Mortgage Glossary
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 75% (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.
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.
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*:
- First $55,000; One half percent. (0.5%)
- $55-250,000; One percent.
- Over $250,000; One and a half percent.
| 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 Realtor as to the rates applicable in your location. SUBJECT TO CHANGE
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 are particularly useful in 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.
Mortgagee Also known as the "lender" - the funder and holder of the mortgage.
Mortgage Insurance If your down payment is less than 25% of the purchase price of the property, the lender is going to require either private mortgage insurance or public mortgage insurance through Canada Housing and Mortgage Corporation (CMHC) or GE Capital. The fee is calculated as a percentage of your mortgage. This is known as default insurance. (Please note that we calculate this amount for you automatically if your mortgage falls into this category.)
Multiple Listing Service (MLS) 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. There are two types of open mortgages:
- Fixed rate mortgages; the term is usually fairly short (6 months to a year) although themortgage.com contains some longer open terms; and the interest rate will be higher than on a closed mortgage.
- Variable Rate Mortgages (VRM’s) are usually open (and are "collateral" type mortgages) but recently, several institutions have introduced closed versions.
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.