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F.A.Q.'s

Mortgage Definitions and

Frequently Asked Questions

Some questions you may have about mortgages

Mortgage Definitions and F.A.Q.'s 

Frequently Asked Questions

How much of a down-payment do I need to qualify?

Conventional mortgage - 20% or more of the determined home value.

High – Ratio Mortgage - Also known as an "insured mortgage" (with CMHC, Genworth or Canada Guaranty) for up to 95% of the determined home value.

A fee is added to the mortgage amount.

How much income do I need to qualify?

There are two criteria:

1. Gross Debt Service Ratio- Your principal & interest + property taxes + heat annual payments total divided by your gross annual household income. This ratio must not exceed 39% of your gross annual household income.


2. Total Debt Service Ratio- To the above totals, add payments on all other debts. This ratio must not exceed 44% of your gross annual household income. (Note: These are industry standards but some lenders may allow these ratios to be higher, usually at a premium price).

What's the difference between mortgage amortization period and mortgage term?

Mortgage amortization period is the length of time it takes to pay off a mortgage, including interest. It may be between 5 and 30 years, depending on how much you can afford to pay. For a new mortgage, the amortization period is usually 25 years.

Mortgage term is how long you commit to your mortgage rate, details and conditions with a lender. When a term ends, you pay off the mortgage or renew it for another term if your lender agrees. Terms range from 1 to 10 years, but 4- to 5-year terms are most common.

How is interest calculated on my variable-rate mortgage?

To calculate interest on your variable-rate mortgage, you need your outstanding principal balance, current mortgage rate and payment frequency.

Multiply the outstanding principal amount by the mortgage rate in effect at the time. Divide that result by 365. Multiply by the number of days in the payment period in which that mortgage rate was in effect.

Interest is also calculated this way in leap years. You pay interest on your regular payment dates.

If you have a fixed-rate mortgage, interest is compounded semi-annually, not in advance.

What's the difference between a fixed-rate mortgage and a variable-rate mortgage?

If you have a fixed-rate mortgage, your interest rate and monthly payments stay the same for the entire mortgage term. If interest rates go up during the term, you're protected because your rate stays the same.

If you have a variable-rate mortgage, your interest rate changes when a specified financial index (such as CIBC Prime Rate) changes. Your mortgage agreement explains how and when your interest rate will change. Your regular payments may stay the same. But if interest rates go down, more of your payment goes towards the principal. If rates go up, more of your payment goes towards the interest.

Selecting the Right Mortgage:

When you’re ready to apply for your mortgage, you will need the following items: a copy of the accepted Offer To Purchase and land survey, copy of the real estate listing for existing homes, salary letter from your employer (self-employed buyers may require financial statements for the past three years as well as personal income tax returns), confirmation that your down payment came from your own resources (e.g. bank statements or a gift letter), a list of all your assets and debts along with account numbers, condominium financial statements (if applicable).

If you are buying a home to be constructed, bring a picture of the property, a copy of the building plans and specifications, the land survey, plus your agreement with the builder.

Mortgage Life Insurance:

It’s a sound idea to seriously consider mortgage life insurance. Generally, the cost is low and can be incorporated into your mortgage payments. In the event of death, terminal illness, or permanent disability, your balance will be paid in full (because details vary among financial institutions, it’s a good idea to read the policy carefully). Quotes are available with each approved mortgage.

Mortgage Definitions

The mortgage industry seems to come with its own set of buzzwords, phrases and language. Here are some common terms you will hear when discussing a mortgage but feel free to let The Mortgage Centre - Island Properties help you sort your way through the mortgage maze.

Amortization

The period of time it takes to pay off your mortgage in full.

Appraisal

The market value of property, usually determined by a professional appraiser.

Assumable

If a mortgage is assumable, a buyer may take over the seller's existing mortgage. Approval must be obtained from the lender prior to the assumption.

Blended Payment:

Mortgage payments that include both interest and principal repayment. The payment remains constant while the amount of interest taken from each payment reduces, and the amount applied to principal increases with each payment.

Commitment letter

Written notification from the lender to the borrower that approves the mortgage request and should state the amount of the mortgage, interest rate, payment and all terms and conditions.

Completion Date

Date the purchase will complete (money will be advanced by the lender).

Gross Debt Service Ratio (GDS)

The percentage of your gross income divided by the total amount of your mortgage payments including principal, interest and taxes. The industry standard is a maximum of 35% however some exceptions may apply.

Interest Adjustment Date

Date when the lender starts collecting interest. The lender will collect an "interest adjustment" which is a calculation of interest from the completion date to the interest adjustment date. Your regular payments will commence one payment period after this date. For example, if you have chosen to make bi-weekly payments, your first payment will come due two weeks after the interest adjustment date.

Loan to Value Ratio

The amount of the mortgage expressed as a percentage of the value of the home. For example, if you wish to borrow $175,000 on a home you are buying for $250,000, the Loan to Value Ratio is 70%. If your LTVR exceeds 80%, you will probably have to insure the mortgage against default.

Maturity Date

Date the mortgage must be paid in full (end of term). You may pay the mortgage out in full, renegotiate with your existing lender or transfer the mortgage to another lender. Contact Terry to discuss your best options.

Mortgage

A mortgage is actually a charge registered in the Land Titles Office and provides evidence that you have given your home as collateral to a lender to secure a loan.

Mortgagor

The borrowor(s) who obtain(s) a loan secured by a mortgage.

Mortgage Term

The interest rate is set for a pre-determined period or term, i.e., 1 - 10 years. At the end of the term this mortgage rate will expire & the mortgage will come up for renewal. at this time the interest rate is re-negotiated.

Net Worth

The difference between what you own (assets) and what you owe (liabilities) is called your Net Worth.

Portable Mortgage

A portable mortgage is a mortgage that can be transferred from one property to another, usually with qualification. This is particularly useful if you sell one home and buy another.

Pre-Payment Penalty

A closed mortgage usually cannot be paid off before the maturity date without paying a pre-payment penalty. The calculation of the penalty amount can be complex and should be discussed in detail with Terry Martin. Some mortgages cannot be paid off before the Maturity Date and should be avoided if possible (See Locked-in Mortgages).

Prepayment Privileges

When you negotiate a closed mortgage, you are entering into an agreement with the lender that you will not pay off the mortgage during the term. In return the lender agrees to maintain the same interest rate throughout the term. However, most mortgages allow certain prepayment privileges, such as an annual prepayment of a certain percentage of the mortgage amount or an annual increase in the mortgage payment.

Principal

The amount of money actually borrowed.

Survey Certificate

Certificate showing the home and other buildings in relationship with the property boundaries.

Total Debt Service Ratio

The percentage of your gross annual income divided by the total amount of your mortgage payments, including principal, interest, and taxes, PLUS the total amount paid to service all other debts including credit cards, loans, lines of credit, etc. The industry standard is a maximum of 42%, however, some exceptions may apply.

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