Making Mortgage Simple
At George Bargis, Broker Financial Group Inc., we make mortgages simple. Please review our glossary of mortgage terms and let’s start talking mortgages!
Adjustments on Closing
One way a purchaser(s) may experience adjustments on closing, is if the vendor(s) has pre-paid either utilities or property taxes or both, up to a certain period of time. For example, if the property taxes for the remainder of the year were due to the Municipality in the month of September, and the property is sold and closing in the month of November, the purchaser(s) would be responsible for reimbursing the vendor(s) on closing for the taxes pre-paid from the day of closing to the end of the year.
Another way a purchaser(s) may experience an adjustment on closing is the Interest Adjustment due on closing. This is the amount of interest required to be prepaid up to the Interest Adjustment Date (IAD). The IAD is the point at which the mortgage interest starts accumulating “in arrears”. In Canada all mortgage interest is calculated and paid after the period to which it applies. This differs from the way in which rental and lease payments are calculated, which is “in advance”. The good news on this one is that if you prepay for say 3 weeks you won’t have to make your first payment for almost two months. Also, if you take a biweekly payment term, the longest interest adjustment period is less than two weeks, by definition.
Is the time period utilized to calculate mortgage payments for each borrower(s), which includes blended payments of principal and interest based on an the term chosen by the borrower(s), and the market rates for the chosen term at the time of closing. This period is normally set at 25 years, but the amortization can be significantly reduced if the borrower(s) chose to utilize the several pre-payment options available. The maximum amortization period available in Canada is 40 years.
Appraisals are conducted by Accredited Appraisers with one of two designations. A CRA or an AACI, the difference being that a CRA can only appraise residential properties, and an AACI can appraise both residential and commercial properties. Appraisers normally provide a lender with two types of approaches in each appraisal report, one being the Market Value approach, which points out the most recent comparable sales in the area of the subject property. This approach is the one most commonly relied on by lenders when determining whether or not to proceed with the mortgage request.
The other type of approach provided in an appraisal report is the Cost approach. This approach places a value on the subject parcel of land, and the replacement value of the subject structure, or cost to reconstruct. Lenders typically use this approach to determine whether or not the land value is disproportionate to the structure on the subject parcel of land. Should there be a disproportionate value on the land vs the structure, most lenders would typically reconsider the amount funds to be advanced, and in many cases would not proceed with the mortgage.
The “assessed” value of a property is used by a municipality as a basis for calculating annual property taxes. An “assessment notice” from the municipality contains the “assessed value” and when multiplied by the current mill rate the property taxes for the year can be calculated.
Assignment of Interest of a Mortgage
Most Provinces allow a legal assignment of interest in a mortgage without having to discharge and re-register the existing one. This allows the mortgagor(s) to save the costs on discharges, searches, and registrations. This is particularly helpful and simplified on a “switch mortgage” and in a situation when a mortgage in secondary position requires a postponement.
An assumable mortgage allows the purchaser(s) the opportunity to take over the existing mortgage on the subject property, with the remaining term that the vendor(s) have arranged and registered. Assuming a mortgage can provide the buyer(s) with below market interest rates, in an increasing rate environment, as well as savings on the legal costs of registering a whole new mortgage. An “Assumption” entails a simple amendment to the mortgage document registered on title.
Blend and Extend
Lenders in many cases will allow borrowers to increase their mortgage balance in the case of a buy-up scenario, or a re-finance for debt consolidation purposes. This is accomplished by blending the existing mortgage balance and interest rate, with the increased amount with the current market rate for the term desired by the applicant(s). Most lenders will also blend the penalty for breaking the existing mortgage terms, (usually an Interest Rate Differential) with the rate for the new extended term. This is also commonly used in cases when borrowers feel that the interest rates are on the rise, and they want a lower rate to protect themselves for the future.
A buy-down of a mortgage rate gives borrowers a reduction of current market rates to the desired interest rate at a cost paid to the lender before closing. This is often used as a marketing feature by new home builders, particularly on high ratio second mortgages, but is normally factored into the price of the home. From time to time, agents also use the buy-down method as a way of marketing.
A conventional mortgage is one that is up to 80% of the value of the property used as security, or conversely, with 20% equity or more. This type of mortgage allows borrowers to avoid insurance premiums otherwise required on high-ratio mortgages.
This allows you to convert your mortgage typically from a shorter term or a variable/adjustable mortgage, to a longer closed term while it is still in effect.
