Mortgage Glossary
A mortgage is the largest loan most people will ever have and it will indebt them for a significant portion of their lives, therefore anyone contemplating taking on a mortgage should have a clear understanding of the exact terms and conditions of the mortgage obligation. Some of the terms generally used in mortgage terminology can be obscure to the uninitiated, thus this glossary acts as a simple lookup guide to understanding the language of mortgage loans.
Acceleration Clause
A clause in the agreement which changes the mortgage's maturity date if the home owner defaults, making the Outstanding Balance due and payable immediately.
Amortization
The amount of time whereby a loan will be paid off through regular blended interest and principal payments
Assumable Mortgage
This mortgage allows a vendor to transfer it directly to a buyer without closing it off and generating a new loan agreement
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Balloon Payment
A payment which is made in addition to a regularly scheduled payment to bring down the amount of principal in a mortgage.
Book Value
The original face value of the mortgage less the amount of principal repayment, or the mortgage amount outstanding at a particular point in time. At origination, the book value and face value are the same.
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Closed Mortgage
A mortgage loan that has a firm set of periodical payments that cannot be accelerated or paid off in any way prior to the maturity date.
Compound Interest
Interest which is charged during the extent of a mortgage loan on previously unpaid interest as well as principal.
Constant Payment Loan
A loan which is repaid by consecutive equal instalments which include interest and principal. It is also known as a blended payment.
Creative Financing
Any form of mortgaging or otherwise obtaining financing on a property which falls outside the purview of conventional institutional lending and which are often utilized by borrowers who cannot meet the standard credit or financial requirements. This form of financing can include any mix of vendor take-back mortgages, rent to own, sweat equity, property swaps, and many other schemes.
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Debt Coverage Ratio
The multiplier whereby the net operating income is greater than the yearly total of mortgage payments, expressed as a ratio of a number always greater than one. In the case of a lender necessitating a borrower to earn $18,000 to take on $10,000 of annual mortgage repayment, the ratio would be 1.8.
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Encumbrance
A lien, mortgage, judgment, or any other form of legal claim which is registered against the title a property.
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Fixed Rate
A type of mortgage where the terms, such as interest rate and payment amount, remain constant throughout the life of the loan.
Foreclosure
An action taken under the law by a mortgage lender in order to seize total possession of a property where they have a legitimate lien due to the fact that the borrower has fallen into default with regards to paying the interest and / or principal of a mortgage owing.
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Genworth Financial Canada
The only private company empowered to issue insurance on mortgages, and thus a non-governmental alternative to CMHC.
Graduated Payment Mortgage
A recent development in mortgage lending, this type of loan is an arrangement whereby the periodic payments which are contributed by the borrower consistently increase in size over a portion of, or even the entire, term of the repayment period of the mortgage.
Guarantor
An individual or entity who agrees to be primarily or secondarily responsible for the debt or performance incurred by another individual or entity.
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High Ratio Mortgage
A mortgage where the down payment is less than 20% of the total purchase price of the property and which has to be insured through underwriters like CMHC or Genworth.
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Interest Adjustment
A relatively minor payment which is prorated for the difference in dates between the closing of a property and the date the first mortgage payment is due. If a payment is due on the 5th of each month and the closing is on the 1st, it would be an adjustment for four days of interest owing.
Interest-Only Loan
A type of mortgage loan where the payments only serve to pay down the interest. At the end of the term of such a loan, the entire principal is owed in one lump sum.
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Judicial Foreclosure
An act of enforcement ordered by the court once a judgment has been passed in the favour of a lender to allow a sale of the property to recover funds lent towards the mortgage.
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Kicker
An additional type of compensation for an investor or lender which allows them not only to periodic payments of interest and principal but also a percentage of the income from a property. Also known as an equity kicker or lender participation.
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Lump Sum Payment
An additional payment made voluntarily to bring down the amount owing on a mortgage, and is only allowed in mortgages that are termed to be Open.
