMHC assists potential home buyers to purchase a home with little downpayment, as low as 5%.
If you are borrowing 75% or less of the value of your property, you do not need to buy
CMHC coverage.
If you are borrowing more than 75% (referred as High Ratio Mortgage), you must buy CMHC coverage. It is law.
Learn more
CMHC will provide insurance coverage, subject to borrowers meeting certain criterias,
for borrowing up to 95% of the value of a property.
Borrowers pay a premium ranging from 0.5% to 2.90% of the mortgage amount.
There is also a limit to the value of the property you want to purchase, typically it is
C$250,000.00 if the property is located in major cities in Canada.
Genworth Financial Mortgage Insurance Company of Canada also provide default insurance
coverage for high ratio mortgage.
For new mortgage the maximum amortization is 25 years. Recently the banking
industry is looking at extending the amortisation period to maximum 35 years.
CMHC has launched a pilot program ending 30/6/2006 for a 30 year mortgage at an
additional premium of 0.25%.
Genworth Financial Canada is offering a 30 year mortage at a 0.2% premium and
a 35 year mortgage at a 0.5% premium.
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Closed Mortgage
When you negotiate a mortgage with a lender, you have the choice of a "Closed Mortgage"
or "Open Mortgage".
Closed Mortgage means that once you have accepted the term (no.of years) and interest rate,you are stuck
with that rate for the duration of the term. Naturally at the end of the term, you have the freedom
to negotiate new term and interest rate.
Example: if you have accepted a 5 year term and an interest rate of 6%, and half way through
interest rate drop to 5%, you cannot ask the lender to adjust your interest rate to 5%.
Likewise if interest rate goes up to 7%, the lender cannot ask you to adjust the interest
rate to 7%.
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Conventional Mortgage
A mortgage that does not exceed 75% of the value of the property.
Mortgage that exceeds 75% are referred to as: High Ratio Mortgage.
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Equity
This is the amount of money you bring in to buy a property.
For Conventional Mortgage, your equity must be a minimum of 25% of the value of the
property.
For High Ratio Mortgage, your equity may be as low as 5% of the value of the property.
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Fire Insurance
The lender will require that you insure your property against fire. In the unfortunate event
that the property is burned down, the Insurance Company will pay the lender. The lender will
use the fund to repay the mortgage and return any excess fund to the borrower.
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First Mortgage
When you borrow money for the first time against your property, it is a first mortgage.
When you borrow a second time against the same property, it is a second mortgage.
When you sell the property the first mortgage has to be paid out first. Any remaining
proceeds of sale then goes to pay off the second mortgage.
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Fixed Rate Mortgage
A mortgage for which the interest rate is fixed for a period of time (the term).
Example: if you have chosen 6% fixed rate for 5 years, no matter what happens in the market,
you stay with 6% for 5 years.
If rate goes down, you loose.
If rate goes up, you win.
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Flex Down Mortgage
As you may know lenders do not want you to borrow your downpayment. The downpayment
should be from your own resources or as a gift from your parents.
Now CMHC (Canada Mortgage Housing Corp) offers a Flex Down Mortgage which allows
a downpayment to come from a variety of sources, including personal loans, lines of
credit or even credit cards. CMHC will charge you a small fee for this service.
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Guarantor
In the event that you do not qualify for a mortgage, the lender may ask that you find
a third party person who is willing to assume responsibility for the mortgage in case of default.
A guarantor cannot be one of the registered owners of the property.
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Gross Debt Service Ratio(GDSR)
Lenders like to know how much of your gross income will be used to pay for:
1. The monthly mortgage payment based on a 25 years amortisation.
2. Taxes on the property pro-rated for one month.
3. Monthly heating cost on the property.
4. Monthly condominium fee on the property, if applicable.
As a general rule the total of the four items above should not exceed 32%
of your gross monthly income (before tax and other deductions).
