Glossary: Mortgage Terms & Definitions

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“A” Lender: an “A” Lender is a lender that lends to borrowers whom have “A” Credit. See also Prime Lender and “A” Credit.

“A” Credit: A borrower with “A” Credit has sufficiently good credit to receive the best interest rates available at a given time. A borrower’s credit worthiness is typically assessed on the basis of a borrower’s Beacon Score.

Accelerated Payments: Accelerated payments are typically selected by borrowers with the objective of reducing loan amortization (i.e. paying down a loan quicker) and reducing interest costs. Accelerated payments are similar to bi-weekly payments except that in this case the bi-weekly payment amount is calculated as ½ of the monthly payment amount. As a result, one extra payment is made by the borrower every year. The same principle can be applied to accelerated weekly payments.

Adjustable Rate Mortgage (ARM): See Variable Rate Mortgage.

“Alt-A” Credit: Alt-A credit is a category of credit worthiness somewhere between “A” Credit and “B” Credit.

Amortization Period: the number of years it takes to repay your mortgage in full.

“B” Credit: A borrower with “B” Credit does not have sufficiently good credit to receive the best interest rates available at a given time. A borrower’s credit worthiness is typically assessed on the basis of a borrower’s Beacon Score.

“B” Lender: A “B” Lender is a lender that lends to borrowers whom have “B” Credit.

Beacon Score: A beacon score is a value provided by Equifax on a borrower’s credit bureau report that reflects a borrower’s credit worthiness. A Beacon Score of 680 and above is generally considered to be very good and will often enable a borrower to qualify for mortgage financing under a higher Total Debt Service Ratio (TDSR).

Bi-Weekly Payments: Borrowers can increase their loan payment frequency by selecting a bi-weekly repayment plan instead of a monthly repayment plan. Bi-weekly payments are calculated on the basis of 26 repayment periods per year instead of 12 which results in the same annual repayment amount by comparison to a monthly repayment schedule. The advantage of a bi-weekly repayment schedule is a slightly reduced amortization period, slightly reduced interest costs and a potential convenience to the borrower by matching loan payments with income payments.

Blended Payments: Blended payments are most commonly applied to constant payment loans and are comprised of both an interest and principle component according to an amortization schedule. The proportion of a payment applied to interest and principle changes over time as the loan is repaid or as a result of changing interest rates in the case of a variable rate mortgage.

Capped Rate Mortgage: This is a variable rate mortgage that the lending institution has rate ‘capped’. In other words, the rate will fluctuate with prime, but the institution guarantees that you will not pay more than a certain interest rate, set by them.

Closed Mortgage: You typically cannot pay out a closed mortgage without some kind of penalty; however, a closed mortgage typically has a lower interest rate than an open mortgage.

Closing Costs: Closing costs are the costs required to close a mortgage transaction. In the case of a purchase transaction, closing costs are costs in addition to the purchase price of the property that are paid on the closing date. As an example, closing costs may include legal fees, disbursements, property transfer tax (PTT), and tax adjustments.

Constant Payment Loan: A constant payment loan is a loan that is repaid by equal, regular and consecutive blended payments of interest and principle. Payments are typically made on a specified day and according a specified payment frequency, such as monthly, where each payment includes all interest due for a given payment period. Thus, the portion of a payment that is applied to interest decreases over time as the principle loan amount is repaid. This type of mortgage repayment plan is very common in the residential mortgage industry.

Conventional Mortgage: A conventional mortgage is a mortgage where the loan to value ratio is less than or equal to 80% or by comparison, the borrower is contributing 20% or more of the property value as a down payment.

Convertible Mortgage: A convertible mortgage is a mortgage that can be changed from one type of mortgage to another type of mortgage after a specific period of time, such as six months. In most cases, this applies to the mortgage term. For example, in the case of a six month convertible mortgage, a borrower could potentially lock into a longer term mortgage without penalty at any time throughout the initial six month term.

Deposit: the deposit is not paid to a lender. A deposit is typically paid upon making an offer to purchase a property and is typically paid to a real estate brokerage in trust. If paid to a lender, then it would be a commitment fee. Commitment fees typically only apply to commercial loans. Both a deposit and a commitment fee differ from a down payment, which is related to the Loan to Value of a given mortgage loan.

Down Payment: A down payment is the amount of cash paid by a buyer in connection with a property purchase. Down payment amounts typically range from 5-20% of the purchase price, depending on the loan to value ratio for a given transaction. A down payment is not the same as a deposit. See also conventional mortgage and high ratio mortgage.

Gross Debt Service Ratio (GDSR): The GDSR is a lending constraint used by lenders to qualify a borrower for mortgage financing. This is the percentage of gross annual income required to cover housing and shelter costs. GDSR typically includes payment, interest, taxes and heat. GDSR and TDSR calculations are used by lenders to assess a borrower’s ability to service a given debt load (i.e. used in qualification process). Lender policies dictate the maximum GDSR that will be approved, which is one factor that can limit a borrower’s maximum principal loan amount.

