Here are some definitions to help out. Our friendly, expert brokers always have the time, if you have more questions.
Adjustable-Rate Mortgage (ARM)
An ARM is a variable rate product where the payments ‘float’ up or down along with changes in the prime rate to account for the interest cost portion of the payment. The amounts going to your mortgage principal remain unaffected during your term, and your amortization stays on track.
The payment change happens at the end of a full payment period, usually the payment after the upcoming one. There may be certain benefits of an ARM vs the static payments of a VRM (Variable-Rate Mortgage) that help ensure mortgage balance stability.
Agreement of Purchase and Sales
The legal contract a purchaser and a seller enter into. We recommend that you have your offer prepared by a professional realtor who has the knowledge and experience to satisfactorily protect you with the most suitable clauses and conditions.
Amortization Period
The number of years it takes to repay the entire mortgage loan through a schedule of pre-determined payments that combine interest and principal amounts. The current standard amortization is 25 years, and having more time to pay off your mortgage is an extended amortization.
Appraisal
The process of determining the market value of a property. A lender will often require an appraisal to confirm the market value of the property for purchase or a refinance.
Assets
Resources of value that you own or can access. Often used in determining net worth or in securing financing.
Assumption Agreement
A legal document signed by a buyer that requires the buyer to assume responsibility for the obligations of an existing mortgage. If someone assumes your mortgage, make sure that you get a release from the mortgage company to ensure that you are no longer liable for the debt.
Blended Payments
Equal payments, consisting of both interest and principal components. Typically, while the payment amount does not change, the principal portion increases, while the interest portion decreases.
Blind Bidding
In blind bidding, competing offers for a home or property are placed without the transparency of knowing what the other offers contain — meaning the successful bidder could wind up paying significantly more than the original asking price of the property.
This type of ‘non-transparent’ bidding has seen a recent resurgence in Canada in reaction to a pandemic buying surge, which has been said to further drive up house prices and exacerbate housing inventory issues, especially in heated large-centre markets, such as Vancouver, Victoria and Toronto.
Bona-fide Sale Clause
This very restrictive mortgage condition means you can’t leave your lender or pay out your mortgage during your term unless you sell your property. Often tacked onto ‘ultra-low rate’ mortgages, this clause protects the lender from incurring additional costs during the term. Other restrictions may also apply, such as hefty refinance fees, lack of pre-payment privileges, or additional sales conditions that may limit the sale price or to whom you can sell your home.
Bridge Financing
Also known as interim or gap financing, a short-term loan at a higher interest rate (prime + 3% or 4%) that allows you to span overlapping closing dates when buying a home and selling your existing one. Secured against home equity, the down payment for a new home is borrowed from your existing home and allows your mortgage to temporarily span both homes until both deals are resolved.
Bully Offer
A bully offer is also known as a pre-emptive offer — a high-pressure surprise tactic to make an early bid on a home or property in an effort to secure the sale before other prospective buyers even have a chance to bid. It comes in well before the seller’s set offer date, is often stripped of some or all conditions of sale (that are designed to protect the buyer), and typically with an above-list price.
Clean Offer
Also referred to as a ‘no-conditions‘ offer, it’s an offer made on a home listed for sale that is completely stripped of typical sale conditions, in order to speed the process to buy a home.
Closed Mortgage
A mortgage that cannot be prepaid or renegotiated for a set period of time without penalties and fees.
Closing Costs
The fees and taxes due at the closing of a mortgage agreement, which can include Land Transfer Tax (LTT) or title transfer tax, legal fees, and outstanding utilities and property taxes.
Closing Date
The date on which the new owner takes possession of the property and the sale becomes final.
Collateral
An asset, such as term deposit, Canada Savings Bond, or automobile, that you offer as security for a loan.
Conditions of Sale
A buyer will place particular conditions as part of a contract (offer) to buy a home, which means the title remains with the seller until the buyer meets the conditions by a specified deadline to finalize the sale. The typical conditions of sale are: Financing, Sale of Existing Home, Home Inspection and Condo Document Review.
These conditions are designed to protect the buyer in case something adverse occurs to interfere with their ability or desire to finalize the contract. During the conditional period, the seller has an ‘escape clause’ that allows them to still consider other offers, but has to notify and allow the buyer first right of refusal (within 24-48 hours).
