Glossary of Terms

Adjustment Date: Date agreed to by both parties to a real property transaction for the adjustment of property taxes, rent, interest, and other items.

Agreement for Sale: A contract by which the owner of land (vendor) agrees to sell land to another (purchaser) who aggress to purchase it. The purchaser's interest is registered in the Land Title Office as a charge against the vendor's certificate of title. The contract provides that the purchase price will be paid by instalments.

Amortization:  The number of years it would take to repay the entire mortgage based on a set of fixed payments.  The longer the amortization, the more interest is paid out over the life of the mortgage; albeit monthly payments will be lower.   

Appraisal Value:  An estimate of the value of the property, conducted for the purpose of mortgage lending by a certified appraiser. This appraisal is not to be confused with a building inspection. Most appraisals use one or both of two techniques:

Market value comparison approach: The majority of residential appraisals use this technique, 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.

Depreciated cost approach: This technique is a supporting measurement of value used by many appraisers, 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.

Arms Length Transaction: A transaction between unrelated entities where a willing seller (the seller is not compelled to sell) transacts with a willing buyer (the buyer is not compelled to buy).

Assessed Value:  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" calculates the property taxes for the year.

Asset: Items of value owned by a business. Contrast to Liability.

Balance Sheet: A financial statement listing Assets, Liabilities, and Owner's Equity at a specific point in time. This is also known as a Statement of Financial Position or Statement of Assets and Liabilities.

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 - IRD) with the rate for the new extended term. The idea is to get a lower rate and protect against rate increases in the future.

Borrowing: Incurring an obligation to repay a debt in order to invest or consume more than one currently owns.

Bridge Financing: Bridge financing is used as temporary funds to cover the cost of a new home if the sale of  the buyer’s current home is not complete by the time the buyer’s new home purchase is scheduled to complete.  In order to arrange bridge financing the borrower must have an unconditional offer to purchase his/her  existing home.

Brokerage Fee: Fee charged by a mortgage broker for arranging a loan.

Builders Lien: A claim registered against the title to land by a contractor, Supplier of materials or workman with respect to work done or materials supplied to improve that land.

Buydown: 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’s 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.

Canadian Mortgage & Housing Corporation (CMHC):  A federal crown corporation which administers the National Housing Act  (NHA), and through which all federal housing policies and programs are implemented.

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.

Caveat: A notice registered against the title to land warning those looking at the title that a claim has been made.

Chattel Mortgage: A document evidencing a debt owed by the borrower (mortgagor) to the lender (mortgagee). The mortgage is secured by the lender against personal property owned by the borrower as collateral to ensure the repayment of the debt. These mortgages are governed by the Personal Property Security Act.

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 a specific borrower 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.

Compounding Period: The number of times per year in which the interest rate is compounded. In Canada, mortgages are generally compounded semi-annual which is twice per year. Where interest is paid monthly, the monthly rate will be lower to compensate for the monthly compounding.

Completion Date: Date on which the purchase's solicitor undertakes to the vender that he will pay the balance owing to the vender upon the transfer of title being accepted for registration.

Compound Interest: Interest which, during the life of the loan is charged or calculated at regular intervals and if not immediately paid will, in subsequent period, earn interest itself.

Condition: A fundamental term of a contract, a breach of which allows the injured party to terminate the contract and/or sue for damages or Specific Performance.

Condition Precedent: Legal term for a "subject to" clause. In contract law, a condition precedent calls for the happening of some event or the performance of some act the contract shall be binding upon the parties.

Conditional Sale: A contract for the sale of goods by which the seller reserves ownership (but not possession) of the goods until the price has been paid (usually by instalments) Such contracts are regulated by the Personal Property Security Act.

Condominium Fee: A common payment among owners which is allocated to pay expenses associated with the development.

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.

Contract: An agreement between two or more persons which create an obligation to do or not to do a particular thing.

Conventional Mortgage: A traditional mortgage for up to 80 per cent of the appraised value of a property.

Convertible Mortgage: A mortgage that gives the borrower the flexibility to change from a short-term to a longer-term mortgage if it seems advantageous to do so. For example, when interest rates appear to have hit bottom.

Conveyance: The process of transferring interest on land from one person to another way of a transfer document. Conveyancing usually refers to the transfer of title to land but also includes dealings such as assignments, leases, and mortgages

Co-Ownership Syndicate: A real estate syndicate organization in which two or more investors are owner of an undivided interest in real property.

