Mortgage Glossary
We have put together some basic information on mortgage terminology, mortgage
costs and some tips on how to make an informed decision on your mortgage needs.
While this is not an all-inclusive list, we hope it will help you find the right
mortgage for your needs.
Amortization: A mortgage is amortized over a period of years. This amortization period is the
length of time it takes to pay off the mortgage in full. The usual amortization
period is 25 years, however, this can be accelerated to pay off the mortgage more
quickly or in some cases can be stretched to 40 years to reduce the monthly payment.
Assumable: Some mortgages are assumable with qualification. This means that should you sell
your house before the term of the mortgage is completed, the purchaser can take
over your mortgage if they qualify. This allows you to avoid paying a penalty
to break your mortgage.
Blend & Increase: The ability to increase your existing mortgage or the term of the mortgage,
with only the increased amount or term at today’s interest rate. The interest
rate for the existing mortgage is combined or blended with the interest rate of
the increased amount. This is advantageous if you have a good rate on your existing
mortgage or if you want to avoid a penalty to pay out an existing mortgage.
Commitment Letter: This is the document that your lender will confirm the basic terms and conditions
upon which the lender will provide the mortgage and indicate the conditions that
must be met before funding. The standard conditions include but are not limited
to receipt of an appraisal, income verification by way of employment letters and
income tax returns, as well as verification that the purchasers downpayment has
not been borrowed.
Discharge: For reasons, planned or unplanned, the borrower may need to sell before the end
of the mortgage term. Discharge fees vary widely between lenders which may result
in thousands of dollars in penalties. Worse yet, if the discharge policy is "No
Discharge", the borrower may be locked in for the entire term of the mortgage.
Early Pay-out Penalty: Many people don’t think about breaking their mortgage when they are in the midst
of arranging it, however, this possibility cannot be overlooked. An individual’s
circumstances can change – transfer of employment, marriage breakdown, etc. Some
mortgages are fully closed and cannot be broken under any circumstance. Other
mortgages have a sales clause allowing for early payout of the mortgage upon an
arms-length sale of the property, subject to a penalty (for example, three months
interest). Some mortgages allow the borrower to break the mortgage, for any reason,
upon payment of a penalty.
Interest Adjustment Date: This may apply to mortgages that close on any day other than the requested day
of payment. For instances: since some lenders want monthly payments to be made
on the first day of the month, they will adjust the interest due on closing so
that interest on your mortgage is paid up until the first of the coming month.
If you close on the 20th of the month (and the month has 30 days), you will have
to pay interest for 10 days so that you are paid up until the first of the coming
month. Then your first full mortgage payment will be due on the first of the following
month.
Interest Rate: The rate of interest is a key consideration when arranging your mortgage. The
interest is the payment to the lender for the use of the mortgage money.
The interest rate can be fixed (where the rate remains constant for the term)
or floating (where the rate changes at regular intervals). Short term or convertible
terms usually have lower interest rates and can be used to a borrower’s advantage
in an unstable market. These mortgages allow you to ride out a fluctuating or
falling rate market until rates reach a level where you wish to "lock-in" to a
longer term. On the other hand, long term rates offer stability and eliminate
the need to monitor rates daily.
Interim Financing: When the purchase of your new home closes in 60 days but the sale of your current
home closes in 90 days, you will need interim or bridge financing. This is because
for 30 days, you will own both properties, and of course, not receive the equity
out of your old property. If the lender you choose cannot provide you with interim
financing, you may find getting it from other lenders will be very expensive.
Mortgage: A contract between a borrower and a lender, where the borrower pledges a property
to a creditor as security for the payment of a debt. "Charge" is another word
for mortgage.
Mortgage Life Insurance: Life insurance that pays off the balance of the mortgage in the case of the borrowers
death (i.e., if a spouse dies, the remaining spouse would not have to worry about
mortgage payments – it would be paid in full). The monthly cost of getting this
insurance through the lender is typically less costly than similar coverage obtained
directly from an insurance company.
Payment frequency options: You will often have the choice of making payments on your mortgage on a monthly,
semi-monthly, bi-weekly or weekly basis. Increasing the payment frequency, i.e.,
bi-weekly instead of monthly, can shorten the amortization of your mortgage and
save you a considerable amount of interest.
By law, all mortgages in Ontario are registered as having monthly payments. Any
change to this is done by an amendment to the mortgage. This amendment is a privilege
and can be revoked in the event of failure to make payments.
Pre-authorized chequing/debit: In this computer age, mortgage payments are normally made by pre-authorized
chequing or debit where the lender takes your regular monthly, semi-monthly, bi-weekly,
or weekly payment out of a predetermined bank account automatically.
Prepayment privileges: These prepayment privileges allow you to make extra lump sum payments, double
your payments or increase your regular payments. Prepayment privileges vary from
lender to lender. If you want to be able to pay your mortgage off quickly, check
the flexibility of your prepayment privileges.
Portable: If you have a good mortgage rate and a number of years remaining on your term,
you may want to take your mortgage with you to a new home when you move. This
can be done if the mortgage is portable. The property you are moving to will have
to be reviewed and approved by the lender before you can "move" the mortgage to
the new property.
Rate Guarantee: The period of time, prior to closing of your house purchase ("the completion
date") that a lender will guarantee that the interest rate they have offered will
not rise. This is usually for a period between 60 and 90 days - although longer
rate holds are available under special conditions. The commitment letter will
also state under what conditions (if any) that they will decrease the interest
rate if and when rates in general drop prior to your completion date.
Standard mortgage fees: All mortgages have standard fees associated with them such as renewal fees, discharge
fees, NSF fees, etc., These vary from lender to lender and should be considered.
Tax holdback: When property taxes are included with your mortgage payments, your lender will
hold back funds from your mortgage proceeds to cover interim or final property
taxes payable to the municipality. The amount depends on the month the mortgage
was funded and on the dates when interim and final taxes are due. Holdbacks are
used to pay for the current year’s taxes, while your monthly tax installments
are accumulated in the account to pay for the next year’s taxes.
Term:This is the period of time that the interest rate and the loan is contracted
for. Terms can vary from 3 months to 25 years.
