Glossary of mortgage terms

Accelerated Payment

A mortgage repayment plan in which the borrower makes more payments than needed. The extra money is applied directly to principal. Not all months have 4 weeks; some have 5. Accelerated bi-weekly payments are calculated by dividing the monthly payment by 2; making 26 payments a year. Accelerated weekly payments are calculated by dividing the monthly payment by 4.

Acceleration Clause

A clause in a mortgage which provides that where default has occurred in making any mortgage payment, the outstanding mortgage amount becomes due.

Accrued Interest

The interest charged for the period of time that has elapsed since the last interest date.

Action for Possession

A legal remedy available to a lender when a mortgage is in default. It allows the lender to take possession of the mortgage property.

Agent

One who is authorized to represent and act on behalf of another person or business; the principal in transactions involving a third party. Unlike an employee who merely works for the principal, an agent works in place of the principal.

Agreement of Purchase and Sale

A written agreement between vendor and purchaser in which the purchaser agrees to buy certain real property and the vendor agrees to sell upon terms and conditions as set out in that agreement.

Alternative Lending

A lending classification where the borrower’s ability or intent to pay may be viewed as less certain than in prime lending; the amount of the mortgage (relative to the property) may be seen as excessive; or the property pledged as security may be seen to have a lower value.

Amortization

Refers to the process of paying off a mortgage in regular payments composed of both interest and principal.

Amortization Period

The time over which the mortgage is to be completely repaid, assuming equal payments. This means that when looking, for example, at a mortgage with a 25-year amortization period, it would take 25 years to reduce the balance to zero, if all regular payments were made on time and the terms (payment and interest rate) remained the same.

Amortization Schedule

A table showing the amounts of principal and interest which make up each of the periodic level payments and the outstanding principal balance of the loan after each level payment is made.

Amortized Mortgage

A mortgage requiring regular payments which include both principal and interest sufficient to fully repay the loan by maturity.

Anniversary Date

The same date in each calendar year during the term of the mortgage. The first anniversary date occurs one year from the date interest is adjusted and the periodic repayments begin.

Appraisal

An independent, unbiased report that uses various analysis techniques and market research to determine the realistic value of a property.

Appraisal Report

An independent assessment of a property by a qualified individual. A statement giving an opinion of value of an adequately described property, as at a specific date and supported by pertinent data.

Appraiser

Determines the market value of a house based on its condition, and the selling price of comparable houses recently sold in the area. The licensing requirement for real estate appraisers varies from province to province.

Arrears

An overdue mortgage payment.

Assessment (Assessed Value)

A value placed upon property (land and buildings) for taxation purposes.

Assets

Goods of value, either tangible or not, that a borrower or business owns.

Assumption of Mortgage

The act of assuming liability for an existing mortgage on a property by the purchaser of that property. With builders’ loans, the assumption is usually evidenced by written agreement.

Beacon Score

The name given to the credit score published by Equifax. See also Credit Score and FICO Risk Score.

Blended Payments

Regular equal mortgage payments combining, or blending, interest and principal components in one constant payment.

Blended Rate

The rate that results from the blending of an existing mortgage and a new mortgage with differing interest rates into one consolidated mortgage. The calculation to determine the final rate takes into account both the interest rates and the amount of principal for each of the component loans.

Bridge Financing

A loan provided to borrowers to provide financing for purchase, pending closing of the sale of their existing property.

Bridge Loan

A short-term, high interest loan intended to offset financial hardship until a long-term loan is secured.

Brokerage

The aspect of business concerned with bringing parties together for the transaction of business and the execution of contracts. Brokerage involves sales, exchanges, and rentals.

Broker

One who acts as an intermediary between parties in a transaction. A broker, for a fee or other consideration, arranges a transaction (a sale) by a seller to the buyer.

Builder’s Loan

A loan designed for borrowers who need financing for construction projects. These differ from normal loans as the funds are received in stages (also known as draws) during the building process to protect the lender from construction abandonment.

Buy Down

A lump sum payment as consideration for the reduction in the interest charged on a loan from that which would normally be charged.

Canada Mortgage and Housing Corporation (CMHC)

A Crown Corporation which was initially created to administer the National Housing Act (NHA), and is Canada’s only public sector mortgage insurer. CMHC is charged with administering government housing initiatives and works with community organizations, the private sector, non-profit agencies, and all levels of government to help create innovative solutions to today’s housing challenges.

