BASIC
DEFINITIONS
MORTGAGE:
A long-term loan primarily for the purpose of buying a home. A mortgage
is a legal agreement in which the borrower pledges the property
being purchased as security for the loan.
PRINCIPAL:
The amount of the loan - the cash you actually borrow.
TERM:
The number of months or years the mortgage covers. Normally,
it will be anywhere from six months to five years.
AMORTIZATION:
The actual number of years it will take to repay the mortgage in
full. This is usually much longer than the term of the mortgage.
EQUITY:
The difference between the amount for which the property could be
sold and the amount you still owe on the loan.
TYPES
OF MORTGAGES
PRE-APPROVED MORTGAGE:
Preliminary approval is given by the lender of the borrower's application
for a mortgage to a certain maximum amount and usually with a guaranteed
rate for a set period of time.
CONVENTIONAL MORTGAGE:
A loan for no more than 75 per cent of the appraised value or purchase
price of the property, whichever is less.
HIGH RATIO MORTGAGE:
A mortgage usually for more than 75 per cent of the appraised value
or purchase price of the property. Such a mortgage is often referred
to as an NHA mortgage because it is granted under the provisions
of the National Housing Act. These mortgages must, by law, be insured
through GE Mortgage Insurance Corporation or the Canada Mortgage
and Housing Corporation (CMHC).
FIRST MORTGAGE:
The debt registered against your property that has to be paid first
in the event of sale or default.
SECOND MORTGAGE:
A mortgage granted when there is already one other mortgage
registered against the property. If the borrower defaults and the
property is sold, the second mortgage is paid after the first mortgage.
LEASEHOLD MORTGAGE:
A mortgage on a home and/or improvements where the land is rented
rather than owned.
COLLATERAL MORTGAGE:
A mortgage backed by a promissory note and the security of a mortgage
on real property. The money borrowed is usually used for other purposes,
such as home improvements, a vacation or a business investment.
BRIDGE FINANCING:
A special, short-term loan needed to cover the time gap between
completing the purchase of a property as agreed and finalizing arrangements
to pay. This usually occurs when two properties are involved and
the closing dates do not match.
TERMS
AND CONDITIONS
FIXED RATE MORTGAGE:
A mortgage for which the rate of interest is set for a specific
period of time (the term of the mortgage). The regular payment of
the principal and interest remains the same throughout the term.
VARIABLE RATE MORTGAGE:
A mortgage for which the rate of interest changes from time to time
as money market conditions change. The amount of the regular payment
of a variable rate mortgage does not change. The difference lies
in the way the payment is applied. If interest rates go up, more
of the regular payment will be applied toward interest. If interest
rates go down, more of the regular payment will be applied toward
the principal.
OPEN MORTGAGE:
A mortgage which allows the borrower to repay the loan more quickly
than agreed, usually with prepayment charges.
CLOSED MORTGAGE:
A mortgage that generally does not allow the borrower to repay the
loan more quickly than agreed.
PORTABLE MORTGAGES:
A mortgage where the principal balance, the term remaining and the
interest rate are transferred to a mortgage on your new property.
BLENDED:
Occurs when you combine the mortgage balance outstanding on the
home you are leaving and adding additional financing to purchase
your new home. The interest rate will change to one that combines
the rate on your old mortgage with the rate in effect at the time
you add additional financing.
COMPOUND INTEREST:
Interest charged on interest owing. The more frequent the compounding,
the more interest will be paid.
BUYING DOWN:
A term used when quoting interest rates. It means that someone,
usually the vendor or seller, has arranged with the mortgage lender
to prepay a portion of the interest owing on the mortgage. This
allows you, the new borrower, to assume a mortgage debt at an interest
rate lower than the current or stated rate.
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