Mortgage Terms

Use this section to better understand a mortgage term. Capitalized words are defined in the section.

AMORTIZATION
The number of years that the payments are spread over. Most have an amortization of 25-30 years.

APPLICATION
The first step of the approval process. Without an application, the mortgage professional cannot accurately assess the client’s situation.

APPRAISAL
A professional estimate of a property’s value using Comparables of similar properties. Lenders often ask for Appraisals as a condition for approving a Mortgage.

ASSESSMENT (PROPERTY TAX)
The estimated value of a property used by municipalities to determine the property tax amount.

BACK-END INSURANCE
Mortgage Default Insurance used and paid for by some lenders to ensure that a mortgage is risk-free. This is invisible to the client and only affects the client if the insurer has restrictive guidelines.

CHARGE
Also called a Mortgage Charge. This is a legal claim that is registered against a property, often by a lender or municipality. A lawyer or notary is needed to register a Charge.

CLOSED MORTGAGE
A Mortgage where there are restrictions and/or penalties on prepayments and payouts. Most Mortgages allow for 15%-20% prepayment of the principal annually with no penalties.

CMHC
Canadian Mortgage and Housing Corporation. This federal agency provides Mortgage Default Insurance for mortgages where the down payment is less than 20%. The Mortgage Insurance is for the benefit of the lender and the fee is paid by the borrower. Genworth and Canada Guaranty are two competitors that provide the same insurance.

COMMITMENT LETTER
A document issued by the lender that confirms that the Mortgage is approved as well as the interest rate, Term, Amortization, and all the Conditions.

CONDITIONS
Provisions issued by the Lender that have to be cleared before the approval is final. Conditions include Appraisal of the property, confirmation of the income, proof of the Down Payment, etc.

CONFIRMED INCOME
Income that can be proven and is therefore allowed by the Lender. A salary is Confirmed Income; unreported tips is not.

CONSENT AGREEMENT
A document that the client signs at the start of the application process that grants the mortgage professional authorization to represent the client with lenders and order a Credit Bureau report.

CONVENTIONAL MORTGAGE
A Mortgage where there is a Down Payment of 20% or more. A Conventional Mortgage does not require Mortgage Default Insurance.

CREDIT BUREAU REPORT
A summary of liability amounts, monthly payments, and delinquency history for active and closed accounts. Lenders review the credit bureau report closely when considering an application. A company called Equifax collects the data and issues the report.

CREDIT BUREAU SCORE
A score issued by Equifax that reflects the payment history and liability balances. A score of 680 is typically needed to get best rates. A score of less than 600 is considered poor while a score of 750 or more is considered strong.

DEBT SERVICE RATIOS
See GDSR and TDSR.

DOWN PAYMENT
Cash that the client puts into a purchase. If a property sells for $500,000 and the client requests a mortgage of $400,000, the down payment is $100,000. Some Lenders allow gifted down payments from family members.

EARLY PAYOUT PENALTY
A penalty charged by a Lender when the client pays off the Mortgage prior to the end of the Term, usually due to the sale of the property. The Penalty is explained in the Commitment Letter.

EQUITY LENDING
A type of lending whereby a client has a large Down Payment but insufficient Confirmed Income and/or problems with credit. Private Lending typically employ Equity Lending principles.

EQUITY TAKEOUT
A brand new Mortgage taken out against the client’s existing property. This is often used for debt consolidation or investing.

FIRST TIME BUYER
A client who has never owned property anywhere. A First Time Buyer can avoid the Property Transfer Tax when the purchase price is $475,000 or less as well as redeem up to $25,000 of RRSPs without income tax implications.

FIXED TERM MORTGAGE
A Mortgage where the interest rate is unchanged for the entire Term.

FORECLOSURE
A remedy for a Lender whereby the property is seized or sold when the Mortgage is in default. Due to conservative banking regulations, Foreclosures are quite rare in B.C.

GENERAL DEBT SERVICE RATIO (GDSR)
The per cent of the client’s gross income that would go to the proposed Mortgage, including Property Taxes, Strata Fees, and heat. The maximum allowable GDSR varies by Lender but 36% is typical.

GUIDELINES
A series of rules issued by each Lender that outline its policy on a variety of areas such as TDSR, GDSR, Down Payment required, sources of Income, minimum Credit Bureau Scores, etc. Some Lenders will be flexible with a Guideline if the rest of the Application is strong.

HIGH RATIO MORTGAGE
A Mortgage where the Down Payment is less than 20%. By law, a High Ratio Mortgage must have Mortgage Default Insurance.

HOLDING COMPANY
A corporation whose primary purpose is to own an asset. Many lenders will not approve a Mortgage if the property is owned by a Holding Company.

HOME EQUITY LINE OF CREDIT
A Line of Credit secured by real estate. Known as a HELOC, it offers an attractive interest rate but requires a Mortgage Charge.

INCOME CONFIRMATION
The written proof of income earned that lenders need in order to Underwrite a Mortgage. Income Confirmation examples include a Job Letter, Pay Statement, T-1s, T-4s, and T-5s.