Canada Mortgage Bonds Program

Similar to Mortgage-Backed Securities (MBS) in that the Canada Mortgage and Housing Corporation guarantees the timely payment of interest and principal. However, an MBS has a disadvantage to investors because borrowers of the underlying mortgages can make partial or full prepayments of their mortgage principal. While borrowers like this flexibility, investors do not like the unpredictability. The Canada Mortgage Bond Program eliminates this cash flow uncertainty to investors because CMHC guarantees both semi-annual interest payments, and the repayment of principal on a specified maturity date.

Capacity (5 Cs of Credit)

The ability of a borrower to repay a loan.

Capital (5 Cs of Credit)

The amount of money the borrower has invested into the property.

Capped Rate Variable Mortgage

A variable rate mortgage on which the lender has set a limit to interest rate increases or decreases.

Cash Back

A mortgage feature that provides the borrower with cash back as a percentage of the mortgage principal. It is generally used to cover closing costs.

Character (5 Cs of Credit)

The general impression of how trustworthy a borrower is to repay a loan; the borrower’s length of employment is a key measurement.

Chattel Mortgage

A mortgage given on chattels. This type of mortgage is usually given as collateral security to a mortgage on real estate. As an example, there may be a chattel mortgage on real estate. As an example, there may be a chattel mortgage on refrigerators and stoves in an apartment building.

Closed Mortgage

A mortgage agreement that cannot be repaid, refinanced, or renegotiated until maturity, unless otherwise stated in its terms. These terms may include limited prepayment options such as:

Double Up Option

The opportunity to double the scheduled principal and interest payments.

Option to Increase a Payment

The option to increase the periodic payment by a set percentage once a year.

Lump Sum Payment Option

The choice to prepay a portion of the principal once each year.

No Cost Switching of Payment Option

This option allows the borrower to change the payment schedule (monthly/semi-monthly/bi-weekly/weekly).

Skip a Payment Option

This alternative grants the borrower the ability to skip a monthly payment without the mortgage going into default.

Closing Date

The date on which a sale becomes final, funds are transferred from the purchaser to the vendor, and the new owner takes possession of a property.

Co-Applicant

One of two or more people applying together for a loan.

Co-Insurance

A sharing of risk between the insurer and the insured which depends on the relationship of the amount of insurance carried versus the amount of insurance required at the time of the loss.

Collateral (5 Cs of Credit)

Guaranteed support for a loan, generally consisting of funds or real estate, that ensures added security to the lender. Collateral can also take the form of guarantees provided by third parties i.e., guarantors.

Collateral Mortgage

A mortgage backed by additional security if the lender believes the primary security is insufficient.

Compound Interest

Interest charged not only on the principal sum, but also on interest amounts charged, but not paid, in preceding periods that accumulate as new principal.

Conventional Mortgage

A loan based on the credit of the borrower and the collateral for the mortgage. A conventional mortgage does not exceed 80% of the market value of the property. This means that the borrower must have 20% or more available for the down payment.

Convertible Rate

Mortgages with a convertible rate feature allowing borrowers to fix the rate of their variable rate mortgage at any time with no penalty.

Co-Operative

A form of multiple ownership of real estate in which a corporation or business trust holds title to a property. Individual unit holders have the exclusive right to occupy their unit by lease, but their investment in the corporation is by way of shares.

Co-Ownership

The idea that a property (present or future) can be held at the same time by several persons. The most common types of co-ownership are joint tenancy and tenancy-in-common.

Credit (5 Cs of Credit)

The repayment history of the borrower.

Credit Check

Examines the borrower’s past payment history, outstanding debt levels, employment, income and residence history in order to assess how likely the borrower is to repay the mortgage loan.

Credit Report

A detailed description of the applicant’s credit records. This includes information provided by lenders concerning credit card payments and loans repayment history.

Credit Score

A single three-digit number that represents the information found in a borrower’s credit history. Equifax’s credit score is known as the Beacon Score, while TransUnion’s score is called the FICO Risk Score.

Current Ratio

A measure that shows the ability of a firm to pay its current liabilities. It is calculated by dividing current assets by current liabilities.

Deed

A legal document in writing, duly executed and delivered, that conveys title or an interest in real property.

