Mortgage School

All About Mortgages

A mortgage is a contract for a loan that is borrowed for the purpose of financing real estate. The “mortgage contract” is registered against the title to property. Like all other contracts, the mortgage contract contains terms and conditions for the repayment of the loan, and the eventual cancellation of the contract.

The person or company that borrows the “mortgage loan” is referred to as the mortgagor. The person or company that lends the “mortgage loan” is referred to as the mortgagee.

Mortgage loans may be lent by financial institutions, private mortgage investment corporations, other companies that are chartered to lend money and individuals who lend their own money.

Residential Mortgages

Loans that are for residential properties that contain 1 to 4 units. The units can be owner-occupied or rented. Residential mortgages usually have prepayment privileges. In other words, the loans may be repaid before maturity, provided that the mortgagee earns an incentive or “bonus” for permitting the early repayment of the loan.

Commercial Mortgages

Loans that relate to larger, multi-tenanted, commercial-use properties usually cannot be repaid prior to maturity of the mortgage. However, loans that relate to smaller, owner-occupied commercial-use properties usually have prepayment privileges that are similar to conditions of mortgages for residential properties.

Closed Mortgages

Mortgages that cannot be terminated and the loan repaid before maturity of the contract. Mortgages that apply to residential properties may be repaid, subject to payment of a bonus to the mortgagee for terminating the contract.

Open Mortgages

Mortgages that may be terminated without payment of a bonus to the mortgagee.

Fixed-rate Mortgages

Mortgages for which the interest rate for the loans that they secure remains the same throughout the term of the contract.

Amortized Mortgages

Mortgages by which the principal sum of a loan decreases over the term of the contract. Amortized mortgage loans are repaid in payments that include both principal reduction of the loan and the interest that is required to be paid for borrowing the loan. These instalment payments are the same during the term of the loan. At each consecutive payment, a greater portion of the total payment is paid towards the reduction of principal and less is paid towards the interest.

Interest-only Mortgages

Mortgages for which the instalment payments are only interest, and the mortgagor owes the same money at maturity of the mortgage that was initially borrowed.

Variable-rate Mortgages

Mortgages that are amortized and for which the interest rate may fluctuate during the term because it has been pegged to rise or fall with the commercial banks’ prime lending rate, which is referred to as “Prime”. The instalment payment for variable-rate mortgages remains constant unless a negative amortization occurs.

Adjustable-rate Mortgages

Mortgages that are amortized and for which the interest rate may fluctuate during the term, because it has been pegged to rise or fall with Prime. The instalment payment for adjustable-rate mortgages changes whenever the interest rate changes.

All of these types of mortgage loans are available from Domus Financial Corporation. Domus’ management team consults with you regarding which type of mortgage loan best suits you and your unique circumstances.

Default Insurance

If a homeowner wishes to purchase or refinance a residential property and borrow the money form a Canadian financial institution, and the homeowner does not have the minimum down payment funds or equity that is prescribed by regulation, federal and provincial statutes require that the mortgage must be insured against default by the homeowner, thereby protecting the financial institution against potential losses if a default occurs. If a default occurs, and the financial institution is forced to sell the property to repay its mortgage loan, and if the institution suffers a deficiency when it sells the property, the institution may file a claim with the insurer to recover the deficiency that it suffered.

There are currently 3 mortgage default insurers that are licensed to offer such insurance in Canada. All 3 companies’ insurance programs are similar, but with slight differences that relate to geographic location of property and qualifying rules. The only company that offers mortgage default insurance everywhere in Canada, which is mandated by law, is CMHC.

Canada Mortgage And Housing Corporation (“CMHC”)

CMHC is an agency of the Government of Canada that provides mortgage default insurance to financial institutions as well as other housing-related services. CMHC was initially established on January 1, 1946. It was initially named Central Mortgage And Housing Corporation, which was changed to its current name in 1979.

Throughout its history, CMHC has been a prominent vehicle for housing Canadians, enabling the development of communities, the renewal of Canadian cities, providing affordable rental

housing and providing inexpensive source of financing. Most Canadians though know it primarily for its mortgage default insurance program.

