Adjustable-Rate Mortgage (ARM)
Although they are often used interchangeably, there is actually one key difference between an adjustable-rate mortgage and a variable-rate mortgage.
The interest rate on an ARM will fluctuate over time because the interest is pegged to a benchmark short-term interest rate, typically the prime rate. As the prime rate changes, the ARM rate will also change. What does that mean for you, the Borrower? It means if interest rates increase, not only will the cost of your debt increase but so will your monthly mortgage payment.
There are some ARM products that offer fixed-payments. This means your payment stays the same for the term even when interest rates change. In this case, your payment would stay the same but the amortization period could change.
Agreement of Purchase and Sale (APS)
A written contract between a purchaser and a seller for the sale of a property from the seller to the purchaser.
Amortization Period
The amortization period is the length of time it will take you to completely pay off a mortgage. The most common amortization period in Canada is 25 years.
If your down payment is less than 20%, the maximum amortization period allowed is 25 years. Since most mortgages have a 5-year term, this gives you flexibility at the end of the 5 years to either continue with the amortization period remaining at that time or change it.
Your amortization period affects the size of your mortgage payment. The longer the amortization period, the smaller the monthly payment but, the longer it will take you to pay off your mortgage. While a longer amortization period can make your monthly payments more manageable, it also means that you will pay more interest over the life of your mortgage.
A shorter amortization period results in a larger mortgage payment but will save you money in the long run because you’ll be paying less interest over the life of your mortgage. It will also allow you to be mortgage-free sooner.
Annual Percentage Rate (APR)
The APR is calculated by taking the contractual interest rate on the Mortgage and adding any non-interest finance charges. This rate must be disclosed to Borrowers as per the Business Practices and Consumer Protection Act. So, always make sure this rate is shared with you!
Appraised Value
The appraised value is the fair market value of a property as determined by an accredited appraiser. Appraisals are often required when obtaining financing secured by a house and typically paid for by the Borrower.
Bank of Canada
The Bank of Canada is Canada’s central bank. It is responsible for Canada's monetary policy and for the promotion of the economic and financial welfare of Canada and is the sole issuing authority of Canadian banknotes. It also provides banking services and money management for the government, as well as loans to Canadian financial institutions.
Basis Points (bps)
Interest rates are often stated in basis points which can be confusing. But, a basis point is simply one-hundredth of a percent, or 0.01%. Here’s an example: a Variable Rate Mortgage rate could be quoted at 20 basis points below the Prime Rate. This means the VRM rate would be the Prime Rate minus 0.20%.
Blended Payments
Blended payments are a way of repaying a loan with a fixed monthly payment made up of principal and interest (blended) over an agreed-upon amortization period. The Principal component of the monthly payment increases over time while the Interest component decreases.
Blend and Extend
An existing mortgage can often be renegotiated to extend the term. Lenders will typically ‘blend’ the penalty for breaking the existing term with the rate for the new extended term. A Borrower is typically motivated to do this for one of two reasons; to take advantage of lower rates in the market or to protect themselves against a potential rate increases in the future.
Bridge Loan
Let’s say you currently own a home and you’re purchasing a new home. You need to put a down payment on the home you want to purchase before you are able to sell your existing home. A bridge loan is a short term loan that could often be used in this situation. In order to qualify, you would need a signed, unconditional sale offer on your existing home.
Canada Guaranty Mortgage Insurance Company
Canada Guaranty is a private mortgage insurance company and the second largest private provider of Mortgage Default Insurance in Canada (Sagan is the first).
Canada Mortgage and Housing Corporation (CMHC)
The Canada Mortgage and Housing Corporation (CMHC) is a crown corporation of the Government of Canada and the largest provider of Mortgage Default Insurance in Canada. CMHC acts as Canada’s national housing agency and provides Mortgage Default Insurance to protect lenders if a Borrower defaults on their mortgage.
Cash-Back Mortgage
When you purchase a home you’ll probably find the need for a little more cash flow than you might have expected. From new furniture to closing costs there are expenses galore. Enter the cash-back mortgage. If you have a cash-back mortgage, you will receive a certain percentage of the mortgage principal balance in cash. The downside? The interest rates on these mortgages may be higher than on some other mortgages.
Closed Mortgage
Overachiever looking to pay off your mortgage early? Then, a closed mortgage might not be right for you. The interest rate for a closed mortgage is generally lower than the interest rate for a comparable open mortgage. However, this type of loan restricts the Borrower’s ability to pay off their mortgage early by imposing penalties. Most contain some form of prepayment privilege but they are limited. For a variable-rate closed mortgage (or ARM) the penalty is typically equal to 3 months of interest. For a fixed-rate closed mortgage the penalty is typically the greater of 3 months interest or the Interest Rate Differential.
Closing Costs
Closing costs are a not-so-fun surprise to a lot of first time homebuyers. So, let’s make sure you’re prepared. Closing costs are the expenses you will need to pay when closing the purchase of your home and obtaining your mortgage. Typical closing costs you can expect include fees for lawyers, title insurance, appraisal, home inspection, the PST on Mortgage Default Insurance as well as land transfer taxes. As a general rule of thumb, it is recommended to have funds totalling at least 1.5% of the property value to account for closing costs.
An even bigger surprise to a lot of people is that the seller has closing costs too. These include real estate commission (if applicable), their own legal fees and any costs related to discharging a mortgage they may have had on the property.
Closing Date
The closing date is an exciting (and expensive day). On your closing date, you will pay the balance of the home purchase price to the seller, and the seller transfers title or ownership of the property to you. This is handled by your lawyers and the seller’s lawyers. Your lender will work with your lawyer to ensure all of the legal documents are in place and the requirements of the lender have been met in order to make sure the mortgage funds are available on the closing date.
Co-Borrower/Co-Applicant
When there is more than one borrower on a mortgage, the lead borrower is referred to as the Primary Borrower. Any other borrowers are considered Co-Borrowers, or Co-Applicants during the mortgage application process. The Co-Borrowers share the legal obligations of the mortgage.
Collateral Mortgage Charge
A mortgage charge that is secured by a borrower’s property where the registration on title can be for an amount higher than the mortgage amount. The charge is registered as a lien on the property financed by the mortgage. The result is often a re-advanceable mortgage where the lender has a claim against the property for more than the amount of the original mortgage. If the borrower fails to make the required payments, the lender can take legal action to enforce their rights under the mortgage charge and recover the amounts that are owed. Their legal remedies include a right to sell the property.
Commitment Letter
Your commitment letter is a legal agreement between you and a lender that confirms that the Lender is prepared to loan you the necessary funds and outlines both the terms of the mortgage and a list of conditions that need to be met by you in order for your mortgage to be funded on a specific date.