This feature allows you to double up your mortgage payments anytime without penalty. It is often associated with the ability to “skip” an equivalent number of payments. This can be used either to accelerate the pay-off of a mortgage (as it is an enhanced prepayment privilege) or to manage a volatile cash flow. For example, commission-based individuals such as Realtors could “double-up” with each commission cheque, and “skip” during low cash flow periods. This is not offered by all lenders.
This is known as the amount of cash paid towards the purchase of a home by buyers on closing. This is different than the deposit on a purchase, which is the amount of money required when executing an agreement of purchase, and demonstrates commitment to the vendor on the part of the purchaser.
Is the difference between the market value for which you could sell your property and the outstanding mortgage financing registered against it. There is an important distinction between the “down payment” to a lender and the equity. For example, equity is typically used to describe the asset value that a home owner has available in their home. In the case of 100% financing available to some purchasers, a buyer who purchases a home without a down payment, can potentially have “equity” if the value of the property quickly goes up.
A first mortgage is a mortgage registered before all others on title, and gives the lender a priority lien/charge against the owner’s property that has precedence over all other mortgages. Priority is determined by the date and time registered, so a first mortgage was literally and legally registered “first”. A new first mortgage can therefore only be registered as a “first” mortgage upon the discharge of an existing one if the holder of a second mortgage “postpones” (i.e., “puts back in time”) to a time immediately following the registration of the new first mortgage.
5% Down Program for First Time and Repeat Buyers
This allows buyers to obtain up to 95% financing on their purchase. The mortgage must be insured by either CMHC (Canadian Mortgage and Housing Corporation), or Genworth Financial, as a high-ratio mortgage. This maximum home value will vary according to geographical location and eligibility can vary with personal circumstances.
Gross Debt Service Ratio (GDSR)
This ratio calculates the percentage of your shelter related costs compared to your gross income. This is calculated by dividing your monthly shelter costs (principal, interest, property taxes, heating and half of condo fees) by your gross monthly income and multiplying by 100. Lenders utilize the GDSR to determine the ability of borrowers to make mortgage payments. For most lenders and the insurers, the GDSR should be no more than 32%, although exceptions can be made.
Is a mortgage that has less than 20% equity. Most of these types of mortgages require high-ratio insurance. There are exceptions depending on the type of lender. For example, lenders that operate in the secondary or “B” lending market may charge an administration fee in lieu of the insurance premium. Some secondary lenders are also more flexible with their guidelines for the most part in exchange for higher interest rates.
Home Inspection Report
A report commissioned by a property owner or purchaser, usually to verify the condition of a property prior to the “firming up” of a Real Estate transaction. The scope and detail may vary, but most reports indicate the specific problem and the cost to repair.
Interest Rate Differential
A penalty for early prepayment of all or part of a mortgage outside of its normal prepayment terms. This is usually calculated as “the difference between the existing rate and the rate for the term remaining, multiplied by the principal outstanding and the balance of the term”.
- $100,000 mortgage at 9% with 24 months remaining.
- Current 2 year rate is 6.5%.
- Differential is 2.5% per annum.
- IRD is $100,000 * 2 years * 2.5% p.a. = $5,000.
Loan-to-Value Ratio (LTV)
The percentage of the value of the property for which a mortgage is required. For example, if a borrower applies for a mortgage of $200,000 on a property with a value of $250,000 the LTV is 80%. This is calculated by dividing $200,000 into $250,000 and multiplied by 100. Any LTV over 80% is considered a high-ratio mortgage.
Is the term used to define the Borrower of the mortgage loan.
If your down payment is less than 20% of the purchase price of the property, the lender is going to require either private mortgage insurance or public mortgage insurance through Genworth Financial or Canada Housing and Mortgage Corporation (CMHC). The fee is calculated as a percentage of your mortgage. This is known as default insurance. (Please note that one of our agents will calculate this amount for you automatically if your mortgage falls into this category.)
A mortgage which allows you to transfer the existing mortgage balance and remaining term to another property, without bonus or penalty. The mortgage must be registered on title of the new property with a different legal description. Should you require additional funds for the new subject property, then you will be effectively changing the terms of the mortgage and costs may apply depending on the lending institution you are dealing with.
The right to repay a portion of the outstanding principal of a mortgage without bonus or penalty. Most Banks historically limit this to an annual payment on the anniversary date of no more than 10% of the original principal. In recent years with much competition, new lenders have offered as high as 25% as a pre-payment privilege, with the added option to double-up on payments on an accelerated basis. For more information and a free consultation on how this works, please feel free to contact us.