Credit Analysis: An investigation of a loan applicant's ability to repay.

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.

Creditor: A person to whom a debt is owed. Contrast to Debtor.

Current Assets: Those assets which will be converted into cash, sold, or consumed within one year or the normal operating cycle of a business, whichever is longer, Current Assets may include Cash, Marketable Securities, Accounts Receivable, Investments, and prepaid expenses.

Default:  Failure to make monthly mortgage payments as agreed, or to meet certain other terms of a mortgage agreement.

Depreciation: The amount by which the value of improvement has decreased over time as a result of wear and tear or change in taste. Depreciation can be classified as physical or functional and curable or incurable.

Disclosure Statement: A schedule showing the face value of the loan, all costs associated with issuing the loan to the borrower, and the effective annual rate as required by the B.C. Mortgage Brokers Act.

Double-up:  This feature 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.

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.

Easement: A limited right of use of another's land by a landowner for the benefit of his land. The land receiving the benefit is called the dominant tenement and the land granting the benefit is called the servient tenement.

Economic Life: The time span over which a property is employed in its Highest and Best Use

Effective Annual: An annual interest rate that is compounded once a year. This is the rate used for disclosure purposes under the B.C. Mortgage Brokers Act.

Equity: The difference between the price for which a property could be sold, less the total debt registered against the property.

Effective Interest Rate: This is the actual interest rate paid on a loan or mortgage. In Canada, mortgages typically have a higher effective interest rate because of the fact that interest rates are compounded semi-annually or twice per year.

Fee Simple: The legal term for the maximum interest in land available to a person, or the maximum of legal ownership. Equivalent in many ways,and for practical purposes to absolute ownership.

First Mortgage: The first mortgage in the mortgage agreement  and will have first claim on assets in the event of default.  Priority is determined by the date and time registered, so a first mortgage was literally and legally registered first.

5% 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 GE Capital Mortgage Insurance Corporation or CMHC.  This maximum home value will vary according to location and eligibility can vary with personal circumstances.

Foreclosure: A legal action taken by a mortgagee to obtain possession of a property, by reason of the mortgagor's default in payment of the principal and or interest of the mortgage debt.

Fully Amortized Mortgage: Loan which is repaid completely by a series of payments over the full duration of the amortization period.

Gross Debt Service Ratio (GDSR):  The percentage arrived at by dividing monthly shelter costs (principal, interest, property taxes, heating and some or all of condo fees) by 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. 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.

Gross Income: The amount earned through employment or investment before taking taxes or other deductions into consideration. This amount may or may not be the same as gross income for purpose of mortgage lending.

High-Ratio Mortgage: A mortgage that exceeds 80% of the home's appraised value or purchase price (Loan to Value – LTV), which- ever is lower. These mortgages must be insured for payment; 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 proceeding with the real estate transaction.  Most reports will indicate any specific  problems and estimation of 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.

Income Tax: That part of taxable income which a person or corporation is required to forward to Revenue Canada Periodically.

Interest Adjustment: The process of calculating compound interest payable on the amount borrowed between the day the monies are advanced and the day amortization period starts.

Interest Only Loan: A loan which is serviced by interest-only payments. At the end of the term the full principal plus interest for the last payment period of the loan is still owing.

Interest Rate Differential (IRD) :  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 5.5% with 24 months remaining. Current 2 year rate is 3.75%. Differential is 1.75% per annum. IRD is $200,000 * 2 years * 1.75% p.a. = $7,000.

Joint Tenancy: Where two or more persons acquire an equal undivided interest on a property. When one person dies, that person's share automatically goes to the survivor or survivors.

Land Transfer Tax, Deed Tax or Property Purchase Tax  A fee paid to the municipal and /or provincial government for the transferring of property from seller to buyer.

Lender Value: The estimated value of a property for lending purposes. It is a long-term conservative estimate of the value of the security as determined by the lender and therefore, does not necessarily equal Market Value or Sale Price.

Liability: Monies owed by business. Contrast to Asset .

Lien: A claim or charge on real personal property for payment of some debt, lien obligation or duty.

Loan to Value (LTV) : The ratio of the loan to the appraised value or purchase price of the property, whichever is lower.

Maturity Date:  The end of the term, at which time you can pay off the mortgage or renew it.

Maturity: The date on which the balance owing on a mortgage becomes due; the final day of the term of a mortgage.

