Adjustments on Closing

There are two types of adjustments for which a buyer can be charged on closing;

• Prepaid services. Where the sellers have prepaid property taxes or certain utilities, the buyers can be charged for the amount of prepayment on a pro-rata basis, depending on the date of occupancy. For example, if the sellers have paid the property taxes to the end of the year, and the sale closes on October 15th, the purchasers will be charged with an adjustment of 77/365'ths (the number of days remaining in the year) of the total paid for the year.
  
  
• Interest. This is the amount of interest required to be prepaid up to the Interest Adjustment Date (IAD). IAD is the point at which the mortgage interest starts accumulating "in arrears". In Canada all mortgage interest is calculated and paid after the period to which it applies. This differs from the way in which rental and lease payments are calculated, which is "in advance". The good news on this one is that if you prepay for say 3 weeks you won't have to make your first payment for almost two months. Also, if you take a biweekly payment term, the longest interest adjustment period is less than two weeks, by definition.

Amortization

The process of paying off the principal balance owed of the mortgage through scheduled, systematic repayments of principal and extra payments of principal at irregular intervals. Usually associated with a target period (the standard being 25 years) over which the initial blended payment is calculated. The maximum amortization period available in Canada is 40 years.

Appraisal

This is an estimate of the current value of the property for the lender (the 'subject property'), using one or both of the following techniques;

• Market value comparison approach: The majority of residential appraisals use this technique, comparing recent sales of similar properties ('comparables' or 'comps' in real estate jargon) and adding and subtracting the differences in value of the same features in the subject property. For example, if a house of the same size on the same street and in the same condition as the subject property recently sold for $200,000, but this 'comparable' had a triple garage and a finished basement and the 'subject' does not; the appraiser calculates the market value of these features (say, $12,000 in total) and deducts this amount from $200,000, giving an 'adjusted value' of $188,000. This is usually done with at least three 'comparables' and either averaged or the middle ('median') value used.
  
  
• Depreciated cost approach: This technique is a supporting measurement of value used by many appraisers, whereby the land value is estimated and added to an estimate of the depreciated building value. Where there are few comparables available, relatively more weight might be given to this method. 

Assessment

The "assessed" value of a property is a historical, static estimate of the value of your property used by a municipal (local) government as a basis for calculating annual property taxes. An "assessment notice" from the municipality contains the "assessed value" and when multiplied by the current "mill rate" the property taxes for the year can be calculated. In some municipalities, the mill rate is provided on the assessment notice and in others it is provided separately

Assignment of Interest

Most Provinces allow a legal assignment of interest in a mortgage to have full legal effect without having to discharge and re-register the existing one. This is particularly useful in:

• Switch situations, where the costs of transferring lenders would otherwise be very high.
• Second mortgage situations where a postponement may be difficult to obtain. 

Assumable Mortgage

The A mortgage which a qualified buyer can take over from the current owner of a property upon its sale. Assuming a mortgage can provide a buyer with a below market interest rate, (if rates are now higher), as well as saving on the legal costs of creating and registering a whole new mortgage. "Assumption" entails a simple amendment to the mortgage document registered on title (see "switch").

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Blend and Extend

A closed mortgage can often be "opened" for the purpose of extending the term. Most lenders will blend the penalty for breaking (usually an Interest Rate Differential) with the rate for the new extended term. The idea is to get a lower rate and protect against rate increases in the future

Buy-down

"Paying down" the mortgage rate by paying the lender a premium at time of funding. This is often used as a marketing feature by new home builders, particularly on high ratio second mortgages.

Buyer's Agent

A Realtor who acts contractually on behalf of the buyer. Traditionally, and still in most cases, the Realtor is the Agent of the Sellers and is paid by them out of the proceeds of the sale. A Buyer's Agency Agreement allows a Realtor (with full disclosure to the sellers or their agent) to negotiate on behalf of the buyer, with no legal conflict of interest. The seller still pays the Buyer's Agent fees, but this is always spelled out and acknowledged in the Offer to Purchase.

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Canada Mortgage and Housing Corporation (CMHC)

A federal crown corporation which administers the "National Housing Act" (NHA), and through which all federal housing policies and programs are implemented.

Cap Rate

The highest rate that a borrower will pay within a defined time period. Examples are; the rate committed on a commitment letter or a mortgage pre-qualification (also known as a "rate hold"); or the maximum rate that will be paid by the borrower during the term of a "protected variable rate mortgage". A lender will usually have to incur a cost to insure against rate increases during the capping period. This insurance is called a "hedge".