LENDER
An institution or company that provides funds for mortgages. A Lender can be a bank, a Monoline, a credit union, or a private company.

LINE OF CREDIT
A bank product where a client can borrow up to the credit limit at any time. A Line of Credit can unsecured or secured by real estate.

LOAN TO VALUE (LTV)
The ratio of the Mortgage to the purchase price. A Mortgage for $400,000 on a $500,000 purchase price has a LTV of 80%.

JOB (EMPLOYMENT) LETTER
A letter from the client’s manager or HR department that states the client’s job title, salary or wage, hours worked per week, and start date. Self-employed clients will not have a job letter.

MONOLINE LENDER
A type of lender that does not lend funds that it has on deposit. Rather, a Monoline lends funds provided by an investor, such as a pension plan. Monolines typically have attractive rates but can have more restrictive lending Guidelines.

MORTGAGE
A loan that is secured by real estate. It also refers to the actual Mortgage Charge that is registered against a property.

MORTGAGE INSURANCE
Also called Mortgage Default Insurance, it is a product that pays the Lender in case the client defaults on the mortgage. Mortgage Insurance is legally required for High Ratio Mortgages with the insurance premium paid by the client.

NEW TO CANADA
A type of Mortgage offered by some Lenders for clients with Permanent Resident status and who landed within the last 3-5 years. A New To Canada program typically requires a larger Down Payment but has a less stringent income requirement.

NON-RESIDENT
A type of Mortgage offered by some Lenders for clients who lives outside Canada. Lenders typically require a larger Down Payment and Income Confirmation.

NOTICE OF ASSESSMENT
A document issued by the Canada Revenue Agency once the T1 Tax Return has been processed and validated. Lenders often require the most recent Notice of Assessment as a Condition since it proves that income taxes are up to date.

OPEN MORTGAGE
A Mortgage where some or all of the balance can be paid off without penalty. An Open Mortgage has a higher interest rate.

PREPAYMENT PRIVILEGE
The allowable annual amount that a client can pay down (in addition to the regular payment) without penalty. Lenders typically allow 15-20% of the principal annually.

PRIME RATE
The interest rate offered to the banks’ best corporate clients. Variable Mortgage and HELOCs have interest rates that are linked to the Prime Rate.

PRIVATE MORTGAGE
A Mortgage offered by unregulated Lenders. A Private Mortgage has a higher rate and often a fee but has much looser Guidelines than traditional Mortgages.

PROPERTY TAX
A tax levied by a municipality against real estate. The amount is based on the property value and its zoning. Lenders include the Property Tax amount when calculating the GDSR and TSDR.

PROPERTY TRANSFER TAX
A tax levied by the Province of BC on property transactions. First Time Buyers can avoid the Property Transfer Tax if the purchase is price is less than $475,000 and the property is to be the principal residence.

QUALIFYING RATE
The interest rate that is used to calculate the payment when determining the Debt Ratios. For High Ratio and Variable Rate Mortgages, the current Qualifying Rate is 4.64%. This is not the actual rate that the client will pay on the Mortgage.

RE-FINANCE
A Refinance is when an existing Mortgage is paid off and new funds are added. This involves registering a new Mortgage Charge so there are legal fees.

STATED INCOME
A type of Mortgage for self-employed clients whereby the client self-reports his or her income. The income must be supportable and the Stated Income Mortgage typically has a higher rate and other Conditions attached.

STRATA FEES
The monthly fee charged by a condominium strata board of directors to cover such expenses as maintenance, landscaping, garbage removal, and amenities. Lenders include the Strata Fee when calculating the GDSR and TDSR.

T-1 (TAX RETURN)
The document submitted to CRA that details all sources of income, allowable deductions and credits, and tax payable for a given year

T-3
The tax slip issued by a financial institution that shows Trust Income earned in a given year. T-3 amounts must be included as income on the T-1.

T-4
The tax slip issued by an employer that shows income earned and income taxes withheld in a given year. T-4 amounts must be included as income on the T-1.

T-5
The tax slip issued by a financial institution that shows Investment Income earned in a given year. T-5 amounts must be included as income on the T-1.

TERM
The period of time that the interest rate is in effect. At the end of the term, the Mortgage can be renewed, switched to a new lender, paid off, or paid down -all without penalty. A new interest rate is negotiated when the Term ends. Most Terms are 5 years.

TITLE SEARCH
An online inquiry to determine the legal owner(s) of a property as well as the existence of a Mortgage and other Charges.

TOTAL DEBT SERVICE RATIO (TSDR)
The per cent of the client’s gross income that would go to all payments, including the proposed mortgage, including Property Taxes, Strata Fees, and heat as well as all other payments. The maximum allowable TDSR varies by lender but 43% is typical.

UNDERWRITING
The process of evaluating, assessing, and approving a Mortgage Application by a Lender.

VARIABLE RATE MORTGAGE
A Mortgage where the interest rate float with the prime rate. A Variable Rate Mortgage is expressed in relation to Prime; for example, Prime – .30%.