Mortgage: A document evidencing a debt owed by the borrower (mortgagor) to the lender (mortgagee). Registration of the mortgage in the Land Title Office transfers the mortgagor's interest in land to the mortgagee as security for the repayment of the debt.

Mortgagee: The lender.

Mortgagor: The Borrower.

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.

Mortgage Insurance:   Applies to high-ratio mortgages. It protects the lender against loss if the borrower is unable to repay the mortgage.   The fee is calculated as a percentage of the mortgage.  This is known as default insurance.

Mortgage Life Insurance: Pays off the mortgage if the borrower dies.

Nominal Rate: An interest rate quoted as a rate per annum; it is equal to the interest Of Interest rate per compounding period multiplied by the number of compounding periods.(For example, j2 = 10%; j4=12%; j12=11.5%).

Offer: A proposal to so or refrain from doing some specified thing usually followed by an expected acceptance, counter-offer, return promise or act. The person who makes the offer is called the offeror. The recipient of the offer is called the offeree.

PITH:  Principal, Interest, Taxes, Heating and half of Condo Fees, if applicable. Otherwise known as shelter expenses. T his is a basic component of the ratios used to determine borrower qualification.

Portability:  A mortgage which allows the borrower  to transfer the amount and terms over to a new property without cost or penalty. The mortgage will have to be registered on title of the new property, so strictly speaking it is not identical in all respects.  

Possession Date: Date on which the purchaser is entitled to possession of the property.

Power of Attorney: A document conferring authority to one person to act as another's agent on his behalf.

Pre-Approved Mortgage:  Qualifies the potential borrower for a mortgage before the buyer actively shops for a property.  This provides the buyer with a degree of certainty as to how much they can borrow and the terms thereof. 

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.

Prepayment Privileges: The right to repay periodically more than the scheduled principal payment.  Some lenders limit prepayments to a single annual payment on the anniversary date of the loan or perhaps once a year.  Payments can also range from 10% to 20% of the original amount outstanding.  Other lenders provide a high degree of flexibility and allow lump sum payments and also loan repayments to be increased by 10% to 20%.   See also Double-Up.

Principal: That portion of the original amount borrowed which still has to be paid back to the lender.

Purchaser's Statement: A closing statement in a real property transaction which indicates the balance of cash required from the purchaser to complete the transaction.

Refinancing: Paying off the existing mortgage and arranging a new one or re-negotiating the terms and conditions of an existing mortgage.  Reasons to do this could include  more money, a better rate, or

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.

Renewal: Re-negotiation of a mortgage loan at the end of a term for a new term.

Restrictive Covenant: A covenant restriction the use of the land of the covenantor (the Servient Tenement) for the benefit of land belonging to the covenantee (the Dominant tenement). An example would be a restriction on the height of a building on one piece of land so that adjacent or adjoining lands are not put in shadow.

Second Mortgage: Additional financing. Usually has a shorter term and higher interest rate than the first mortgage.

Simple Interest: Interest which is computed only on the principal balance. It is not compounded by calculating interest payable on accrued interest.

Statement of Adjustment: A closing statement in a real property transaction whose format is structured by debits and credits.

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 preferential 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.

Tax Rate: The number of dollars per $1000.00 worth of actual value which is payable in property taxes.

TDS Ratio (Total Debt Service Ratio): The percentage of gross annual income required to cover payments associated with housing and all other debts and obligations, such as car loans and credit cards.

Tenants Agreement: Contract between the landlord and the tenant, pertaining to the letting of residential premises.

Tenants in Common: Where two or more persons acquire interests in a single property. Each may sell or bequeath their interest and in the event of death, their interest becomes a part of their estate.

Term: Refers to the length of time the mortgage agreement covers, generally between 6 months to 10 years.  When the term matures, the balance of the mortgage is either paid-off or renegotiated for another term at the prevailing market rates.

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.

Total Debt Service Ratio:  The percentage arrived at by dividing the borrower’s monthly shelter costs (principal, interest, property taxes, heating and half of condo fees) PLUS all other monthly debt obligations by the borrower’s 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 42% for a particular application, with some as low as 37%.

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.

Vendor's Statement Of Adjustment: Closing Statement which shows the net amount of proceeds to be paid to Vendor upon completion of the transaction.

Vendor Take-Back Mortgage: A mortgage taken back by the vendor from the purchaser to facilitate a sale whereby the vendor becomes the mortgagee and the purchaser becomes mortgagor.

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; information requested can include income structure, length of employment, position etc.