In other words, your Gross Debt Service Ratio should not exceed 32%.
If the GDSR exceeds the lender's maximum ratio allowed, you may have to:
a. borrow less.
b. look for a cheaper property.
c. choose a term with a lower interest rate so as to reduce the monthly payment.
d. or a combination of the above.
You may try to find your GDSR by:
Click here
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Gross Household Income
This is the total of:
1. Salary
2. Wages
3. Commission
4. Other assured income
before tax and any other deductions, earned by all household members who are co-applicants for the mortgage.
Lenders will require that you provide written proof of these incomes by one or more of the following:
a. A letter from your employer confirming your income.
b. A copy of your pay stub.
c. A copy of your Bank statement.
d. A copy of your previous year tax return.
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High Ratio Mortgage
If your downpayment is less than 25% of the purchase price of your property,
your mortgage will fall under the category of "High Ratio Mortgage".
Assuming that the lender approves your application, you must purchase "default
insurance" provided by Canada Mortgage Housing Corporation (CMHC) or
Genworth Financial Mortgage Insurance Company.
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Holdback
If you borrow money to construct a new home or to renovate an old home, the
lender will hold back a certain amount of the mortgage amount, to ensure that
the construction or renovation is satisfactorily completed at every stage.
The lender will release the holdbacks as each stage of the construction or renovation
is completed.
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Inspection
The examination of the house by a building inspector selected by the purchaser,
to ensure that the house is in satisfactory condition.
Lenders usually do not require an inspection of the property because they will rely
on the appraisal report.
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Interest Rate Differential(IRD)
Under "closed mortgage" you may not repay more than the monthly payment and
other payment specifically agreed between you and the lender.
If you insist on repaying more than the agreed amount any time before the end
of the term, the lender will penalise you with any loss incurred because of
interest rate differential.
Example: You borrow at 7% on a 5 year term. At the end of 3 years, you repay an excess
$10,000.00. At that time interest rate has gone down and the lender is only able to
re-lend the $10,000.00 at 6% for the remaining two years. The lender incurs a loss of 2%
on $10,000.00 for 2 years, equal to $400.00. The interest rate differential is $400.00.
On the other hand, interest rate may have gone up and the lender re-lends the $10,000.00
at 8% for the remaining two years. The lender makes an extra 1% for 2 years, equal to
$200.00. The lender cannot charge you any rate differential but will not give you the
gain either.
Please note however that most lenders will charge a minimum IRD amount irrespective of whether
there is a rate differential gain or loss.
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Interim or Bridge Financing
If you sell your property and buy a new property around the same time, the closing dates
may not be on the same date.
If you have to pay for the new property before you receive the sale proceed of your old
property, the lender may assist by providing you with an interim financing.
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Lenders
Lenders are the persons or company that lend you the money. Lenders may be Bank, Trust Company,
Credit Union, Private Corporation, Individual, Finance Company, seller of the property,
your neighbour, a member of your own family, in other words anybody.
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Maturity Date
The last day of the term (no.of years that the interest rate has been fixed when you first
took out the mortgage) of your mortgage.
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Mortgage
A loan that you take out in order to buy a property. The property itself is used as
security or collateral.
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Mortgagee
This is the lender who lends you the money on your mortgage.
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Mortgagor
This is you, the borrower of the mortgage.
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Mortgage Term
The number of years or months over which you have agreed with the lender on a
specific interest rate.
Term usually ranges from 6 months to 10 years.
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Mortgage Penalty
This is a fee you have to pay the lender in the event that you break certain terms and
conditions of the mortgage. Penalty are always agreed in advance between lender and
borrower.
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Open Mortgage
A mortgage that you can repay at any time in full or partly, without penalty.
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Payment Frequency
You may choose to repay your mortgage weekly, every other week, twice a month or monthly.
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Posted Rate
This is the rate that lenders will lend you money for your mortgage and that they
advertise to the public.