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Market Rate
The prevailing rate of interest expressed at a particular point in time, when a loan may be financed or refinanced.
Maturity
The specific date which is predetermined to be the final date of a specific mortgage agreement and when the total amount of the mortgage loan plus interest must be paid off in full.
Mortgage Rate
The interest percentage which is paid to provide a return on investment to the lender. It is generally expressed as a percentage of the total amount of the loan.
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Net Proceeds
The net value of a loan when all of the various appraisal costs; legal and brokerage fees; and various other charges are subtracted.
Novation
This term refers to the acceptance by lender for a third party to take over a specific debt from the original debtor. In these cases, the individual or entity who originally incurred the debt is thus released from any further obligation and the third party takes on all of the responsibilities to service that debt to the lender.
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Open Mortgage
A mortgage which can be renewed, refinanced, or paid off whole or in part at any time during the term. The rates of interest charged on open mortgages are generally higher than closed loans, and there are often penalties for availing of the early paying opportunities.
Outstanding Balance
The total amount owing to the mortgage lender at any particular time in the repayment schedule, regardless of whether the terms of the loan agreement call for the repayment to be performed over a period of amortization or in an end of the term lump sum basis.
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Porting
The act of transferring a currently existing "portable" mortgage from one property to another.
Power Of Sale
A clause which is incorporated into a mortgage agreement which allows the lender to seize the property if the borrower should default on the repayment schedule, and thus sell the property at a public auction to recover the funds lent to purchase the property, and thus avoid the various proceedings surrounding a foreclosure action.
Preapproved Mortgage Certificate
A document stating that the lender has agreed to extend a borrower a mortgage for a predetermined amount of money and at a given interest rate.
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Qualified Acceptance
An agreement to enter into a specific contractual loan agreement if specific conditions are satisfied. Also referred to as conditional acceptance.
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Refinance
The procedure whereby an existing mortgage is paid off in order to establish on the same property a completely new mortgage incorporating a different set of conditions and terms. This process is usually executed when a home owner has a requirement for additional funds.
Reverse Annuity Mortgage
A relatively new form of mortgage arrangement where the lender pays the borrower periodically during the term of the loan, and when the term arrives at termination the borrower must pay back the lender in a lump sum by either selling or refinancing the property.
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Simple Interest
A form of interest calculation where it is figured one time only on the originally borrowed sum, and repaid at the very end of the term in a lump sum basis, at the same time as the full amount of the loan's principal.
Straight-Line Principal Reduction Loan
A mortgage loan which is repaid with periodic payments that perennially include the identical amount of principal and a variable amount of interest based on the balance of principal still owing.
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Transfer Mortgage
A process whereby a mortgage loan debt is transferred to another lender, institution, or mortgage company.
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Usury
Generally interpreted to be the practice of charging a higher interest rate on a particular financial product or service which is greater than is allowed by law. The historical utilization of this word applied to the charging of any interest whatsoever, but modern law restricts only the level of interest under the guidelines specifying criminal usury.
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Variable Rate Mortgage
A mortgage loan which is repaid via a series of periodical payments which are not fixed, but tied to rise and fall with the interest rate changes of the current financial markets.
Vendor Take-Back Mortgage
A mortgage which is extended not by a conventional institutional lender but by the vendor directly to the purchaser. These mortgages are part of creative financing schemes which are often utilized by borrowers who cannot meet the credit or financial requirements specified by conventional institutional lenders.
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Wraparound Mortgage
A financing option where a secondary mortgage is registered to allow the borrower additional funds and the repayment is blended with the existing mortgage obligation.
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Yield Spread Premium
This is a fee paid by the mortgage institution or investor to the loan broker in exchange for receiving a considerably higher interest rate, or a rate that is above wholesale.
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Zoning Confirmation
The confirmation through the real estate qualification process that the zoning for the property is suitable for the uses the prospective new owner wants to apply to it.
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