 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.
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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 30
or even 35 years
to reduce the monthly payment.
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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.
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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.
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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.
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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.
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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.
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Interest
Adjustment Date: This may apply to mortgages that close on any day
other than the requested day of payment. For instance: 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.
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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.
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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.
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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.
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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
Mortgage Broker
is typically less costly than similar coverage obtained directly from
an
insurance company or lender.
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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 Canada 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.
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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.
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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.
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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.
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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 120 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 funding date.
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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.
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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.
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Term:This
is the period of time that the interest rate and the loan is contracted
for. Terms can vary from 3 months to 10 years (alhtough the standard
term
is still 5 years). Do not confuse with Amortization.
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Member,
Canadian Association of Accredited Mortgage Professionals E. & O.E.
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