Glossary of Mortgage Terms

June 19, 2012

Are you looking to buy that swanky apartment you came across the other day? Are you tired of paying rent? Lastly, are you qualified for a mortgage? If yes, the journey to owning your own home has just begun. Before visiting your banker, familiarize yourself with the basic mortgage terminologies. This will save both you and your banker or broker a lot of valuable time. Besides, you don’t want to obtain a mortgage that you won’t be able to pay later or one that you don’t really want.

Mortgage

A mortgage is a loan which is secured against a property. The apartment or house you are purchasing is the security, or collateral, for the loan. As the borrower, you are referred to as the mortgagor, while the banker is known as mortgagee. The actual mortgage amount is known as the principal, which must be repaid together with the interest according to the terms of the mortgage including the amortization period, interest rate and payment frequency.

Closed mortgage and Closing Date

This is a mortgage that is not open for renegotiation during its term. A closing date is the date when the property is transferred to you..

Fixed Rate Mortgages

This is a type of mortgage where you get a constant interest rate for the entire repayment period. The predictability of interest payments helps you budget for them.

Variable or Adjustable Rate Mortgages

This is a type of mortgage whose interest rate fluctuates based on changes in market rates as set by the Bank of Canada. It may be more difficult to budget for interest payments with such mortgages due to constant fluctuations.

Convertible Mortgages

This kind of mortgage is a mix of fixed and adjustable mortgages. This allows you to opt for either fixed or adjustable rates depending on interest fluctuations. For example, borrowers could lock in a long term fixed rate, but still carry the option to convert their mortgage should Canadian mortgage rates become more favorable with their convertible option. Convertible mortgages differ from mixed mortgages which offer pre-determined interest rate variances at the time of the loan application

Vendor Take Back Mortgage

This is a type of mortgage provided to the buyer by the seller to facilitate the purchase of the property. Essentially, it is an administrative agreement between the two parties and can be helpful when the buyer cannot finance the entire property from a down payment and traditional first mortgage.

Portable Mortgage

This is a current mortgage that you can transfer to a new property. This in essence means you can transfer this mortgage to another property that you own. The main benefits of a portable mortgage are insurance against rising interest rate and elimination of penalties associated with closing a mortgage. As this mortgage typically has tougher eligibility restrictions, it is used less frequently than other types of mortgages.

Conventional Mortgage

This refers to a mortgage whose maximum threshold is 75% of the value or purchase price of the property. A Hi-Ratio mortgage is one that exceeds 75% of the same, and insurance is usually required for this type of mortgage.

Equity

This refers to the difference between the market value of your property and the outstanding mortgage obligations. The difference is an asset that belongs to you.

Gross Debt Service Ratio

This is a mathematical calculation the banker uses to measure your capacity to repay the mortgage. This ratio is calculated by adding annual mortgage payments and property taxes, and then dividing this sum by the gross family income. Ratios of up to a maximum of 32 percent are the acceptable norm.

Interest Adjustment Date (IAD)

This refers to the date of the commencement of the mortgage term, and is usually the first of the month after the closing date. It is advisable to sign the mortgage towards the month end.

Total Debt Service Ratio

This is another mathematical calculation your lender uses to measure your capacity to repay the mortgage. Specifically, this ratio shows the proportion of gross income that is spent on housing-related payments. It is calculated by adding together the annual mortgage payments, property taxes and other debt payments, and then dividing the sum by the gross family income. Ratios of up to 40 percent are the acceptable norm.

Home Equity Line of Credit

This is your personal line of credit which is secured against your property. It allows you to borrow up to 75% of market value of the property. Typically, you are able to choose the repayment schedule as long as minimum interest payments are made monthly. Since the interest on this loan is variable, homeowners should watch out for rising mortgage rates as they can cause repayment balances to increase.

Down payment

A down payment refers to the initial upfront portion of the total amount due when purchasing a home, usually given in cash at the time of finalizing the transaction. Down payments typically range between 5% and 25% of the purchase price.

While this is not an inclusive list of mortgage terms, it provides the basic terminology required to understand and facilitate a buy or sell transaction.



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