Closing

The final exchange of consideration and legal completion of a transaction, involving either a house purchase, a mortgage registration, or both.

Closed Mortgage

A mortgage whose terms state that it cannot be paid out, even with a penalty, unless the lender agrees. In some cases, a closed mortgage may be discharged at a defined cost, usually Interest Rate Differential (IRD), but sometimes with a punitive penalty such as full interest to maturity.

Commitment Letter

A written commitment from a lender to lend mortgage funds to specific borrowers as long as certain conditions are met within a specified time period before closing. A key component of the commitment, particularly in a period of volatile interest rates, is the "rate hold", where a lender may "cap" a rate for a defined period, such as 60 days or 90 days. Commitments on financing for new homes, which usually have longer closing dates, can be negotiated between the lender and the builder and be held for as long as 6 months, and even a year.

Compliance Letter

Required in many municipalities throughout Canada before a property transfer can take place. This is an acknowledgement from the building department that the property either has, or is clear of outstanding work-orders. Work-orders are specific clean-up or fix-up requirements that the owner must complete, particularly before a transfer of ownership.

Connection Charges

Some local utility companies (hydro, gas, oil) charge a fee on closing to connect new buyers up to their service. More normal, however, is an extra charge on the first billing.

Conventional Mortgage

A mortgage usually amounting to 75% (Loan to Value ratio) or less of the value of the property.

Convertible Mortgage

This allows you to convert your mortgage to a new one of longer term while it is still in effect.

Credit Report

A record of an individual's payment history available at a credit bureau. Individuals can order a copy of their own report by contacting their local bureau.

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Default

Failure to make monthly mortgage payments as agreed, or to meet certain other terms of a mortgage agreement.

Double-Up

This feature (not offered by all lenders) allows you to double up your mortgage payments anytime without penalty. This feature is often associated with the ability to "skip" an equivalent number of payments. This can be used either to accelerate the pay-off of a mortgage (as it is an enhanced prepayment privilege) or to manage a volatile cash flow. For example, commission-based individuals such as Realtors could "double-up" with each commission cheque, and "skip" during low cash flow periods.

Down Payment

The amount of cash paid towards the purchase transaction by the buyer of a home. This is also known as the purchaser's initial "equity" in the property.

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Equity

The difference between the value for which you could sell your property and what is owed against it. There is an important distinction from "down payment" to a lender. For example, if a buyer purchases a home without a down payment, he/ she can have "equity" if the value of the property quickly goes up.

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First Mortgage

First Mortgage A mortgage registered before all others on title. Gives the lender a primary lien/charge against your house and property that has precedence over all other mortgages. Priority is determined by the date and time registered, so a first mortgage was literally and legally registered "first". A new first mortgage can therefore only be registered as a "first" mortgage upon the discharge of an existing one if the holder of a second mortgage "postpones" (i.e., "puts back in time") to a time immediately following the registration of the new first mortgage.

Five-Percent Down Program

This allows buyers to obtain up to 95% financing on properties up to a certain value. The loan must be insured against default by Genworth Mortgage Insurance Corporation or CMHC (Canada Mortgage and Housing Corporation). This maximum home value will vary according to location (local Realtors should know the applicable limit) and eligibility can vary with personal circumstances.

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Genworth Mortgage Insurance Corporation

Canada's only private mortgage insurer. For more details see Mortgage Insurance.

Gross Debt Service Ratio (GDS)

The percentage arrived at by dividing your monthly shelter costs (principal, interest, property taxes, heating and half of condo fees) by your gross monthly income and multiplying by 100. This is used by all lenders as a yardstick by which to measure the ability of a borrower (or borrowers) to make mortgage payments. For example, most lenders require that this ratio be no more than 32% for a particular application, while others allow higher limits.This is also the maximum qualifying GDS for most default insurance applications.

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High-Ratio Mortgage

A mortgage which is greater than 75% (Loan To Value ratio) of the value of the property. Normally requires insurance to be paid to protect the lender. (see Mortgage Insurance)

Home Inspection Report

A report commissioned by a property owner or purchaser, usually to verify the condition of a property prior to the "firming up" of a Real Estate transaction. The scope and detail may vary, but most reports indicate the specific problem and the cost to repair. Unfortunately, no licensing is required, and this service is not specifically regulated other than by general consumer protection legislation. The best safeguard against inadequate work is to ask for the resume of the Inspector, and if possible check references from previous customers.