Conventional Mortgage
A mortgage of 80% or less Loan-to-Value (LTV) of the purchase price or the value of the property (20% or more down payment). A mortgage exceeding 80% LTV is referred to as a ‘high-ratio’ mortgage which legally requires insurance.
Credit Scoring
A system that assesses a borrower on a number of items, assigning points that are used to determine the borrower’s credit worthiness. In Canada, credit scoring is provided by either Equifax or TransUnion. Read our blog Credit 101 for more info.
Deflation
Refers to a downward trend of prices that may benefit consumers for a time but may harm various sectors of the economy, including borrowers. Usually, inflation has been at normal levels and so deflation indicates an undesirable price direction for maintaining national economic health.
Disinflation
Refers to a downward change in the inflation rate, usually where the inflation may still be higher overall but has reduced in the short term or is on its way to reducing to normal inflation rates.
Demand Loan
A loan where the balance must be repaid upon request.
Deposit
A sum of money put in trust by the buyer making an offer to purchase. When the offer is accepted by the vendor (seller), the deposit is held in trust by the listing real estate broker, lawyer, or notary until the closing of the sale, at which point it is given to the vendor. If a house sale does not close due to the buyer’s failure to comply with the terms set out in the offer, the buyer forfeits the deposit, and it is given to the seller as compensation for breaking the contract (the offer).
Down Payment
The amount of cash you put towards your home or property purchase that indicates to lenders your financial commitment in securing a mortgage loan.
The size of down payment can affect the type of mortgage loan for which you’ll qualify: A down payment of less than 20% of the property’s value (often referred to as a high-ratio mortgage) requires mortgage default insurance, which comes with added premiums. A down payment of 20% or more of the property’s value is called a conventional mortgage which doesn’t require insurance, but may come with higher interest rates.
Equity
The difference between the market value of the property and any outstanding mortgages registered against the property. This difference belongs to the owner of that property.
Equity-based Mortgage
Qualifying for a mortgage loan based on the value of the property and its potential marketability, instead of using traditional income, credit and other property criteria for qualification. Typically, those who acquire this type of mortgage have credit challenges or are unable to provide a traditional source of income.
Extended Amortization
An amortization period that is longer than what is considered to be industry standard (currently 25 years). Up to 30 years may be available in some circumstances.
First Mortgage
A debt registered against a property that has first call on that property.
First Time Home Buyer
Someone who is buying a property for the first time, or who has not owned a property for a length of time, as outlined by federal requirements. This type of buyer may be able to access to federal programs, credits and rebates designed to support their entering into the real-estate market.
Fixed-Rate Mortgage
A mortgage for which the interest is set for the term of the mortgage, which also provides set payments and a known amount that will be paid off of principal for the mortgage term selected.
Gross Debt Service Ratio (GDS)
One of the calculations used by lenders to determine a borrower’s capacity to repay a mortgage (the second one being Total Debt Service). Add your current mortgage payment, property taxes, approximate heating costs, and 50% of any maintenance fees, and divide this sum by your gross monthly income. Ratios up to 39% are currently considered acceptable.
Guarantor
A person with an established credit rating and sufficient earnings who guarantees to repay the loan for the borrower if the borrower does not.
High-Ratio Mortgage
A mortgage that exceeds 80% of the purchase price or appraised value of the property. This type of mortgage must be insured by CMHC (Canadian Mortgage and Housing Corporation), Canada Guaranty or Sagen (formerly Genworth). See CMHC’s website for a breakdown of their premiums.
Home Equity Line of Credit (HELOC)
A revolving line of credit that allows you to borrow against the equity in your home, typically at a much lower interest rate than a traditional line of credit (or other forms of credit, such as a credit card). Interest is paid monthly on the amount withdrawn, and you have flexibility in repaying the amount borrowed (which is in addition to your monthly mortgage payments). A HELOC may allow you to borrow up to 80% of the purchase price or appraised market value of the property if combined with your existing mortgage, or up to 65% if a ‘stand alone’ line of credit.
HVAC System
HVAC (Heating, Ventilation and Air Conditioning) refers to the ‘beating heart’ of a home — the complete system made up of individual components that circulate air flow to heat or cool, and exchange indoor and outdoor air. It’s important to periodically inspect, repair and maintain proper functioning and efficiency of this system to reduce utility bills, improve air quality and ensure health and safety.
