Industry Jargon Explained
đ 1 – 11 minute read
Baffled by some of the phrases realtors and bankers throw at you? Here are some commonly usedâbut not always understoodâwords to describe mortgages:
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Amortization Period
This is the number of years it will take to repay the entire mortgage in full and is determined when you are approved. A longer amortization period will result in lower payments but more interest overall as it will take longer to pay off. The typical amortization range is 15 to 30 years.
Appraisal
An estimate of the current market value of a home.
Appreciation
An increase in the value of a home or other possession from the time it was purchased.
Bona-fide Sales Clause
Means you cannot pay off your mortgage during the term unless you sell your property.
Closed Mortgage
This is any mortgage where you have agreed to pay the lender for a specified period of time. This means that you cannot pay it off, refinance or renegotiate before the mortgage term ends without incurring a penalty. Depending on the lender, there may be options for accelerated payments but it depends on your particular mortgage contract. While these mortgages tend to be a lot stricter, they can often provide lower interest rates.
Closing Date
The date when the sale of the property becomes final and the new owner takes possession of the home OR if a Refinance, the date when you receive the requested funds and if applicable, have the agreed upon debts paid off.
Collateral Charge Mortgage
Also referred to as a collateral loan, this is a âtypeâ of registration. Collateral mortgages are registered in place of a first mortgage and can be one charge or a 1st with a Line of Credit (LOC). In many cases collateral mortgages are registered for more than the mortgage loan amount.
Commitment Letter
A mortgage commitment letter is a formal document from your lender stating that you’re approved for the loan based on certain conditions being satisfied, referred to as a Conditional Approval. Lenders issue a mortgage commitment letter after an applicant successfully completes the pre-approval process.
Conditions
Conditions are borrower obligations to deliver supporting documents or take actions specified by your lending institution. Mortgage purchase (or Refinance) conditions are the sum of all the agreements made between a person selling a home, the person buying it and/or the lender providing the necessary funds. Whether you are buying someone else’s home, putting money down on a home that is under construction, or refinancing in order to access money from property you already own, conditions are written into a mortgage to protect everyone.
Conditional Approval
A conditional approval is offered to you by the lender in a commitment letter and means the lenders mortgage underwriter is mostly satisfied with your mortgage application. They are willing to approve your mortgage so long as you can meet their pending conditions outlined in your commitment letter.
Condition on Financing (COF)
A Condition on Financing is an optional (but often included) clause submitted with your Offer to Purchase that gives us a window of time, typically 3 to 5 business days to:
- submit your live offer to a lender,
- satisfy the conditional requirements of the mortgage commitment, and
- secure your financing.
If you cannot secure financing during this window, for whatever reason, you can safely withdraw your Offer to Purchase and have your initial deposit returned to you.
Conventional Mortgage
In the case of a conventional mortgage, the loan covers no more than 80% of the purchase price on the property. This means, the buyer has put 20% (or more) down on the property. These mortgages do not require default insurance due to the amount down and are classified as Uninsurable (explained in greater detail below).
Debt Service Ratios
- Gross Debt Service (GDS) Ratio: The percentage of a person or householdâs gross monthly income that goes to pay the mortgage principal and interest, property taxes and heating costs, plus 50% of any condominium maintenance fees or 100% of the annual site lease for leasehold tenure if applicable. To qualify for a mortgage, the borrowerâs GDS ratio must be at or below 35 or 39% (depending on the lender).
- Total Debt Service (TDS) Ratio: The percentage of a person or householdâs gross monthly income that goes to pay the mortgage principal and interest, property taxes and heating costs, plus all other debt obligations such as car payments, personal loans or credit card debt. To qualify for a mortgage, the borrowerâs TDS ratio must be at or below 42% or 44% (depending on the lender).
Default
Failing to make a mortgage payment on time or to otherwise abide by the terms of a mortgage loan agreement. If borrowers default on their mortgage payments, the lender can charge a penalty or even take legal action to take possession of the home.
Default Insurance
This insurance protects the lender in the event that the borrower defaults on their mortgage. This insurance is mandatory for borrowers putting less than 20% down.
Deposit
A deposit, which typically makes up a portion of your down payment, is an initial payment that is frequently required when your offer to purchase a home is accepted. This deposit can range from 5 – 10% of the purchase price and serves as a demonstration of your commitment to the seller. By making this payment, you are showing that you are serious about following through with the purchase and intend to fulfill the terms of the agreement.
Derogs
Short for âderogatoryâ, derogs refers to an overdue account or late payments on your credit report.
Down
Short for down payment. In Canada, the minimum down payment is 5% on a home purchase up to $500,000 and 10% down is required on the amount over $500,000 up to $999,999. A 20% down payment is required for purchases $1M +.
Equity
The cash value that a homeowner has in their home after subtracting the mortgage balance and/or other debts owed on the property. Equity usually increases over time as the mortgage loan is gradually paid down. Changes in overall market values or improvements to a home can also affect the value of the equity.
Fixed Interest Rate
A fixed-rate mortgage means you are locked in at the interest rate agreed for a longer length of time.
Flex Down
This refers to a borrowed down payment program, which allows homeowners to âborrowâ money for the down payment from a credit card, line of credit or other loan. In this case, the repayment of the loan is included in the debt calculations.
Foreclosure
This refers to the possession of a mortgaged property by the bank or lender if a borrower fails to keep up their mortgage payments.
High-Ratio Mortgage (Also known as an Insured Mortgage)
A high-ratio mortgage is where the buyer has provided a down payment of less than 20% of the purchase price and needs to pay a premium known as Mortgage Default Insurance to one of the 3 mortgage insurers to insure the mortgage against default. This mortgage is also known as an Insured mortgage (explained in greater detail below).
