the Home Buyers Mortgage Guide

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In Whistler
Phone 604.905.3800 fax 604.905.3801
In squamish
Phone
604.898.5600
fax
604.898.5661
Toll Free in Canada & USA
Phone 1.877.932.2688 fax 1.877.932.2690
table of contents
A.Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
B.Mortgage Qualification Procedures . . . . . . . . . . . . . . . . . . . . . 4
B1.General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
B2. Job Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
B3. Sources Of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
B4. Employment Income Verification . . . . . . . . . . . . . . . . . . . . . . . . 4
B5. Other Sources Of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
B6. Credit History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
B7. Source Of Down Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
B8. Income And Expenses (GDS/ TDS Ratios) . . . . . . . . . . . . . . . . . . . 7
B9. Property Information And Documentation . . . . . . . . . . . . . . . . . . . 7
C. Mortgage And Property Definitions . . . . . . . . . . . . . . . . . . . . . 8
C1. Conventional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
C2. High Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8
C3. Freehold Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
C4. Leasehold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8
C5. Condominium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8
C6. Co-operative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
C7. Joint Tenancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
C8. Tenants In Common Or Undivided Owner Ship . . . . . . . . . . . . . . . . 9
C9. Fractional Interest Properties . . . . . . . . . . . . . . . . . . . . . . . . .
9
D. Mortgage Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
D1. Closed Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
D2. Open Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10
D3. Convertible Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
D4. Fixed Rate Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
D5. Variable Rate Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11
D6. Payment Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11
D7. Amortization And Payment Frequency Comparisons . . . . . . . . . . . . . 11
D8. Portable & Assumable Mortgage . . . . . . . . . . . . . . . . . . . . . . .
12
table of contents
E. Cmhc Policies & Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . 13
E1. What Is CMHC’s Role? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
E2. CMHC Fees & Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
E3. Extended Amortization Options . . . . . . . . . . . . . . . . . . . . . . . .
14
E4. CMHC’s 1 - 4 Unit Rental Program . . . . . . . . . . . . . . . . . . . . . .
14
E5. High Ratio Financing For Self Employed Applicants . . . . . . . . . . . . . . 15
E6. CMHC Second Home Lending Program . . . . . . . . . . . . . . . . . . . . 15
F . Other Government Incentives . . . . . . . . . . . . . . . . . . . . . . . . 16
F1. Using Your RRSP For Down Payment . . . . . . . . . . . . . . . . . . . . . 16
F2. Property Transfer Tax Information . . . . . . . . . . . . . . . . . . . . . . .
16
F3. First-time Home Buyers’ Tax Credit . . . . . . . . . . . . . . . . . . . . . .
16
G. Closing The Deal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
G1. Estimated Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
H. Mortgage payment calculator . . . . . . . . . . . . . . . . . . . . . . . . 18
I. Non-residenT lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
I1. Non-resident Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
I2. Whistler Condo Financing . . . . . . . . . . . . . . . . . . . . . . . . . . .
19
I3. How Canadian Mortgages Work . . . . . . . . . . . . . . . . . . . . . . . . 20
J. construction financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
J1. Understanding the Construction Financing Process . . . . . . . . . . . . . . 21-23
J2. Construction Financing Example Sheets . . . . . . . . . . . . . . . . . . . . 24-27
K. Glossary of mortgage & real estate terms . . . . . . . . . . . . . . . . . 28-34
A. INTRODUCTION For most people, buying a home will be the largest purchase they will ever make. Besides
being a necessary source of shelter for you and your family, it may also be an important
investment for your future.
As mortgage brokers it is our job to find you the best possible mortgage financing for your
own unique situation. The following is a list of just a few of the lenders we work with on your
behalf:
• CIBC
• Citizen’s Bank (owned by Vancity)
• Concentra
• First National
• FirstLine Mortgages
• HSBC
• Home Trust
• ING
• Macquarie Financial
• MCAP
• Merix Financial
• National Bank of Canada
• North Shore Credit Union
• President’s Choice Financial
• Scotiabank
• Squamish Savings (owned by Vancity)
• TD/Canada Trust
We would be pleased to assist you with your home purchase. Application can be made by
telephone, fax, or on-line. We even do house calls.
