Mortgage Glossary
Portable Mortgage A mortgage which allows you to transfer the amount and terms over to a new property without cost or 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 Privilege(s) The right to repay periodically more than the scheduled principal payment. Historically this was limited to a single annual payment on the anniversary date of no more than 10% of the original principal. In recent years, however, prepayment privileges have become more lenient, reflecting peoples’ desire to pay their mortgages off on an accelerated basis. See also Double Up.
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. 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 three years, regardless of the number of times it has been renewed.
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.
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.
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Since RRSP’s can be caught up retroactively, this facility and the large cash refunds it can generate are central to numerous Realtor-driven programs designed to get first time buyers to take the plunge.
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.
Switch This is the term almost universally applied to changing lenders at the end of a term, when the mortgage becomes "open". Most lenders will now pay all of the costs of a "switch." (as well as giving them a reduced rate to lure them away from a competitor)
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% for a particular application, with some as low as 37%. 40% is also the maximum qualifying TDS in most applications for default insurance.
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 differ to some (usually small) extent from other lenders.
Variable Rate Mortgage (VRM) The interest rate is usually compounded monthly and fluctuates with the prime rate at the chartered banks. In most, but not all cases, the VRM is fully open.
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.).