Genworth Financial Canada (“Genworth”)

Genworth is a publicly traded, private-sector supplier of mortgage default insurance in Canada that has been in existence since 1995. Genworth is part of an international conglomerate that through its various divisions operates in approximately 25 countries and offers personal and commercial insurance products.

Canada Guaranty Mortgage Insurance Company (“Canada Guaranty”)

Canada Guaranty began operation on April 19, 2010 when it acquired AIG United Guaranty Mortgage Insurance Company Canada. Canada Guaranty is owned by a group of investors that is jointly headed by Ontario Teachers’ Pension Plan and National Mortgage Guaranty Holdings, Inc.

Property Appraisals

Mortgage lenders require appraisals of property in order to establish what the market value of a property is. Appraisals of properties are conducted by individuals who are certified to state opinions regarding value of property based on comparisons to similar or identical properties that have sold in a geographic area.

It is rare that a property that is identical to the property that is the subject of the appraisal has been sold in close proximity of time and location to the subject. Therefore, appraisers calculate adjustments for size, condition, date of sale, land size, location, neighbourhood characteristics and detrimental factors when they establish market value.

An appraiser uses a standardized form to report his or her findings for residential property appraisals and narrative-style format to report the value of commercial properties.

Mortgage Jargon

Abstract of Title (Title Search)
An examination of the records related to the ownership of real estate that have usually been maintained by a governmental or authority or the designated agent of a governmental authority. A title search indicates the historical ownership, financing transactions and any other claims against the title of a property.

Accrued Interest
Interest which accumulates after the date that a payment for the mortgage loan was last paid.

Adjustable-rate Mortgage
Mortgages that are amortized and for which the interest rate may fluctuate during the term, because it has been pegged to rise or fall with commercial banks’ prime lending rate, which is referred to as ”Prime“. The instalment payment for adjustable-rate mortgages changes whenever the interest rate changes.

Agreement Of Purchase And Sale
The contract by which the owner of property sells the property to another person or entity.

Amortization
The process by which the principal sum of a loan decreases over the term of the contract. Amortized mortgage loans are repaid in payments that include both principal reduction of the loan and the interest that is required to be paid for borrowing the loan. These instalment payments are the same during the term of the loan. At each consecutive payment, a greater portion of the total payment is paid towards the reduction of principal and less is paid towards the interest.

Appraised Value
A value that usually a certified appraiser establishes as the value of a property, which a mortgage lender considers for the purpose of offering a mortgage loan.

Assignment (Transfer) Of Mortgage
The assignment or transfer of a mortgagee’s interest in a mortgage to another person or entity.

Assumption Of Mortgage
The occurrence of the purchaser of a property assuming the liability for the terms and conditions of a mortgage that is already registered against the title of a property. This action may occur without the consent of the mortgagee. However, the conditions of most mortgages require that the mortgagee grant his or her consent to the assumption.

Blanket Mortgage
A mortgage that is registered against the title of more than 1 property.

Bridge Loan
A short-term loan that is given to a borrower to assist the borrower to purchase a property before he or she sells a property that is currently owned and from which the sales proceeds are required to complete the purchase of the new property. The lender usually registers a mortgage against both properties to secure its loan.

Closed Mortgage
A mortgage that cannot be terminated and the loan repaid before maturity of the contract. Mortgage loans that apply to residential properties may be repaid, subject to payment of a bonus to the mortgagee for terminating the contract.

Collateral Mortgage
A mortgage that is the secondary or additional security for repayment of a loan. The primary security is a promissory note that the borrower has signed.

Completion Date
The date that is set by both parties to a transaction for its completion, whether it be the purchase and sale or financing of a property.

Compound Interest
When interest that is earned is added to the principal sum of a loan, and interest is earned or paid on their total for the next payment period, the process is called compounding.

Conditional Agreement Of Purchase And Sale
An agreement that requires that specified conditions must be met before the sale and purchase of the property may be consummated.

