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Adjustments on Closing:
There are two types of adjustments for which a buyer
can be charged on closing;
- Prepaid services. Where the
sellers have prepaid property taxes or certain
utilities, the buyers can be charged for the amount of
prepayment on a pro-rata basis, depending on the date
of occupancy. For example, if the sellers have paid
the property taxes to the end of the year, and the
sale closes on October 15th, the purchasers will be
charged with an adjustment of 77 / 365'ths (the number
of days remaining in the year) of the total paid for
the year.
- Interest. This is the amount of
interest required to be prepaid up to the Interest
Adjustment Date (IAD). 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.
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Amortization:
Paying off the principal balance of the
mortgage, usually by a combination of equal periodic
payments and extra payments of principal at irregular
intervals. Usually associated with a target period (the
standard being 25 years) over which the initial blended
payment is calculated. The maximum amortization
available in Canada is 40 years. |
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Appraisal
This is an estimate of the current value of the
property (the 'subject property'), using one or both of
the following techniques;
- The majority of residential appraisals use the
market value comparison approach, comparing recent
sales of similar properties ('comparables' or 'comps'
in real estate jargon) and adding and subtracting the
differences in value of the same features in the
subject property. For example, if a house of the same
size on the same street and in the same condition as
the subject property recently sold for $200,000, but
this 'comparable' had a triple garage and a finished
basement and the 'subject' does not; the appraiser
calculates the market value of these features (say,
$12,000 in total) and deducts this amount from
$200,000, giving an 'adjusted value' of $188,000. This
is usually done with at least three 'comparables' and
either averaged or the middle ('median') value used.
- A supporting measurement of value used by many
appraisers is the "depreciated cost" approach, whereby
the land value is estimated and added to an estimate
of the depreciated building value. Where there are few
comparables available, relatively more weight might be
given to this method.
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Assessment:
The "assessed" value of a property is a
historical, static estimate of the value of your
property used by a municipal (local) government 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. In some municipalities, the mill rate is
provided on the assessment notice and in others it is
provided separately. |
Assignment of
Interest:
Most Provinces allow a legal assignment of interest
in a mortgage to have full legal effect without having
to discharge and re-register the existing one. This is
particularly useful in:
- Switch situations, where the costs of transferring
lenders would otherwise be very high.
- Second mortgage situations where a postponement
may be difficult to obtain.
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Assumable
Mortgage
A mortgage which a qualified buyer can
take over from the current owner of a property upon its
sale. Assuming a mortgage can provide a buyer with a
below market interest rate, (if rates are now higher),
as well as saving on the legal costs of creating and
registering a whole new mortgage. "Assumption" entails a
simple amendment to the mortgage document registered on
title (see "switch"). |
Blend &
Extend:
A closed mortgage can often be "opened"
for the purpose of extending the term. Most lenders will
blend the penalty for breaking (usually an Interest
Rate Differential) with the rate for the new
extended term. The idea is to get a lower rate and
protect against rate increases in the
future. |
Buy
Down:
"Paying down" the mortgage rate by
paying the lender a premium at time of funding. This is
often used as a marketing feature by new home builders,
particularly on high ratio second
mortgages. |
Buyer Agent
:
A Realtor who acts contractually on
behalf of the buyer. Traditionally, and still in most
cases, the Realtor is the Agent of the Sellers and is
paid by them out of the proceeds of the sale. A Buyer's
Agency Agreement allows a Realtor (with full disclosure
to the sellers or their agent) to negotiate on behalf of
the buyer, with no legal conflict of interest. The
seller still pays the Buyer's Agent fees, but this is
always spelled out and acknowledged in the Offer to
Purchase. |
Cap Rate:
The highest rate that a borrower will
pay within a defined time period. Examples are; the rate
committed on a commitment letter or a mortgage
pre-qualification (also known as a "rate hold"); or the
maximum rate that will be paid by the borrower during
the term of a "protected variable rate mortgage". A
lender will usually have to incur a cost to insure
against rate increases during the capping period. This
insurance is called a "hedge". |
Closed Mortgage:
A mortgage whose terms state that it
cannot be paid out, even with a penalty, unless the
lender agrees. In some cases, a closed mortgage may be
discharged at a defined cost, usually Interest Rate
Differential (IRD), but sometimes with a punitive
penalty such as full interest to