This guide has been developed to assist and guide you through the home buying and
financing processes. It will provide you with the information necessary to make an informed
decision about purchasing and financing your new home.
We are able to arrange 1st / 2nd mortgages for purchases and/or refinance for both
residential and commercial property. Construction financing, transfers/switches, & lines of
credit are also provided. In some cases broker / lender fees may be charged, but not without
your consent.
B. MORTGAGE QUALIFICATION PROCEDURES
B1. General Information
There are many factors taken into consideration when a lender is qualifying you for a mortgage. Among the
deciding factors are: family income and job stability, past credit history, net worth (assets minus liabilities),
source of down payment, the amount of the mortgage and its percentage of the value, and finally your debt
service ratios. You will be asked to fill out a mortgage application and authorize the institution to perform a
credit investigation (also called a Credit Bureau or “Bureau” for short). There are many sources of funds for
financing: banks, trust companies, life insurance companies, other finance companies and private lenders.
B2. Job Stability
Lenders like to see the progression of your employment over a two to five year period. Generally speaking, the
minimum length of time on your current job that is considered acceptable is 1 year. If you have been employed
less than 1 year in your current job, the lender may make an exception provided your current job is related to
your previous one (i.e. in the same industry) or you were previously in school.
B3. Sources of Income
Whether you are a salaried, hourly or commission-based employee, the lender will require proof of your
income. In order to “use” your income for qualification purposes, the lender must be confident that it is:
a) Stable and likely to continue over a reasonable period of time, and
b) Declared to the government on your income tax return.
Any income that is earned as “cash” or “under the table” cannot be used to qualify you for a mortgage.
It is up to the lender to decide what is appropriate in each case. If you are self-employed, the income
verification process is a bit more complicated in that you will have to provide a minimum of 2 years’
worth of business financial statements and tax returns.
B4. Employment Income Verification
B. MORTGAGE QUALIFICATION PROCEDURES
B5. Other Sources of Income
As with employment income, you will also have to provide proof of any other sources of
income you may have. Below are some of the most common sources of income and the
documentation required:
In all of the above cases, the lender may request 2-3 years’ copies of your Canada Revenue
Agency Notice of Assessment to confirm the amount of these incomes.
B6. Credit History
Since your past credit activity is considered to be the best indicator of your future ability
and/or willingness to repay debt, the lender will rely heavily on your credit rating to make a
lending decision. They will request a credit report from your local credit bureau. This report
is referred to in the industry simply as a “bureau”. The bureau will show all your past credit
activity including loans, credit cards, lines of credit, collections, judgments, and bankruptcies
for the past 7 years. Each item on the bureau is given a rating from 0 to 9. Zero represents an
inactive account and 9 represents a “written off” or bad debt. The best rating is a 1. You will
hear terms such as “I2” or “R9” which are the codes given to evaluate each debt reported on
the bureau. The rating will start with either an R, I, or O depending on the type of debt, but
the number of ratings all mean the same thing.
To avoid surprises or misunderstanding, it is best to be up front about any past credit
problems you may have had. As long as your past credit problems are supported by a valid
explanation, they will be considered to be part of your past and you may still be approved for
a mortgage.
There are two credit bureau reporting agencies, Equifax and Trans Union. Their web sites are
as follows:
• www.equifax.ca • www.tuc.ca
B. MORTGAGE QUALIFICATION PROCEDURES
B7. Source of Down Payment
The lender will also want to know where your down payment is coming from. That is, have
you saved the funds yourself over a period of time? Do you have stocks, bonds, RRSPs,
mutual funds or other investments that you are cashing? Are you receiving a gift from a
relative? Are you selling an asset you already own? Are you refinancing an existing property?
The amount of down payment relative to the purchase price will also be evaluated. A lender’s
decision to approve the mortgage application will also take into account what percentage of
equity you will have in the property. For example, are you putting down 25% of the purchase
price from your own savings or will you be receiving a gift for 5% of the purchase price? The
more equity you have from your own funds, the stronger your application is considered to be.