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Interest Rate Differential

A penalty for early prepayment of all or part of a mortgage outside of its normal prepayment terms. This is usually calculated as "the difference between the existing rate and the rate for the term remaining, multiplied by the principal outstanding and the balance of the term".

Example.

• $100,000 mortgage at 9% with 24 months remaining.
• Current 2 year rate is 6.5%.
• Differential is 2.5% per annum.
• IRD is $100,000 * 2 years * 2.5% p.a. = $5,000.

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Land Transfer Tax (LTT)

A tax payable to the Provincial Government by the purchaser upon the transfer of title from a seller.

Lien

This is a claim made against a property for the payment of a debt or obligation related to the property or its owners.

Lien Holdbacks

Liens result if an owner or contractor does not pay its suppliers and subcontractors for materials supplied to build the property or for work done.  Solicitors in accordance with provincial regulations manage lien holdbacks to protect their clients by withholding a portion of a draw (usually 10% to 15%) for a period of time (commonly 30 to 45 days) after the work is completed.  The holdback is usually released upon expiry of the statutory period and upon satisfactory verification of Title and Searches.

Cost to Complete Holdbacks:

On progress advance mortgages, the cost to complete the construction of the property is always held back to ensure there is adequate work in place to secure the advanced funds and the funds remaining to be advanced are sufficient to cover the remaining construction costs.  The cost to compete hold back is required in addition to the lien holdback.

Lender calculates the cost to complete holdback from the information contained on the appraiser’s inspection report.

Seasonal Deficiency Holdback:

Deficiency holdbacks can occur when fall and winter weather prevents completion of exterior work i.e. stucco, paint, concrete etc.  Funds are released upon completion of the outstanding work generally the following spring or summer season.

Deficiency Holdbacks may be waived if the following conditions have been met:

• The property is at least 95% complete
• The cost to complete does not exceed 5%
• There are no liens and lien filing period has expired
• The unit is occupied; and
• An occupancy permit has been issued.

Loan-to-Value Ratio (LTV)

The percentage of the value of the property for which a mortgage is required. This ratio is important in determining whether or not default insurance is required, and if so, what the cost of that insurance will be (see "Mortgage Insurance") For example, if the property value is $200,000, the down payment available is $20,000 and the required mortgage is $180,000. The LTV is $180,000/$200,000 or 90%.

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Mill Rate

A rate that multiplies by each one thousand dollars of property assessment to give the annual real estate taxes.

Mortgage Broker

A registered agent who negotiates with lenders on behalf of a borrower to obtain the best overall mortgage for that borrower's circumstances. Mortgage Brokers are particularly useful in financing "non standard" situations which cannot be funded by a major national lender. This is possible because a Mortgage Broker has access to lenders who do not advertise nationally or operate retail locations.

Mortgagee

Also known as the "lender" - the funder and holder of the mortgage.

Mortgage Insurance

If your down payment is less than 25% of the purchase price of the property, the lender is going to require either private mortgage insurance or public mortgage insurance through Genworth Mortgage Insurance Corporation or Canada Housing and Mortgage Corporation (CMHC). The fee is calculated as a percentage of your mortgage. This is known as default insurance. (Please note that Invis will calculate this amount for you automatically if your mortgage falls into this category.)

Multiple Listing Service (MLS)

A service of a local Real Estate Board which publishes and exchanges details of properties registered with them. While this used to be for the exclusive use of registered Realtors, it is now possible for a private individual to "list" a property without committing to pay a Realtor a "listing commission" if the property sells. The majority of properties sold in Canada are sold through the local MLS.

Municipal Levies

Special levies can be charged by municipalities to recover the cost of special services, if these services cannot, for some reason, be funded out of general revenues, or apply primarily to home buyers. Examples: Water meter installation; road improvements, sewer improvements.

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Open Mortgage

This allows you to pay back the borrowed funds without notice or penalty. There are two types of open mortgages:

• Fixed rate mortgages; the term is usually fairly short (6 months to a year) and the interest rate will be higher than on a closed mortgage.
  
  
• Variable Rate Mortgages (VRM's) are usually open (and are "collateral" type mortgages) but recently, several institutions have introduced closed versions.

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PITH

Principal, Interest, Taxes, Heating and half of Condo Fees, if applicable. Otherwise known as your "shelter expenses". This is a basic component of the ratios used to determine whether or not you qualify.

Portable Mortgage

A mortgage which allows you to transfer the amount and terms over to a new property without cost or penalty. The mortgage will, of course, have to be registered on title of the new property, so strictly speaking it is not identical in all respects. While most mortgages have a portability feature, in the event you might need more money when you transfer the mortgage over to the new property, make sure you either have the right to blend in any new funds required, or can arrange the additional funds separately.