maturity. |
Closing:
The final exchange of consideration and
legal completion of a transaction, involving either a
house purchase, a mortgage registration, or
both. |
Commitment Letter:
A written commitment from a lender to
lend mortgage funds to specific borrowers as long as
certain conditions are met within a specified time
period before closing. A key component of the
commitment, particularly in a period of volatile
interest rates, is the "rate hold", where a lender may
"cap" a rate for a defined period, such as 60 days or 90
days. Commitments on financing for new homes, which
usually have longer closing dates, can be negotiated
between the lender and the builder and be held for as
long as 6 months, and even a
year. |
Compliance Letter:
Required in many municipalities
throughout Canada before a property transfer can take
place. This is an acknowledgement from the building
department that the property either has, or is clear of
outstanding work-orders. Work-orders are specific clean-up or fix-up requirements that the
owner must complete, particularly before a transfer of
ownership. |
Connection Charges :
Some local utility companies (hydro,
gas, oil) charge a fee on closing to connect new buyers
up to their service. More normal, however, is an extra
charge on the first billing. |
Conventional Mortgage:
A mortgage usually amounting to 80%
(Loan to Value ratio) or less of the value of the
property. |
Convertible Mortgage:
This allows you to convert your mortgage
to a new one of longer term while it is still in
effect. |
Credit Report:
A record of an individual's payment
history available at a credit bureau. Individuals can
order a copy of their own report by contacting their
local bureau. |
Default:
Failure to make monthly mortgage
payments as agreed, or to meet certain other terms of a
mortgage agreement. |
Double-Up:
This feature (not offered by all
lenders) allows you to double up your mortgage payments
anytime without penalty. This feature 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. |
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Down Payment:
The amount of cash paid towards the
purchase transaction by the buyer of a home. This is
also known as the purchaser's initial "equity" in the
property, but is used by a lender to judge the personal
commitment to the property. For example, a lender
considers that, if a buyer saved the down payment, or
received it as a gift from a loved one, they will be far
more committed to maintaining the property value and
making the mortgage payments than if they acquired it
for "no money down". |
Equity:
The difference between the value for
which you could sell your property and what is owed
against it. There is an important distinction from "down
payment" to a lender. For example, if a buyer purchases
a home without a down payment, he/ she can have "equity"
if the value of the property quickly goes
up. |
First Mortgage:
Gives the lender a primary lien / charge against your house and property which 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. |
Five Percent Down Program:
This allows buyers to obtain up to 95%
financing on properties up to a certain value. The loan
must be insured against default by one of Canada's
default insurance companies. |
Gross Debt Ratio Service (GDS):
The percentage arrived at 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. This is
used by all lenders as a 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 32% for a particular
application, while others allow higher limits. This is
also the maximum qualifying GDS for most default
insurance applications. |
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Hedge:
A fairly complex money market instrument
the simple purpose of which is essentially to insure a
mortgage lender (or borrower, through a protected or
split-term mortgage) against interest rate movements. In
the lender's case the price of this insurance will vary
depending upon many political and economic factors, but
will generally be lower when interest rates and the
economy are less volatile. The buyer on the other hand
can hedge at no cost, or at a reasonable rate premium by
using specifically designed products. |
High Ratio Mortgage:
A mortgage which is greater than 80%
(Loan To Value ratio) of the value of the property.
Normally requires insurance to be paid to protect the
lender. (see Mortgage Insurance) |
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. Unfortunately, no licensing is required, and
this service is not specifically regulated other than by
general consumer protection legislation. The best
safeguard against inadequate work is to ask for the
resume of the Inspector, and if possible check
references from previous customers. |
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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".
Example:
- $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.
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Land Transfer Tax (LTT):
A tax payable to the Provincial Government by the
purchaser upon the transfer of title from a seller. In
Ontario a simple formula applies*:
- One half percent (0.5%) on the first $55,000
(minimum $275).
- One percent (1.0%) on the next $195,000 ($55 -
250,000).
- One and a half percent (1.5%) on amounts over
$250,000.
Example:
- Price = $370,000: LTT = ($55,000 * 0.5%) +
($195,000 * 1%) + ($120,000 * 1.5%) = $275 + $1,950 +
$1,800 = $4,025.