If your mortgage is not fully open, you may be charged a penalty if you want to pay off all or part of your mortgage over and above your allowable pre-payment privilege before the end of the mortgage term. The normal prepayment penalty is the greater of three months’ interest or the Interest Rate Differential (IRD) on the amount to be prepaid. CMHC (for insured mortgages) and a few of the major lenders set the maximum penalty at 3 months interest after the mortgage has been in effect for a minimum of three years, regardless of the number of times it has been renewed.
The balance outstanding on a mortgage. It is also important to note when borrowing funds, the difference between the principal and interest paid by you on your scheduled payment plan by reviewing the amortization schedule provided to you by your mortgage agent. This will help you to understand the cost of funds to you over the term of your mortgage.
This occurs when a borrower makes changes to the original terms of their existing mortgage by obtaining a new mortgage on an existing property. Borrowers may be looking for more funds to renovate, purchase a larger home, looking for a better rate and different pre-payment terms, or simply making an investment which requires them to use some of the remaining equity in their property. Whatever the reason, if we could be of assistance, please feel free to contact us to discuss your options.
Registered Retirement Savings Plan (RRSP)
A Federal Plan which allows a taxpayer to contribute approximately 18% of earned income — to a maximum of $13,500 into a retirement plan “tax free”. If the taxpayer has already paid tax on personal income, then the RRSP contribution (which can be made until March 1st of the year following the year in which the income was earned and taxed) can result in a significant tax rebate.
Since RRSP’s can be caught up retroactively, this facility and the large cash refunds it can generate are central to numerous programs designed for first time home buyers.
Renewal of a Mortgage
The renewal of a mortgage is when the term of a borrower’s existing mortgage has expired, and the borrower is being offered the option to renew for an additional term. It is important to note that up to 75% of existing borrowers will sign the renewal agreement sent to them by their Bank, without the realization that it is not the best available rate. Please feel free to contact us to assist you with finding the best rate possible when your mortgage comes up for renewal. Don’t just sign your renewal offer; we can “switch” your mortgage for you Free.
Is a mortgage registered behind an outstanding first mortgage, and is typically obtained by a borrower who requires a small amount of additional funds in proportion to their existing outstanding first mortgage balance. This would help the borrower to avoid the penalty costs of discharging the first that would normally not be at the end of its term. Second mortgages have higher rates attached to them, but do. Actually save the borrower money when taking the penalty of discharging the existing first mortgage into account. On the renewal date of the first mortgage, the borrower could have the option to consolidate the two outstanding mortgages into one first. Contact us for assistance, and more information on second mortgages.
This is the term used throughout the industry which allows a borrower to switch to a new lender at the end of their mortgage term. The mortgage becomes “open” at this point and the switch is completed internally without cost to the mortgagor or borrower, as most lenders pay all of the costs associated with this type of transaction. Borrowers can typically take advantage of this program to get reduced rates with a competitor, which we can assist you with based on the wide range of lenders we have access to that are not available to consumers direct. Click here for further information if your mortgage is coming up for renewal, and we’ll switch your mortgage for FREE.
At the time of a sale, the lawyer for the buyer must confirm that local taxes have been paid up to date. If they are, a Tax Certificate is issued, from which any adjustments can be made — usually requiring the buyer to compensate the seller for any prepaid taxes. If they are not up to date, the municipality requires that the seller pay them off from the proceeds of the sale. If there are insufficient proceeds, then it may fall upon the buyer to pay them.
Insurance offered by Title Companies to protect a landowner, and thus the mortgage lender against any “clouds” or legal questions on the title to the subject real estate, or of legal priority of the Lender.
Total Debt Service Ratio (TDS)
The percentage arrived at by dividing your monthly shelter costs (principal, interest, property taxes, heating and half of condo fees) PLUS all other monthly debt obligations by your gross monthly income and multiplying by 100. This is used by all lenders as the “upper limit” yardstick by which to measure the ability of a borrower (or borrowers) to make mortgage payments. For example, most lenders require that this ratio be no more than 40% for a particular application, with some as low as 37%. 40% is also the maximum qualifying TDS in most applications for default insurance. There are lenders however that offer products for those borrowers who do not qualify under these guidelines. Contact us for more on these product lines.
This is a promise by a Lawyer to ensure that certain conditions (usually of the lender) are met after closing, due to time constraints. The best example is the undertaking to register a discharge of an old first mortgage after the new one has been registered, because there is simply not enough time to do so at closing. It also governs such closing dynamics as releasing funds before a new mortgage document is officially registered.
Variable Rate Mortgage (VRM)
The interest rate is usually compounded monthly and fluctuates with the prime rate at the chartered banks. In some cases, but not all cases, the VRM is fully open. VRM’s are normally chosen by borrowers in a stable or declining interest rate environment since they can save the borrower a fair amount of money.