Demand Letter

A letter sent by the lender to the borrower demanding immediate payment of all arrears, together with costs.

Discharge Document

Once the receipt (acknowledging the completion of payment) has been processed and registered to the title, it becomes the discharge document.

Discharge of Mortgage/Charge

A legal document executed by the lender, and given to the borrower when a mortgage loan has been repaid in full, releasing him or her from all obligations and covenants contained in the mortgage.

Double Up Option

A clause that may be included as part of an open mortgage contract, giving the borrower the opportunity to double the scheduled principal and interest payments.

Electronic Funds Transfer (EFT)

The automatic transfer of funds from one account to another. Mortgage repayments can be made electronically directly to the lender.

Equity (for Mortgages)

The difference between lending value (the purchase price or market value) and indebtedness.

Existing Mortgage

A mortgage loan that is already in place when the property is being sold. The buyer may have the option of assuming the mortgage or taking out a new one, depending on whether the mortgage is assumable.

Expandability

A feature available in some mortgages. It allows the borrower to increase or expand the principal on a first mortgage at the lender’s agreed upon interest rate.

Face Value

The amount of money the borrower promises to repay (at the contract rate of interest)

Fair Market Value

The highest price reasonably expected for an interest in land when sold by a willing seller to a willing buyer after adequate time and exposure to the market.

Fee

The right of ownership of a property. In real estate, this is an inheritable estate in land.

First Mortgage

A mortgage registered before all others on title.

Fixed Rate Mortgage

Mortgage where the interest is determined and set for the term of the mortgage. Fixed rate mortgages are most desirable when current interest rates are low.

Foreclosure

A legal remedy available to a lender when there is default under any of the covenants in the mortgage. It deprives the borrowers of their equitable right to redeem.

Fully Amortized Mortgages

A mortgage that requires constant regular payments of both principal and interest components for the life of the mortgage.

Garnishment

The legal attachment of a debtor’s wages, cash flow, or assets by creditors. The party served with notice must comply with the Garnishee Order and forward funds to the creditor(s) named.

Group Insurance

A type of insurance plan in which premiums are set for a large group as a whole, as opposed to individual premiums set on personal characteristics. All mortgage creditor insurance plans are group insurance plans.

Guarantor

One who promises to pay a debt or perform an obligation contracted by another in the event the original borrower fails to pay or to perform as contracted

High Ratio Mortgage

A mortgage with a loan-to-value of 80% or more. This occurs when the borrower’s down payment is 20% or less of the property value.

Holdback

The withholding of, or non-advancement of, a portion of a mortgage loan to maintain adequate security: pending achievement of a performance requirement, or as protection against liens.

Home Equity Financing

A type of mortgage refinancing in which the mortgage amount is increased to take advantage of the increase equity in a home.

Interest Only Loan

A loan in which the borrower only pays regularly scheduled payments on the interest to the lender and the principal remains the same during the life of the loan. The principal is repaid in full at the end of the loan’s term.

Interest Rate

The percentage charged on outstanding loan balances.

Joint Tenancy

An ownership of property by two or more people, each of whom has an undivided interest subject to the right of survivorship.

Judgement

The official and authentic decision of a court of justices upon the respective rights and claims of the parties to an action or suit being litigated and submitted to its determination.

Land Titles System

A system of land registration under which the registrar, or master of titles, passes on the validity of the mortgage instrument and determines its legal effect. The Government guarantees title.

Lease

A contract between landlord (lessor) and tenant (lessee) for the occupation or use of the landlord’s interest in a property by the tenant for a specified period of time and for a specified consideration (rent).

Legal Description

The written geographical description of a property (metes and bounds) as described in the land register.

Lien

A claim on real or personal property for the payment of some undischarged debt or duty.

Listing Agreement

A contract between a seller and a real estate agent or broker setting out the conditions of the listing. A listing agreement generally includes, but is not limited to, the length of the listing period, the desired sales price, and the amount of the commission.

Loan-to-Value Ratio (LTV)

The amount of the mortgage loan compared to the value of the property. This ratio is calculated by the lender prior to providing the loan. The results of this calculation help to determine whether the applicant will qualify for a loan and whether the application, if approved, will be for a conventional loan or a high ratio loan.