*Please check with your Mortgage
Alliance professional as to the rates applicable in your
location. |
Lien:
This is a claim made against a property
for the payment of a debt or obligation related to the
property or its owners. |
Loan-To-Value Ratio (LTV):
The percentage of the value of the
property for which a mortgage is required. This ratio is
important in determining whether or not default
insurance is required, and if so, what the cost of that
insurance will be (see "Mortgage Insurance") For
example, if the property value is $200,000, the down
payment available is $20,000 and the required mortgage
is $180,000. The LTV is $180,000 / $200,000 or
90%. |
Mortgage Broker :
A registered agent who negotiates with
lenders on behalf of a borrower to obtain the best
overall mortgage for that borrower's circumstances.
Mortgage Brokers arrange financing for "A+" clients as
well as financing "non-standard" situations which cannot
be funded by a major national lender. This is possible
because a Mortgage Broker has access to lenders who do
not advertise nationally or operate retail
locations. |
Mortgage Insurance:
If your down payment is less than 20% of
the purchase price of the property, the lender is going
to require mortgage insurance. The fee is calculated as
a percentage of your mortgage. This is known as default
insurance. |
Mortgagee:
Also known as the "lender" - the funder
and holder of the mortgage. |
Multiple Listing Service:
A service of a local Real Estate Board
which publishes and exchanges details of properties
registered with them. While this used to be for the
exclusive use of registered Realtors, it is now possible
for a private individual to "list" a property without
committing to pay a Realtor a "listing commission" if
the property sells. The majority of properties sold in
Canada are sold through the local
MLS. |
Municipal Levies:
Special levies can be charged by
municipalities to recover the cost of special services,
if these services cannot, for some reason, be funded out
of general revenues, or apply primarily to homebuyers.
Examples: Water meter installation; road improvements,
sewer improvements. |
Open Mortgage:
This allows you to pay back the borrowed funds
without notice or penalty. |
Pith:
Principal, Interest, Taxes, Heating and
half of Condo Fees, if applicable. Otherwise known as
your "shelter expenses". This is a basic component of
the ratios used to determine whether or not you
qualify. |
Portable Mortgage:
A mortgage which allows you to transfer
the existing amount and terms of your mortgage over to a
new property without penalty. The mortgage will, of
course, have to be registered on title of the new
property, so strictly speaking it is not identical in
all respects. While most mortgages have a portability
feature, in the event you might need more money when you
transfer the mortgage over to the new property, make
sure you either have the right to blend in any new funds
required, or can arrange the additional funds
separately. |
Prepayment Penalty:
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 before the end of the fixed term.
The normal prepayment penalty is the greater of three
months' interest or the Interest Rate Differential (IRD)
on the amount to be prepaid. |
Principal:
The amount of money owing on your
mortgage, including accrued unpaid
interest. |
Refinance:
Obtaining a new mortgage on an existing
property. You might be looking for more money, a better
rate, or different prepayment
terms. |
Registration Fees:
Fees paid to the provincial government
for recording a title transfer, mortgage registration or
other instrument such as an Assignment or Lien with the
local authorities. |
Simple Interest:
Interest which is computed only on the
principal balance. It is not compounded by calculating
interest payable on accrued
interest. |
Survey:
The legal written and/ or mapped
description of the location and dimensions of your land.
The survey should also show the dimensions and placement
on the lot of any structure, including additions such as
pools, sheds and fences. An up-to-date survey is often
required by a lender as part of the mortgage
transaction. Lenders might allow the title insurance in
lieu of a survey. |
Switch:
This is the term almost universally
applied to changing lenders at the end of a term, when
the mortgage matures. |
Tax Certificate:
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. |
Title Insurance:
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 real estate, or of legal priority of the mortgagee.
This is usually considerably less expensive than the
labour-intensive and liability-fraught process of having
to have a lawyer search title, and certify it as "clear"
-- a process known as "certifying title" or giving an
"opinion of title." |
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%. |
Undertaking:
This is a promise by a Lawyer to ensure
that certain conditions (usually of the lender) are met
(usually 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. |
Underwriting:
The process of deciding whether or not
to lend you money (or how much to lend you) based on all
the information you have given the lender. Every lender
has a different underwriting process and lending
criteria which diff, er to some (usually small) extent
from other lenders. |
Verification of Employment:
The lender will sometimes contact an
applicant's employer in order to verify information
provided in a mortgage application or a job letter; your
income structure, length of employment, position, and so
on. |
Work Orders:
Municipal by-laws ("zoning" by-laws)
require among other things that residential property be
maintained in a safe and habitable condition, and that a
property's use conform to specific requirements (no
illegal basement apartments, satellite antenna, etc.). |
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