Condominium Ownership
A form of ownership tenure of real estate for which the owner of a piece of real estate solely owns his, her or its specific unit or units and the common facilities of the entire development such as hallways, heating system, elevators, exterior areas, parking areas, etc., are owned in conjunction with the rest of the unit owners.

A prime example of condominium ownership is the ownership of an apartment suite in a multi-unit residential development. An individual unit is usually owned by the occupant. The common facilities are owned by a condominium corporation, which is directed by a Board of Directors, whose members are elected by the unit-owners to manage the affairs of the corporation.

Condominium Status Certificate
A document that has been issued by the management of a condominium corporation that states facts about the status of ownership of a particular unit, its size, common facilities of the property, insurance that affects the property, and financial and legal affairs of the corporation.

Contract
An agreement that creates, defines and specifies obligations between two or more parties that may or not may involve monetary compensation as consideration for the performance of said obligations and penalties for non-performance of the same.

Conventional Mortgage Loan
A mortgage loan that does not exceed 80% of the market value or purchase price of a property, whichever is less. Mortgage default insurance is usually not required for this type of mortgage.

Credit Report
A report about a borrower’s credit history for all of his or her liabilities including leases, loans, lines of credit and credit cards. A lender will use the information that is contained in the report as one of the criteria for adjudicating a loan application. Credit reports are issued by credit reporting agencies.

Equity
The value of property less the aggregate value of loans that are secured by mortgages that are registered against the title of the property.

Expropriation
The act of acquiring privately-owned property for public use by a governmental authority. The said act usually involves the owner of the property being compensated for the expropriation of the property.

Financing Statement
A document filed by a creditor in a public records office that identifies the creditor’s claim against specified non-real estate property, usually being equipment, motor vehicles, etc.

Fixed-rate Mortgages
Mortgages for which the interest rate for the loans that they secure remains the same throughout the term of the contract.

Foreclosure
A legal procedure by which a mortgagee obtains ownership of the property after the borrower has defaulted on the obligations of a mortgage contract. This process is very rarely employed by mortgage lenders.

Freehold Ownership
The ownership of land and all immobile objects that are attached to the land.

Gross Debt Service (GDS) Ratio
The percentage of an individual’s gross annual shelter costs, which are defined as mortgage loan principal and interest payments plus property taxes payable plus heating costs, as a percentage of the individual’s gross annual income. The GDS ratio that is generally accepted by institutional mortgage lenders is between 32% to 35%.

High-ratio Mortgage Loan
A mortgage loan that exceeds 80% of the market value or purchase price of a property, whichever is less. Mortgage default insurance is required for this type of mortgage.

Interest
In the case of loans, interest is the money that is charged by a lender as consideration for the lending of money.

Interest Adjustment
Most mortgage lenders prefer to receive payments for mortgage loans on the first day of each month. If a purchaser or refinance transaction occurs other than the first day of a month, then the lender will calculate the interest adjustment, which is the interest payable for a mortgage loan from the date that the loan is funded to the first day of the next month, which is referred to as the Interest Adjustment Date.

Interest-only Mortgage Loan
Mortgages for which the instalment payments that are required to be paid for the loan are only interest, and the mortgagor owes the same money at maturity of the mortgage that was initially borrowed.

Joint Tenants
Owners of a property who all own the property together without a specified proportionate interest in the ownership. Upon the death of a joint tenant, his or her share is transferred to the remaining joint-tenant owners.

Line Of Credit
A credit facility that is extended by a lender to a borrower that has a pre-determined limit and from which the borrower may draw funds as necessary, or pay down balances as able. The credit facility usually requires monthly payments of at least 3% of the outstanding balance if the line of credit is not secured by real estate or other assets.

Market Value
The highest price in terms of money for which a property is sold by a seller if it has been exposed for sale during a reasonable period of time so that potential buyers are aware of its availability, and a willing buyer who has knowledge of all the uses that are permitted at the property agrees to pay for the property, with both parties acting free of any undue influences.

Maturity Date
The date on which the mortgage contract expires and the balance of the mortgage loan must be repaid if the mortgage contract is not extended or renewed.

