Canada Mortgage Words and Terms
Amortization Period – The actual number of years it will take to repay a mortgage loan in full. This may go beyond the term of the loan. For example, mortgages often have five-year terms but 25-year amortization periods.
Appraised Value – The estimated of the value of the property offered as security for a mortgage loan. This appraisal is done for mortgage lending purposes and may be less than the purchase price of the property.
Canada Mortgage and Housing Corporation (CMHC) – The Corporation of the Federal Government that administers the National Housing Act (NHA) and provides mortgage insurance to lenders.
Closed and Open Mortgages – A closed mortgage agreement does not provide for payout before maturity. A lender may permit payout under certain circumstances but will levy a penalty charge for doing so. An open mortgage permits for prepayment/repayment at any time without penalty.
Closing Date – The date on which the sale of the property becomes final and the new owner takes possession.
Condominium – A form of ownership in which the owner has title to a dwelling unit and owns a share of the common elements (such as elevators, hallways and the land).
Conventional Mortgage – A mortgage loan that does not exceed 75% of the lesser of the appraised value or the purchase price of the property. A mortgage that exceeds that limit must be insured.
Debt Service Ratios (GDSR & TDSR) – The Gross Debt Service Ratio (GDSR) is the percentage of gross annual income required to cover payments associated with housing (mortgage principal and interest, taxes, secondary financing, heating, and 50% of condominium fees, if any). The GDSR should not exceed 32% of gross annual income. The Total Debt Service Ratio (TDSR) is the percentage of gross annual income required to cover payments associated with housing and all other debts and obligations, such as payments on a car loan. The TDSR should not exceed 40% of gross income. For self-employed/commission sales applicants, net income is used for GDSR and TDSR ratio calculations.
Down Payment – The amount of money (usually in the form of cash) put forward by the purchaser. It represents the difference between the purchase price and the amount of the mortgage loan.
Equity – Equity is the difference between the price for which a property could be sold and the total debts registered against it.
Fixed Rate and Variable Rate Mortgages – A fixed rate mortgage is where the rate of interest is fixed for a specific term. A variable rate mortgage is where the rate of interest changes as money market conditions change, usually not more than once a month. The monthly payment stays the same for a specified period; however, the amount applied towards the principal changes according to the changes (if any) in the rate of interest.
GEMICO – GE Capital Mortgage Insurance Company of Canada, a private mortgage insurer.
High Ratio Mortgage – A mortgage loan that exceeds 75% of the lesser of the appraised value or purchase price of the property. This mortgage must be insured and borrowers must pay an application fee and the insurance premium (which may be added to the mortgage) to the insurer.
Interest Adjustment Date (I.A.D.) – A date, usually one month before monthly mortgage payments begin, when interest on monies advanced before that date is calculated and must be paid by the borrower.
Leasehold Mortgage – A mortgage loan on a home where the building is on leased (rented) land. The lender takes an interest in the lease.
Loan-to-Value Ratio – The ratio of the loan to the appraised value or purchase price of the property, whichever is less, expressed as a percentage.
Maturity Date – The last day of the term of the mortgage agreement. The mortgage agreement must then be renewed or the mortgage balance paid in full.
Mortgagee – The lender
Mortgagor – The borrower
National Housing Act (NHA) Loan – A mortgage loan insured by CMHC.
Offer to Purchase – A formal, legal agreement that offers a certain price for a specified real property. The offer may be firm (no conditions attached) or conditional (certain conditions must be fulfilled).
P.I.T. – Principal, interest, and taxes.
Prepayment Charge – A fee charged by the lender when the borrower pays off all or a portion of a mortgage more quickly than provided for in the mortgage agreement.
Refinance – To arrange a new mortgage for an increased amount. The old mortgage(s) is paid off (discharged) from the proceeds of the new loan. This type of loan is also referred to as “equity take out.”
Renew – To extend a mortgage agreement with the same lender for another term. The length of the term and the conditions (such as the rate of interest) may be changed.
Term – The duration of a mortgage agreement. As the amortization period is longer than the term, mortgage payments made may not fully cover the outstanding principal by the end of the term.