Home Inspection
A thorough examination and assessment of a homeâs state and condition by a qualified professional. The examination includes the homeâs structural, mechanical and electrical systems.
Insured (High-ratio – Less than 20% down payment)
If you put less than 20% down, you will need mortgage loan default insurance. This insurance protects your lender in the event you, the borrower, default on your mortgage loan. As the perceived risk is lower for Insured loans, you the borrower are generally able to obtain the lowest rates in the market place.
The current mortgage loan insurance companies are CMHC, Sagen and Canada Guarantee.
- Maximum 25-year amortization
- Purchase price under $1M
- Applies to Purchases & Eligible Switches
- Must be Owner-occupied (but can have a rental unit)
Insurable (Down payment of 20% or more while meeting the following criteria)
This mortgage meets all the qualifications of an insured mortgage, however, the LTV (Loan to Value) is equal to or less than 80%.
- Maximum 25-year amortization
- Purchase price under $1M
- Applies to Purchases & Eligible Switches
- Must be Owner-occupied (but can have a rental unit)
* In some circumstances when dealing with Insured applications, the down payment required may be greater than 20%. These would pertain to specific niche programs only.
InterestÂ
The fee you pay your lender for the use of their money.
Land Transfer TaxÂ
A tax charged by many provinces and municipalities (usually a percentage of the purchase price) that the buyer must pay upon closing.
LTV â Loan to Value
This is the difference between the value of the property and the amount of mortgage registered against it; Property value $100,000 vs. Mortgage Loan Amount of $80,000 equates to an 80% LTV
Maturity Date
The last day of the term of a mortgage. The mortgage loan must either be paid in full, renegotiated or renewed on this day.
MIC
Short for a Mortgage Investment Corporation, this is a group of investors who will lend you the money for a mortgage if a traditional lender will not due to unusual circumstances.
Mortgage Commitment Letter
A mortgage commitment letter is a formal document from your lender stating that you’re approved for the loan based on certain conditions being satisfied. Lenders issue a mortgage commitment letter after an applicant successfully completes the pre-approval process.
Mortgage Protection Insurance
Protects the family of a borrower by paying off the mortgage if the borrower dies.
Open Mortgage
An open mortgage means you can pay out the balance at any time, without incurring a penalty.
PIT
Principal, interest and taxesâ a calculation representing the amount you can afford to pay monthly on your home. Heating costs are often included in this calculation (PITH).
Principal
The amount a person borrows for a loan (not including the interest).
Pre-Payment Penalties
A fee charged by your lender if you pay more money on your mortgage than the pre-payment option allows.
Pre-Payment Privileges
The ability to prepay a portion of the mortgage principal before it is due and without penalty. This extra payment on the mortgage would be applied directly to the principal, as your regular monthly payment covers the interest.
Property Taxes
These are taxes that are charged by the municipality based on the value of the home. In some cases, the lender will collect property taxes as part of the borrowerâs mortgage payments and then pay the taxes to the municipality on the borrowerâs behalf.
Pull
Also known as a âcredit checkâ or âcredit inquiryâ a âcredit pullâ refers to the act of checking a credit report to determine if the borrower is a viable investment prior to approval of the mortgage.Â
Tax Slips
Tax slips are prepared by your employer, payer, administrator or financial institution. You should receive most of your slips (including your T4, T4A, and T5 slips) and receipts by the end of February. However, T3, and T5013 slips do not have to be sent before the end of March.
Term
Term is the length of time that a mortgage agreement exists between you and the lender. Rates and payments vary with the length of the term. The most common term is 5-years, but they can be anywhere from 1 to 10 years. Generally a longer term will come at a higher rate due to the added security. At the end of the term, the mortgage loan must either be paid in full, renewed or renegotiated, usually with new conditions.
Title Insurance
Protects against losses or damages that could occur because of anything that affects the title to a property (for example, a defect in the title or any liens, encumbrances or servitudes registered against the legal title to a home).
Trade Lines
This refers to any credit cards, loans, wireless phone accounts, or mortgages that appear on your credit report.
Underwriting
This refers to the process of determining any risks relating to a particular loan and establishing suitable terms and conditions for that loan.
Uninsurable (Conventional – down payment of 20% or more)
If your down payment is 20% or greater, mortgage insurance is not required, and you, the borrower have access to more flexible terms. In some circumstances where location or condition of the property is a concern, the lender may request mortgage loan insurance as a condition of financing regardless of the LTV. In these cases, you would have to follow the insurers rules. Uninsurable files follow the rules below and are subject to a potentially higher interest rate.
- Maximum 30-year amortization
- Purchase price over $1M (subject to sliding scale, lender specific)
- Purchase/Refinance/Switch
- Possibility of exceptions on qualifying ratios
- Owner-occupied/Cottages/Second Homes/Rentals
Variable Interest Rate
A variable-rate refers to an interest rate that is adjusted periodically to reflect market conditions.
Vendor Take-Back Mortgage
A type of mortgage where the seller, not a bank or other financial institution, finances the mortgage loan for the buyer.
20/20
A condition that refers to repaying 20% of the mortgage balance OR increasing your payment by 20%, without incurring a penalty.
If you are looking into getting a mortgage donât be afraid to ask questions! At the end of the day, the mortgage contract has your signature on it and it is important to understand any contract you are signing. Get in touch and I would be happy to discuss your situation and answer any questions surrounding mortgage conditions or jargon to ensure the best results for YOU!
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