A Glossary Of Terms That Homebuyers Need To Know
For the ease of communication, every industry has its own language and terms. These words and phrases can be confusing to anyone who is not part of a specific sector’s daily operations, and the mortgage industry is no exception.
To help you as a homebuyer understand the terms, acronyms, and phrases regularly used when purchasing a house with a mortgage, Raj Gera, a mortgage broker with Dominion Lending Centres, has created this handy reference guide. Here you’ll find valuable information allowing you to comprehend and communicate your mortgage needs effectively.
This type of mortgage must usually remain unchanged for whatever term you agree to. Pre-payment costs will apply if you payout, renegotiate, or refinance before the end of term.
This is a mortgage which offers the same security as a closed mortgage, but which can be converted to a longer, closed mortgage at any time without pre-payment costs. Typically associated with fixed rate mortgages.
The mortgage you obtain when you have less than 20% of the total purchase price to put down as your downpayment. This type of mortgage must be insured (through sources such as CMHC or Genworth Financial Canada).
This type of mortgage may be repaid, in part or in full, at any time during the term without any pre-payment costs.
An interest rate that does not change during the entire mortgage term.
Variable Rate Mortgage
An interest rate that will fluctuate in accordance with the prevailing market prime rate during the mortgage term.
The percentage interest that you pay on top of the loan principal. For example, you may take out a mortgage of $100,000 at a rate of 12%. Your monthly payments will consist of a portion of the original $100,000, plus 12% interest.
The process of determining the lending value of a property. There is usually a fee to have an appraisal done.
The amount of interest due between the date your mortgage starts and the date the first mortgage payment is calculated from. Sometimes there is a gap between the closing date of your home purchase and the first payment date of your mortgage. Let’s say that the closing date on your new house is August 10th – but your mortgage payments are on the 15th of each month (so your first payment is calculated from August 15th and paid on September 15th). That leaves five days (August 10th to 14th) that aren’t accounted for in your first mortgage payment. You have to make an extra payment to make up for these five days; the payment is generally due on your closing date. You can avoid all this by arranging to make your first mortgage payment exactly one payment period (e.g., one month) after your closing date.
Land Transfer Tax
A tax that is levied (in some provinces) on any property that changes hands.
Legal Fees and Disbursements
Some of the legal costs associated with the sale or purchase of a property. It’s in your best interest to engage the services of a real estate lawyer (or a notary in Quebec).
Prepaid Property Tax and Utility Adjustments
The amount you will owe if the person selling you the home has prepaid any property taxes or utility bills. The amount to reimburse them will be calculated based on the closing date.
A legal description of your property and its location and dimensions. An up-to-date survey is usually required by your mortgage lender. If not available from the vendor, your lawyer can obtain the property survey for a fee.
Taxes applied to the purchase cost of a property. Some properties are sales tax exempt (GST and/or PST), and some are not. For instance, residential resale properties are usually GST exempt, while new properties require GST. Always ask before signing an offer.
GENERAL MORTGAGE TERMS
The number of years that you take to fully pay off your mortgage (not the same as your mortgage term). Amortization periods are often 15, 20, or 25 years long.
Assuming a Mortgage
Taking over the obligations of the previous owner’s (or builder’s) mortgage when you buy a property.
The portion of the interest rate on a buyer’s mortgage that you assume when they buy your home. If you’re selling your home and the prospective buyer doesn’t like the interest rate on their mortgage, you can offer to add a certain percentage of it onto your existing mortgage. You can add a maximum of 3%.
Canada Mortgage and Housing Corporation (CMHC)
A Crown corporation that administers the National Housing Act for the federal government and encourages the improvement of housing and living conditions for all Canadians. One potential source of mortgage insurance for high-ratio mortgages.
Costs that are in addition to the purchase price of a property and which are payable on the closing date. Examples include legal fees, land transfer taxes, and disbursements.
The date on which the sale of a property becomes final and the buyer takes possession of the property.
The money that you pay upfront for a house. Downpayments typically range from 5%-20% of the total value of the home.
Genworth Financial Canada
A private mortgage insurance company. One potential source of mortgage insurance for high-ratio mortgages.
Insurance to cover both your home and its contents (also referred to as property insurance). This is different from mortgage life insurance, which pays the outstanding balance of your mortgage in full if you die.
The process of having a qualified home inspector identifies potential repairs to the property you are interested in and their estimated cost.
An extra payment that you make to reduce the amount of your mortgage principal.
A loan that you take out in order to buy a property. The collateral is the property itself.
Mortgage Life Insurance
This form of insurance pays the outstanding balance of your mortgage in full if you die. This is different from home or property insurance, which insures your home and its contents.
Multiple Listing Service (MLS)
A computerized listing of the properties available in your area, including information and sometimes pictures of each property.
Pre-Approved Mortgage Certificate
A written agreement that you will get a mortgage for a set amount of money at a set interest rate. Getting a pre-approved mortgage allows you to shop for a home without worrying about how you’ll pay for it.
Offer to Purchase
A legally binding agreement between you and the person who owns the house you want to buy. It includes the price you are offering, what you expect to be included with the house, and the financial conditions of sale (your financing arrangements, the closing date, etc.).
Transferring an existing mortgage from one home to a new home when you move. This is known as a “portable” mortgage.
Repaying part of your mortgage ahead of schedule. Depending on your mortgage agreement, there may be a pre-payment cost for pre-paying.
The process of paying out the existing mortgage for purposes of establishing a new mortgage on the same property under new terms and conditions. This is usually done when a client requires additional funds. The client may be subject to a pre-payment cost.
Once the original term of your mortgage expires, you have the option of renewing it with the original lender or paying off all of the balance outstanding.
The length of time during which you pay a specific rate on the mortgage loan (i.e., the number of years in your mortgage contract). This is different than the amortization period. A mortgage is usually amortized over 20-25 years, with a shorter-term (typically 6 months to 5 years). After the term expires, the interest rate is usually renegotiated with the lender (your bank, for example).
If you’re looking for more information on mortgages, reach out to Raj Gera, a licensed mortgage specialist with Dominion Lending Centres in Oakville, ON. As an experienced mortgage broker, I serve clients across Oakville, Hamilton, Burlington, Toronto, Grimsby, Stoney Creek, St. Catharines, Brantford, Niagara Falls, Kitchener, Waterloo, Milton, Mississauga, and the Greater Toronto Area. Moreover, I support my clients in realizing their treasured dream of homeownership by finding them the perfect mortgage product or interest rate that meets your specific needs. I can offer the best mortgage products in Canada with access to more than two hundred lenders that include big banks, credit unions, trust companies, and financial institutions.