Agreement of Purchase and Sale

The legal contract between the buyer and seller of a home. The agreement generally includes the sale price, deposit amount and closing date, and may require that certain conditions be fulfilled before the deal closes.

Amortization/Amortization Period

The process of paying off a loan over a period of time by making regular payments toward both interest and principal. The amortization period is the total amount of time it will take to pay off the loan. Most mortgages in Canada have an amortization period lasting 25 years.

Appraisal

An estimate of the current market value of a home, usually conducted for lending purposes.

Bridge Financing

A short term loan meant to act as interim financing until permanent financing or additional funds can be obtained. This type of financing is often required when a home buyer needs a downpayment for a home purchase before they have sold their existing property.

Canada Mortgage and Housing Corporation(CMHC)

A crown corporation that administers the National Housing Act. The CMHC is charged with providing mortgage default insurance for High Ratio mortgages and releasing housing data to Canadians.

Closed Mortgage

A mortgage that cannot be repaid, renewed or renegotiated early without penalty.

Closing Costs

The expenses incurred to complete a home purchase, including land transfer taxes, legal fees, survey fees, etc.

Conditional Offer

An offer of purchase and sale contingent on certain conditions within the contract being satisfied. These conditions often relate to financing, the sale of an existing home or a home inspection.

Conventional Mortgage

A mortgage that does not exceed 80% of the purchase price of a home. Under current Canadian financing rules, mortgages exceeding this limit are deemed to be ‘High Ratio,’ and must be insured against default.

Debt-Service Ratio

The percentage of a borrower’s gross monthly income used to carry a mortgage, including monthly payments of principal, interest, taxes, heating costs and condo fees.

Default

Failure by the borrower to fulfill the terms of the loan agreement. Usually borrowers default by not making a payment by an agreed upon date.

Deposit

A sum of money paid to the seller of the home once an agreement of purchase and sale has been signed. The deposit is a symbol of the buyer’s commitment to purchase the property and is usually held in trust by the seller’s agent or attorney until the closing of the transaction, at which time it is usually applied toward the purchase of the home.

Equity

The value of a property minus any claims against it such as mortgages, loans and liens.

First Time Home Buyer RRSP Downpayment

A provision of the Canadian government’s Home Buyer’s Plan, this transaction allows first time home buyers to withdraw up to $25,000 from their RRSP to put toward a downpayment, without incurring a tax penalty. The loan must then be repaid over a maximum term of 15 years.

Fixed Rate Mortgage

A mortgage where the interest rate remains constant for a set period of time and cannot be renegotiated except upon payment of breakage fees.

Foreclosure

A legal procedure where the lender acquires ownership of a property following default by the borrower.

Gross Debt Service Ratio (GDS)

The percentage of the borrower’s income needed to pay all required monthly housing costs, including mortgage payments, property taxes, heating bills and condo fees.

High Ratio Mortgage

A mortgage that is greater than 80% of the property’s appraised value or purchase price. In Canada this kind of mortgage must be insured against default by a mortgage insurer such as the CMHC.

Home Inspection

An examination of a property for structural, mechanical and other deficiencies by an expert of the buyer’s choosing.

HST

A sales tax on all services related to the purchase of a home, including realtor fees, legal fees and inspection fees. Also applies to the purchase price of a newly built home. Must be paid in cash at the time of closing.

Interest Rate Differential (IRD)

A method of calculating the prepayment penalty that applies if a borrower pays off their mortgage before the end of a closed term, or if they pay more than the agreed upon prepayment privilege amount. The IRD is equivalent to the difference between your annual interest rate and the bank’s posted rate that is closest in duration to the remainder of your term, less any discount you received on your initial rate. In a falling rate environment IRD penalties can be tens of thousands of dollars.

Land Survey

A survey outlining the boundaries of a property. Land surveys are often required by lenders before a mortgage is approved.

Land Transfer Tax

A city or provincial tax on real estate transactions payable by the buyer upon closing. Land transfer taxes vary by region and are usually calculated as a percentage of the purchase price.

Mortgage Insurance

Insurance on a mortgage that pays the balance of the loan in the event of a default. If your downpayment is less than 20 percent of the purchase price, you’ll have to pay a mortgage insurance premium, at 1.75-2.75 percent of the mortgage value.

Mortgage Term

The length of time a borrower and lender must abide by the provisions of the mortgage agreement. Such provisions include the interest rate to be paid and the method in which it is calculated, the payment schedule, as well as other details such as prepayment options, break fees, etc. Most lenders offer terms ranging from 6 months to 10 years, with 5 year durations being the most popular in Canada.

Open Mortgage

A mortgage that can be prepaid or re-negotiated at any time without penalty.

Payment Frequency

The regular intervals when borrowers make mortgage payments, usually either monthly, bi-weekly or weekly.

Porting

The act of moving your mortgage from one property to another while maintaining the terms of the loan.

Prepayment Penalty

A charge incurred by the borrower for paying their principal balance more quickly than is stipulated under the terms of their mortgage agreement.

Prepayment Privilege

The ability to pay a portion of the principal balance, beyond the regular mortgage payment, without penalty.

Refinancing

The act of paying off an existing loan with funds from a new loan secured by the same property, usually in order to take advantage of lower interest rates or more favourable terms.

Title Insurance

Insures the lender’s mortgage funds if there is a dispute about the ownership of the property.

Total Debt Service Ratio (TDS)

The percentage of a borrower’s income required to cover payments associated with all required housing costs, plus all other debt obligations, such as payments on car loans, credit cards and personal loans.

Variable Rate Mortgage (or Floating Mortgage)

A mortgage where the rate of interest fluctuates with market conditions, specifically the lender’s prime rate. Prime rates in-turn generally move in tandem with the Bank of Canada overnight rate. Variable rate mortgage payments generally remain constant over the term, even if interest rates fluctuate during that time; if rates go up, more of the payment is applied to interest; if rates go down, more goes toward principal.