MORTGAGE DICTIONARY
There is a lot to know about mortgages, and unless you’ve been exposed to the lending industry, you may not have a clear understanding of what all these financial terms mean. Let’s have a look at some simple explanations, to ensure that your other lenders are not taking advantage of you.
ACCELERATED PAYMENTS
Accelerated payments are one of the simplest and non - intrusive ways to help pay your mortgage loan off faster. By accelerating your weekly or bi - weekly payments, you pay slightly more each payment, but potentially save thousands of dollars in interest over the life of your mortgage.
AMORTIZATION
Think of your Amortization as being the life of your mortgage loan. Generally, when you borrow a substantial amount of money, you want your payments to be manageable. A typical mortgage amortization is 25 years. Meaning, if all payments are made as per your agreement and your term, your mortgage will be done with in 25 years.
APPRAISAL
An appraisal is simply a qualified individual or company who provides the market value of your home. Appraisals are required by lenders, to ensure that the amount of mortgage loan they may provide you does not exceed the acceptable loan to value ratio.
CLOSING COSTS
Closing costs are the total expenses associated with purchasing a home.
Costs may include but are not limited to: legal fees, land transfer tax, deposit, title insurance, property taxes, etc..
CONVENTIONAL MORTGAGE
Conventional mortgages are classified as loans that do not require federal insurance (CMHC or Genworth).
To be classified as a conventional mortgage and save money on this insurance, your down payment must be equal to or greater than 20% of the purchase price.
CREDIT BUREAU SCORE
A score which is generated by analyzing your past and current payment history for debts and the balances and percentages of credit you are currently utilizing. All mortgage lenders use your credit score to determine the amount of risk they will have when providing funding. The good news is, that credit can be fixed. Private lending is an excellent, short term path to help increase your credit score.
DEBT RATIOS
There are two types of debt ratios used by lenders. Total Debt Service Ratio (TDS) and Gross Debt Service Ratio (GDS). GDS is a preliminary look at the affordability of the mortgage payment for you, which includes property taxes, heat and any condo fees. TDS includes all of your other monthly payments you are required to make. An easy way to remember what is included in TDS: Will someone be calling or emailing you if you don’t make a payment? If yes, then you likely include that in your TDS ratio.
EQUITY
A relatively simple calculation: The appraised market value of your home minus all debt secured against your home.
So, if your home is appraised at $400,000 and your mortgage amount is $200,000 (and you have no other debts tied to your home), then you have $200,000 in equity.
FIXED RATE MORTGAGE
A fixed mortgage rate is a guaranteed rate by the lender. Meaning, over the course of the term (1, 2, 3, 4, 5 years, etc...) the rate will not change.
HIGH RATIO MORTGAGE
A high ratio mortgage, is one that is required to be insured by the Canadian Mortgage Housing Corporation (CMHC) or Genworth Financial.
High ratio mortgages are those where the purchasers down payment is less than 20% of the purchase price.
HOME BUYERS PLAN
A federal program which allows a first time home buyer to use up to $35,000 of their RRSP’s tax free, for all or a portion of their down payment.
LOAN TO VALUE (LTV)
LTV is a calculation used by lenders to determine part of the risk associated with a mortgage. The LTV calculation is as follows:
Mortgage Amount - $250,000
Appraised Value - /$400,000
LTV - .625 (or 62.5%)
MARKET VALUE
Market value is simply the amount of money an appraiser has deemed your property will sell for.
MORTGAGE TERM
A mortgage term, is not only the amount of time you have a agreed to a rate with a lender, but also the terms of payment. For instance, if you have a 5 year mortgage term, it means that you are agreeing to those terms for 5 years.
These terms will also include regular payment terms, prepayment terms and other terms based on the lender. Do not confuse your mortgage term with your Amortization!
MORTGAGE RENEWAL
Time to plan and perhaps reassess! After your agreed up on mortgage term is up, you have the option to renew your mortgage to a new set of terms with whoever you’d like, or pay a portion or all of your mortgage off in full!
PRIVATE MORTGAGES (PRIVATE LENDING)
Private mortgages (or lending) are financed via individuals (or groups). Meaning that if you have had credit challenges, or if you have non verifiable income (self employed), individuals or groups of individuals can loan you money with agreeable terms. This type of financing is becoming more popular as a short term strategy to achieve your goal.
REFINANCING
Refinancing can be defined as utilizing available equity built up in your home. Refinancing your home can be an effective strategy to pay down or consolidate high interest rate credit or make strategic investments (rental properties, vacation properties, etc...).
VARIABLE MORTGAGE RATE
An easy way to think of a variable rate mortgage is, that you have a fixed portion plus a variable portion. The variability of the rate will be determined b y the prime lending rate, which can fluctuate. Generally a lender will advertise the rate as Prime + X%.