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Mortgage Terms Glossary

Amortization

The length of time it takes to repay a mortgage loan in full with interest at a given interest rate.

Assumption

The taking over of the mortgage debt and obligations from the owner of the mortgaged property.

Binding Purchase and Sale Agreement

An agreement is considered binding when both parties have signed and agreed to all of the terms of the contract. This would include a signed copy of the purchase and sale agreement even if all the conditions have not been waived.

BMO Protection Plan

A creditor insurance plan underwritten by Sun Life Assurance Company of Canada that offers Life, Life with Critical Illness, Disability and Disability with Job Loss insurance to the borrowers on a residential mortgages.

Canada Mortgage and Housing Corporation (CMHC)

A division of the Government of Canada that acts as Canada’s national housing agency. CMHC’s mandate is to help Canadians access a variety of affordable housing options by insuring mortgages against default for banks. CMHC approved buyers may purchase property with as little as 5% down payment.

Closed Mortgage

A mortgage where prepayments are restricted. Prepayments maybe subject to a prepayment charge if outside of the mortgage prepayment rules.

Collateral

The security for the loan, the property being mortgaged.

Conventional Mortgage

A mortgage that covers up to 80% of the property value and where the bank is not insured against borrower default.

Debt Service Ratios

The ratios used to measure an applicant’s capacity to meet the mortgage requirements.

Down Payment

The cash contribution that must be made by a borrower towards the purchase of a property in order to qualify for a mortgage.

Early Renewal

Renegotiation of the existing mortgage term prior to the maturity date.

Equity

The difference between the property value and the outstanding balance of mortgages and other encumbrances registered against the property.

First Mortgage

A mortgage which represents the first charge against the property.

Fixed Interest Rate Mortgage

The interest rate remains constant until the term of the mortgage matures.

Genworth Canada

A private residential mortgage insurer that helps Canadians access a variety of affordable housing options by insuring mortgages against default for banks. Like CMHC, Genworth approved buyers may purchase property with as little as 5% down payment.

Installment Payment (P&I)

The regular blended payment of principal and interest (P&I) required to repay a mortgage over the amortization period. This payment does not include property tax or creditor insurance premiums and payments.

Interest Adjustment Date (IAD)

The date your lender first starts calculating the normal ongoing interest that you’ll pay. Interest adjustment dates commonly start on the 1st day of the month after a mortgage funds.

Interest Adjustment Payment

A onetime payment made to the bank to cover the interest owed on the mortgage from the possession date, up to the interest adjustment date when buying a new home. The interest adjustment payment amount is calculated by adding up the number of days from the possession date to the interest adjustment date and multiplying that number by the daily interest owed on the mortgage.

Interest Rate Differential (IRD)

The bank’s loss in interest earnings on the outstanding balance of a fixed rate closed term, over the remaining term of the mortgage when a mortgage contract is broken before maturity.

Loan To Value (LTV) Ratio

The amount of a loan as a percentage of the value of the mortgaged property. For example, if a bank mortgages $140,000 of a property worth $200,000, the LTV ratio is $140,000/$200,000= 70%.

Mortgage

A contract by which a person borrows money to buy a house and pays back the money over an agreed time frame.

Low Ratio Mortgage

A mortgage were the loan to value ratio is 80% or less.

Maturity Date

The expiry date of the mortgage term. The balance of the loan and interest on the loan must be repaid in full or renewed for another mortgage term.

Mortgage Commitment

A Preliminary Mortgage Approval by the bank confirming the approval of a mortgage and where all terms and conditions of the approval have been provided to the customer in writing.

NHA Insured Mortgage

A mortgage that is insured by CMHC against borrower default under the National Housing Act.

Non Owner Occupied Property

A property where the owner does not occupy any of the dwelling units in the property.

Open Mortgage

A mortgage that can be prepaid in part or in full at any time, without notice or prepayment charge.

Owner Occupied Property

A property where the owner occupies one of the dwelling units in the property.

Portable Mortgage

This is a feature of residential mortgages that allows customers to transfer the interest rate, loan balance and remaining term of an existing mortgage to another property in their name. This feature in most situations will benefit the customer by avoiding or reducing a prepayment charge by blending interest rates when additional funds are required.

Prepayment Charges

An interest charge applied when prepaying all or part of the mortgage balance before maturity on a closed term, or when prepayment options have been exceeded. The charge may be calculated as an IRD or three months interest penalty.

Prepayment Options

A clause in a mortgage agreement which outlines the conditions governing prepayment of principal.

Principal and Interest (P&I)

Refers to the components of a mortgage payment. Principal is the money used to pay down the balance of the loan. Interest is the charge paid to the bank for borrowing the money.

Property Value

The lesser of the purchase price or the appraised value of a property.

Renewal

Renegotiation of the mortgage for a further term.

Second Mortgage

A mortgage registered against title of a property which ranks behind the claims of the first mortgage lender.

Switch Mortgage Option

Permits a customer with a mortgage at another financial institution to transfer the mortgage to BMO Bank of Montreal.

Term

The period ending at the maturity date of a mortgage loan.

Variable Interest Rate Mortgage

A mortgage where the interest rate fluctuates based on changes in the bank’s prime rate during the term.