High Ratio Mortgage: A high ratio mortgage is a mortgage where the loan to value ratio is greater than 80% or by comparison, the borrower is contributing less than 20% of the property value as a down payment.

Institutional Lender: An institutional lender is a lender which makes a significant number of loans (i.e. banks and insurance companies).

Lending Institution: A lending institution is a financial institution, which makes loans.

Loan Insurance: Loan insurance is generally required by lenders when homebuyers make a down payment of less than 20% of the purchase price. Mortgage loan insurance helps protect lenders against default, and allows buyers to purchase homes with a minimum down payment of 5%, but with an interest rate comparable to that granted with a 20% down payment.

Loan to Value Ratio: Loan to value ratio is the mortgage amount as a percentage of the appraised property value or lending value. For example, a $100,000 property purchased at an 80% LTVR would require a $20,000 down payment.

Mortgage Contract: A contract between a borrower(s) and a lender that outlines the terms and conditions for repaying the money borrowed. In most cases, the term of a mortgage contract will be shorter than the amortization period.

Mortgage Statement: A mortgage statement is a document prepared by a lender and provided to the borrower which shows the current balance, interest rate, amount still owing, past payments, and amortization on the mortgage.

Notice of Assessment (NOA): A NOA is issued by Canada Revenue Agency in connection with the filing of a personal tax return.

Open Mortgage: An open mortgage is a mortgage that can be paid out at any time without penalties.

Prime Rate: A prime rate is a base interest rate referenced by most banks in connection with their lending interest rates. For example, a variable rate mortgage may be available to borrowers at prime less 0.65%, which would be a rate of 2.35% given a prime rate of 3.00%. Prime rates are influenced by the Bank of Canada overnight lending rate.

Private Lender: Private lenders are lenders that are not chartered under the Bank Act of Canada and commonly operate as a mortgage investment corporation lending to borrowers with “B” credit or on transactions that do not conform with standard lending policies of other lending institutions, such as the chartered banks.

Property Assessment Notice: A Property Assessment Notice is a statement issued by the BC Assessment office that indicates a taxable property value used in connection with the calculation of property taxes.

Quick Close: The term “Quick Close” is used in conjunction with discounted mortgage products that apply if a transaction closes within a given period of time, such as 30-45 days. Lenders offer discounted rates for “quick closings” because it costs less to hedge a rate for a shorter period of time by comparison to 60 or 120 day rate hold.

Rate Hold: A “rate hold” is used in connection with a pre-approval application for a mortgage to hold a fixed interest rate currently offered by a lender for a specified period of time, which typically ranges from 60 – 120 days.

Re-Advanceable Mortgage: A re-advanceable mortgage is comprised of two components; (1) a mortgage component; and (2) a line of credit, which reduces the costs to the borrower. As the mortgage is paid down, the available limit on the line of credit increases by an equal amount. Thus, a borrower can take equity out of a property on a regular basis and without having to make an additional mortgage application which reduces costs to the borrower. This tyupe of mortgage is sometimes used in conjunction with the Smith Manoeuvre.

Shelter Costs: Shelter costs are costs associated with housing that are used in Total Debt Service Ratio and Gross Debt Service Ratio calculations to qualify a borrower for new mortgage financing. Shelter costs include the following items with respect to the subject property: mortgage payment (principle and interest), property taxes, heating costs, strata fees (50% if applicable), and pad rent (if applicable).

Smith Manoeuvre: The Smith Manoeuvre is an investment technique that converts non-tax deductable mortgage debt into tax-deductable investment debt, which can offset borrowing costs by way of tax savings and returns on investment.

Subject Property: The property being appraised or used as security in connection with a borrower’s new mortgage financing.

Sub-prime Lender: Sub-prime lenders provide loans to borrowers whom may have difficulty maintaining a mortgage repayment schedule. For example, such borrowers may have poor credit or a poor repayment history. Sub-prime mortgages are considered to be higher risk loans and are typically associated with higher interest rates that are commensurate with the risk.

Term (Mortgage Term): The term of a mortgage represents the duration of a mortgage contract between a borrower and a lender. The mortgage contract specifies repayment conditions, such as interest rates, until the end of term whereupon the outstanding principal is due. At the end of a mortgage term, a borrower has the option to renew or refinance their mortgage without penalty.

Total Debt Service Ratio (TDSR): The Total Debt Service Ratio (TDSR) is a lending constraint used by lenders to qualify a borrower for mortgage financing. TDSR measures the percentage of gross annual income required to cover annual payments associated with house (i.e. shelter costs) and all other debt obligations, such as payments on car loans. Lender policies dictate the maximum TDSR that will be approved, which is one factor that can limit a borrower’s maximum principal loan amount.

Variable Rate Mortgage (VRM): A VRM is a type of mortgage with fixed payments, but fluctuating interest rates. The change in interest rate is usually relative to the prime rate and determines how much of the principal amount and how much interest is payable to the lender.