Prepayment Privilege(s)

The right to repay periodically more than the scheduled principal payment. Historically this was limited to a single annual payment on the anniversary date of no more than 10% of the original principal. In recent years, however, prepayment privileges have become more lenient, reflecting peoples' desire to pay their mortgages off on an accelerated basis. See also Double-Up.

Prepayment Penalty

If your mortgage is not fully open, you may be charged a penalty if you want to pay off all or part of your mortgage before the end of the fixed term. The normal prepayment penalty is the greater of three months' interest or the Interest Rate Differential (IRD) on the amount to be prepaid. CMHC (for insured mortgages) and a few of the major lenders set the maximum penalty at 3 months interest after the mortgage has been in effect for three years, regardless of the number of times it has been renewed.

Principal

The amount of money owing on your mortgage, including accrued unpaid interest.

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Refinance

Obtaining a new mortgage on an existing property. You might be looking for more money, a better rate, or different prepayment terms.

Registration Fees

Fees paid to the provincial government for recording a title transfer, mortgage registration or other instrument such as an Assignment or Lien with the local authorities.

Registered Retirement Savings Plan (RRSP)

A Federal Plan which allows a taxpayer to contribute approximately 18% of earned income - to a maximum of $13,500 into a retirement plan "tax free". If the taxpayer has already paid tax on personal income, then the RRSP contribution (which can be made until March 1st of the year following the year in which the income was earned and taxed) can result in a significant tax rebate.

Since RRSP's can be caught up retroactively, this facility and the large cash refunds it can generate are central to numerous Realtor-driven programs designed for first time buyers.

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Simple Interest

Interest which is computed only on the principal balance. It is not compounded by calculating interest payable on accrued interest.

Survey

The legal written and/ or mapped description of the location and dimensions of your land. The survey should also show the dimensions and placement on the lot of any structure, including additions such as pools, sheds and fences. An up-to-date survey is often required by a lender as part of the mortgage transaction.

Switch

This is the term almost universally applied to changing lenders at the end of a term, when the mortgage becomes "open". Most lenders will now pay all of the costs of a "switch." (as well as giving them a reduced rate to lure them away from a competitor)

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Tax Certificate

At the time of a sale, the lawyer for the buyer must confirm that local taxes have been paid up to date. If they are, a Tax Certificate is issued, from which any adjustments can be made - usually requiring the buyer to compensate the seller for any prepaid taxes. If they are not up to date, the municipality requires that the seller pay them off from the proceeds of the sale. If there are insufficient proceeds, then it may fall upon the buyer to pay them.

Title Insurance

Insurance offered by Title Companies to protect a landowner, and thus the mortgage lender against any "clouds" or legal questions on the title to the real estate, or of legal priority of the mortgagee.

Total Debt Service Ratio (TDS)

The percentage arrived at by dividing your monthly shelter costs (principal, interest, property taxes, heating and half of condo fees) PLUS all other monthly debt obligations by your gross monthly income and multiplying by 100. This is used by all lenders as the "upper limit" yardstick by which to measure the ability of a borrower (or borrowers) to make mortgage payments. For example, most lenders require that this ratio be no more than 40% for a particular application, with some as low as 37%. 40% is also the maximum qualifying TDS in most applications for default insurance.

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Undertaking

This is a promise by a Lawyer to ensure that certain conditions (usually of the lender) are met (usually after closing, due to time constraints). The best example is the undertaking to register a discharge of an old first mortgage after the new one has been registered, because there is simply not enough time to do so at closing. It also governs such closing dynamics as releasing funds before a new mortgage document is officially registered.

Underwriting

The process of deciding whether or not to lend you money (or how much to lend you) based on all the information you have given the lender. Every lender has a different underwriting process and lending criteria which differ to some (usually small) extent from other lenders.

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Variable Rate Mortgage (VRM)

The interest rate is usually compounded monthly and fluctuates with the prime rate at the chartered banks. In most, but not all cases, the VRM is fully open.

Verification of Employment

The lender will sometimes contact an applicant's employer in order to verify information provided in a mortgage application or a job letter; your income structure, length of employment, position, and so on.

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Work Orders

Municipal by-laws ("zoning" by-laws) require among other things that residential property be maintained in a safe and habitable condition, and that a property's use conform to specific requirements (no illegal basement apartments, satellite antenna, etc.).

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