Mortgage
The act of conveyance of property to a creditor as security for payment of a debt. Such security is redeemable or recoverable on the payment or discharge of the debt at a specified date. An encumbrance registered against the title of real estate.

Mortgage Default Insurance
If a homeowner wishes to purchase or refinance a residential property and borrow the money form a Canadian financial institution, and the homeowner does not have the minimum down payment funds or equity that is prescribed by regulation, federal and provincial statutes require that the mortgage must be insured against default by the homeowner, thereby protecting the financial institution against potential losses if a default occurs. If a default occurs, and the financial institution is forced to sell the property to repay its mortgage loan, and if the institution suffers a deficiency when it sells the property, the institution may file a claim with the insurer to recover the deficiency that it suffered.

Mortgage Life Insurance (Group Creditor Life Insurance)
Insurance protection for a borrower for which upon the borrower’s death, the proceeds of the policy are used to pay the balance of a mortgage loan that the borrower owes to the mortgagee. This type of insurance benefits the heirs of a borrower by virtue of the fact that they or the borrower’s estate or not required to repay the balance of a mortgage loan that is owed at the time of death. The borrower usually pays premiums for this type of insurance to a mortgagee in combination with the regular instalment payment.

Mortgage Renewal
The occurrence of the lender agreeing to renew the terms and conditions of a mortgage, but not necessarily maintaining the initial terms and conditions.

Open Mortgages
Mortgages that may be terminated without payment of a bonus to the mortgagee for breaking the contract.

Power-of-sale
The right of a mortgagee to force the sale of the property in the event of default of the mortgage by a mortgagee.

Pre-payment Bonus
A sum payable by a borrower to a lender for the borrower repays all or part of a closed mortgage loan before the maturity date.

Pre-payment Privilege
The privilege for a borrower to prepay all or part of a closed mortgage loan before the maturity date, usually without payment of a bonus to the mortgagee.

Pre-qualification or Pre-approval
Approval by a mortgage lender based on information that a borrower presents regarding income, employment, assets and liabilities, in advance of the borrower identifying a property that he or she wishes to purchase. Pre-qualifications or pre-approvals are subject to the property that is identified at a later date meeting the lenders and mortgage insurer’s criteria. Pre-qualifications or pre-approvals usually provide for a guarantee of an interest rate for a fixed period of time after the date of the pre-qualification or pre-approval.

Principal
The amount of the mortgage loan that is borrowed.

Refinance
The act of repaying a mortgage loan to a mortgagee and the arrangement of a new mortgage loan by the same or different lender. Refinances usually entail the consolidation of other debts with the new mortgage loan.

Survey
A drawing of the dimensions and location of a parcel of land that also contains the parcel’s legal description and a certification by a surveyor as to its accuracy.

Tenants In Common
Owners of a property who share a specified proportion of ownership rights in real property and upon the death of an owner, his or her share is transferred to the estate of the deceased tenant.

Term
The duration of the mortgage contract, which is usually expressed in number of years.

Title
Reference to the ownership of a property.

Title Insurance
Insurance that pays losses incurred by a property owner or mortgagee that arise from defects to the property’s title or ownership.

Total Debt Service (TDS) Ratio
The total of the “annual shelter cost” (Principal, interest, property taxes and heating fuel) for a property, plus the total of borrowers’ other borrowing commitments as a percentage of the borrowers’ gross income. The limit that a mortgage lender permits ranges between 40% to 42% of borrowers’ income.

Variable-rate Mortgages
Mortgages that are amortized and for which the interest rate may fluctuate during the term because it has been pegged to rise or fall with the commercial banks’ prime lending rate, which is referred to as “Prime”. The instalment payment for variable-rate mortgages remains constant unless a negative amortization occurs.

Vendor-Take-Back Mortgage
The occurrence of a seller of a property accepting a mortgage in lieu of cash from a purchaser as consideration for the sale of the property.

Zoning
The right of municipal governments to decide the defined use of lands within the geographic boundaries of the municipality. Regulations that regulate the use of the lands are commonly referred to as zoning by-laws.