Lump Sum Payment Options

A clause that may be included in an open mortgage allowing the borrower to prepay a portion of the principal if desired, and in accordance with the specific terms of the contract.

Maturity

The end of the mortgage’s term.

Maturity Date

The final day of the term of the mortgage on which the balance of the mortgage owing becomes due.

Maximum Mortgage Amount

The maximum dollar that a lender is willing to fund. It is expressed as a percentage of the value of the property to be purchased when using the loan-to-value ratio.

Offer to Purchase

A written contract outlining the terms under which the buyer agrees to purchase the property. There may be conditions attached to the offer; for example, the offer may be conditional on the buyer arranging mortgage financing or selling a current home.

Open Mortgage

Allows a borrower to repay any amount of the principal at any time without notice or penalty, in additional to regular mortgage payments.

Partially Amortized Mortgage

A mortgage that protects both borrowers and lenders from the risk of unexpected interest rate fluctuations. The loan matures on a short-term basis, at which time the full amount of the outstanding amount must be either repaid or refinanced at current interest rates.

Portable Mortgage

A mortgage with an option that allows a buyer to transfer a current mortgage to a new property (typically subject to credit approval and a property appraisal).

Power of Sale

A clause generally inserted in mortgages giving the lender the right and power, on default by the borrower, to sell the mortgaged property by public auction, private contract, or tender.

Prepayment Clause

A clause inserted in a mortgage that gives the borrower the privilege of paying all or part of the mortgage debt in advance of the maturity date.

Prepayment Penalty

The sum of money (usually equal to an amount of interest) a lender may require from a borrower to repay all or part of any outstanding principal in advance.

Principal

The amount borrowed upon which interest is paid.

Renewal Agreement

An agreement through which the lender may agree to extend the mortgage loan, possibly on revised terms for the principal repayments and interest rate.

Reverse Mortgage

Allows older consumers to convert their home equity into monthly cash payment(s), generally for living expenses. A homeowner’s equity is gradually drawn down by a series of monthly payments from the lender to the homeowner. The loan balance is due at the end of the loan period, or upon the death of the homeowner, and is usually settled by the heirs who sell the property to meet the outstanding obligation.

Right of Survivorship (Real Estate)

The right of survivorship comes into effect when land is held in undivided portions by co-owners and one of them dies. In this instance, the deceased’s interest in the land passes to the surviving co-owner, rather than to the deceased’s heirs.

Second Mortgage

A mortgage placed on real property which is already encumbered with one mortgage. Determination of first, second, third mortgage, etc. is determined by priority of registration (time and date).

Skip Payment Option

An example of a mortgage clause that may be added to an open mortgage. If this clause is part of the mortgage agreement, the borrower has the ability to skip a monthly payment without the mortgage going into default.

Term Mortgage

A non-amortizing mortgage under which the principal is paid in its entirety at the maturity date. A term mortgage is sometimes called a straight loan.

Third Mortgage

A mortgage placed on real property which is already encumbered with a first and second mortgage. Determination of first, second and third or subsequent mortgage is by priority of registration (time and date).

Title

The legal evidence that shows the rightful owner of land.

Title Fraud

A range of fraudulent activity regarding the ownership of property. One form of title fraud involves taking out a mortgage against a home that the fraudster does not own. The fraudster assumes the homeowner’s name and credit history, but absconds with the loan proceeds.

Title Insurance Policy

A contract by which the insurer, usually a title insurance company, agrees to pay the insured a specific amount for any loss caused by insured defects to title of a property, for which the insured has an interest as purchaser, lender, or otherwise.

Title Search

An examination of public records to determine the state of title.

Transfer/Deed of Land

A document prepared by a lawyer containing a detailed description of a property that transfer ownership from the vendor to the purchaser.

Variable Rate Mortgage

Also referred to as adjustable rate mortgage. This type of mortgage is the opposite of a fixed rate mortgage. The interest rate on this loan may change during the term of the mortgage reflecting changes in the current market rates.

Vendor Take-Back Mortgage (or Seller Take-Back Mortgage)

A mortgage in which the vendor uses his or her own equity to provide some or all of the mortgage financing in order to sell the property.

Vendor’s Lien

A notice registered on title by the vendor, protecting the vendor for the unpaid balance of the purchase price. It is usually collaterally secured by a mortgage.

 

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Source: Mortgage Professionals Canada