Nowadays however all lenders will provide a discount from the posted rate.
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P.I.T.
Principal, interest and taxes.
These three components together make up your regular payment on a mortgage if you have
chosen to include property taxes on your mortgage payment.
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Pre-approved Mortgage
A written agreement by a lender that you are approved for a mortgage with a specific amount
and a specific rate of interest.
This will give you the confidence to go and look for a property to buy, knowing in advance
that the lender will lend you the money against the property.
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Pre-payment
You may wish to repay part or all of your mortgage ahead of schedule. This is known as
pre-payment. Depending on your mortgage agreement, you may be subject to a penalty for doing so
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Prepayment Charges
If you choose to repay part or all of your mortgage ahead of schedule, the lender will
charge you a fee or penalty known as prepayment charges.
Prepayment charges are always agreed in advance between lender and borrower.
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Principal
The amount of money that you borrow on a mortgage.
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Refinancing a mortgage
If you renegotiate the existing terms and conditions of your current mortgage before it
has reached its maturity, for such purpose as increasing the principal or paying out the
mortgage in full, you are refinancing the mortgage. Depending on your mortgage agreement,
you may be subject to a penalty for doing so.
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Renewing a Mortgage
When the original term of your mortgage expires, you have the option to renegotiate
new term and interest rate with the original lender, or you may choose to pay off all
outstanding balance.
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Reverse Mortgage
This is a mortgage that offers homeowners, 62 years of age or older the opportunity
to convert a large part of their home equity into tax-free money while
they continue to enjoy the comfort of living in their home.
This may be suitable for retired persons with little income but have good
equity in their home.
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Security
This is what you give to the lender as collateral for your mortgage.
For all mortgages, the security or collateral will be the property itself.
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Total Debt Service Ratio(TDSR)
The lender like to know how much of your gross income will be used to pay "All" your
obligations including your obligations under the mortgage.
These obligations will include:
1. The monthly mortgage payment based on a 25 year amortization.
2. Taxes on the property pro-rated for one month.
3. Monthly heating cost on the property.
4. Monthly condominium fee on the property, if applicable.
5. Credit card monthly payment.
6. Personal loan monthly payment.
7. Personal line of credit monthly payment.
8. Car loan monthly payment.
9. Other debts monthly payment.
As a general rule the total of all the above items should not exceed 37%
of your gross monthly income (before tax and other deductions).
In other words, your Total Gross Debt Service Ratio should not exceed 37%.
If your TDSR exceeds the lender's maximum ratio allowed, you may have to:
a. borrow less.
b. look for a cheaper property.
c. choose a term with a lower interest rate so as to reduce the monthly payment.
d. Consolidate all your debts into one debt with a cheaper rate.
e. or a combination of the above.
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Variable/Floating Rate Mortgage
This is a mortgage for which the rate of interest may change from time to time as
other market conditions change.
In most cases, your variable or floating rate is subject to fluctuation of "Prime
Rate".
Prime Rate is the rate of interest that lenders charge their best customers.
The Government Bank of Canada Rate influences changes in Prime Rate.
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Vendor Take Back Mortgage
A mortgage which the vendor of the property agrees to lend you the money to buy
his/her property against the collateral of the property. In other words the vendor
becomes the lender.
Why! Because the seller may be desperate or the seller may find it attractive to lend you the
money at a higher rate than putting the money on term deposit with a Bank.
Also you may not be able to obtain finance from the Bank or other lenders.
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Survey
A document specifying the exact location and detailed measurement of the outline of
a building on a property.
The purpose is mainly to satisfy the lenders that your building is not encroaching on
your neighbour's land. In other words the house is not extended into your neighbour's land.
Every house when first built has an official survey prepared and filed with
the local City Hall.
Most lenders will ask for a copy.
As it costs about C$200.00 to do a new survey, home buyers should try to obtain a copy
from the sellers or from their local City Hall.
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source: CMHC
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