Mortgage Terminology Explained

Mortgage Terminology Explained

Recently, the Canadian government made some significant changes to the Canadian bank's lending practices. These changes have had an effect on the real estate market by shortening the amortization period, and reducing the re-financing limits. Here's a chart that shows what happened to lending practices on July 9 2012:

In order to understand these changes, let's review standard mortgage language:

Mortgage

A debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses wishing to make large value purchases of real estate without paying the entire value of the purchase up front. Mortgages are also known as liens against property, or claims on property.

Mortgagee

An entity (bank, credit union, trust company, parents, previous owners etc.) that lends money to a borrower for the purpose of purchasing a piece of real property. By accepting a mortgage on the real property, the lender creates security in the full repayment of the loan in the future.

Mortgagor

An individual or company (the buyer) who borrows money to purchase a piece of real property. By granting the lender an interest in the property, which allows it to lend the funds with an accurate assessment of risk, the mortgagor provides the lender with a guarantee for the full repayment of the loan. Also known as a "chargor" (although this term is a little obsolete).

Mortgage Broker

The matchmaker between a home buyer and a lender whose goal is to originate a mortgage loan. The broker draws from a pool of various lenders to find the right match.

Canadian Mortgage and Housing Corporation - CMHC

A division of the Government of Canada that acts as Canada's national housing agency. The CMHC's mandate is to help Canadians access a variety of affordable housing options. It also researches housing and real estate trends in Canada and around the world, providing research to consumers, businesses and other government divisions. The major activity of the CMHC, and the one for which it is best known, is mortgage loan insurance, which insures approved lenders (such as Canada's chartered banks) against borrower default. Mortgage loan insurance provides approved borrowers access to low-cost mortgage rates. CMHC approved buyers may purchase property with as little as 5% down payment. If you don't have a 20% down payment, this is called a "high ratio" mortgage and you will require mortgage insurance. If you are buying a home over $1,000,000, you must put 20% down as CMHC will not provide insurance (as of July 9, 2012).

Buyers with 20% down payment can obtain a "conventional" mortgage, or one that does not require CMHC insurance.

Amortization Period

The time over which all regular payments would pay off the mortgage. This time frame was as high as 40 years awhile ago, then the government shortened it to 30 years, and now it stands at a maximum period of 25 years total (as of July 9 2012).

Closed Mortgage

A mortgage agreement that cannot be prepaid, renegotiated or refinanced before maturity, except according to its terms. It's fixed at a certain monthly payment, and there are penalties to change or break the mortgage earlier than originally agreed.

Open Mortgage

These mortgages will allow  you to pay off the mortgage at any time with no penalties. This flexibility can prove to be a little more expensive (slightly higher interest rates).

Assumable Mortgage

A type of financing arrangement in which the outstanding mortgage and its terms can be transferred from the current owner to a buyer. By assuming the previous owner's remaining debt, the buyer can avoid having to obtain his or her own mortgage.

Blended Payments

Payments consisting of both a principal and an interest component, paid on a regular basis (e.g. weekly, biweekly, monthly) during the term of the mortgage. The principal portion of payment increases, while the interest portion decreases over the term of the mortgage, but the total regular payment usually does not change.JIm Flaherty: Bringing You These Changes!

Debt-Service Ratio

The percentage of the borrower's gross income that will be used for monthly payments of principal, interest, taxes, heating costs and condominium fees. This os a standard ratio, that will limit the amount of a mortgage based on your income level.

Total Debt Service (TDS) Ratio

The percentage of gross income needed to cover monthly payments for housing and all other debts and financing obligations. The total should generally not exceed 40% of gross monthly income.

 

 

 

 

 

 

Contact Information

Photo of Claire Franceschetti Real Estate
Claire Franceschetti
Right At Home Realty Inc.
190 Marycroft Ave.
Vaughan ON L4L5Y2
Direct: 416-918-6325
Office: 416-391-3232
Fax: Fax: 416-987-8001