Wherever your down payment is coming from, the lender will require documented proof of
its source:
B. MORTGAGE QUALIFICATION PROCEDURES
B8. Income and Expenses (GDS/TDS Ratios)
Historically, lenders and high ratio insurance providers (CMHC, Genworth) maintained the
qualifying formula shown below as a guide for income to debt ratios. Recently, in the last
couple of years, this formula has been relaxed. Depending on your credit history (a minimum
beacon score of 680 is required) and your level of downpayment, you may be eligible for no
GDS and a TDS of up to 44%. What does this mean for you? It means that your income is
recognized to carry more for a mortgage which may help you purchase the property that you
really wish for.
GDS (Gross Debt Service) and TDS (Total Debt Service) ratios are the two factors that lenders
and CMHC take into consideration when they are determining how much of a mortgage you
qualify for. These ratios take into account your gross family income (before taxes) and divide
that into your expenses. The maximum GDS ratio is 32% and the maximum TDS is 40%.
These are the accepted industry guidelines. GDS and TDS are calculated as follows:
GDS =
Mortgage Payment + Property Taxes + Basic Heat + 1⁄2 Condo Maint Fee
(Max 32%) Gross Family Income
TDS = Mortgage Payment + Property Taxes + Basic Heat + 1⁄2 Condo Maint Fee + Other Exp*
(Max 40%) Gross Family Income
*includes loan, credit card, and other monthly obligation
B9. Property Information and Documentation
After evaluating you as a mortgage applicant, the second part of the mortgage approval
process looks at the property you are purchasing. As mortgagee, the lender will be concerned
with the property they will be using as security for their mortgage. They will want to know
the specifics of the property, namely, the purchase price, location, and size. Your lender may
require some or all of the following documents:
1. A fully executed copy of the Agreement of Purchase and Sale along with all the attached
schedules, amendments and waivers. Fully executed means that all the pages, additions,
and changes have been signed and/or initialed by all parties.
2. An MLS listing or feature sheet and picture of the property. Among other things, this
contains details of the location, condition, asking price and features of the home.
3. A recent appraisal of the property to determine the lending/market value.
C. MORTGAGE AND PROPERTY DEFINITIONS Below are the definitions of some of the more common terms you will hear with respect to your home
purchase and financing.
C1. Conventional
The conventional mortgage is one that is offered on new and existing homes for up to 80% of the
purchase price. This means that the home buyer must have at least 20% of the purchase price
available for a down payment. Conventional mortgages do not normally have to be insured through
CMHC or Genworth.
C2. High Ratio
The term high ratio refers to mortgages that represent more than 80% of the value of the purchased
property. High ratio mortgages must be insured through CMHC (Canada Mortgage & Housing
Corporation), or Genworth. The insurance premium that is paid to CMHC is to protect the lender in the
event that the mortgage is not paid and the bank has to take back the property. This is not the same as
mortgage life insurance. The benefit to the borrowers is that it allows them to purchase a home with as
little as 5% down.
C3. Freehold Ownership Owner has title to and full use of the land and buildings on it over an indefinite period.
C4. Leasehold
A person has use of the property for a limited time. Usually, the land is owned by the federal, provincial or
municipal government and land lease payments are made to them. In the case of a residential home purchase,
the purchaser owns the building but not the land on which it sits. The term “leasehold” can also refer to
situations where both the building and the land are being leased.
C5. Condominium Owner has full and sole use of a housing unit. The owner shares ownership of common space such as
parking garage, and recreation areas with others who all belong to the same condominium group. Since
ownership of common space is shared, so are repair, maintenance and replacement costs. Usually these
expenses are covered through the strata maintenance fees.
C6. Co-operative
Persons have a share in a residential project. They do not have ownership of a particular unit, but as
shareholders they each have use of a unit.
C. MORTGAGE AND PROPERTY DEFINITIONS C7. Joint Tenancy
If you buy a home with another person or with several other people, many types of ownership
agreements can be in place. As joint tenants, each owner holds an equal share in the property
regardless of his or her individual financial contribution. If an owner dies without any specific
arrangements having been made, his or her share is automatically transferred to the other owner(s).
C8. Tenants In Common or Undivided Ownership Each owner holds a specific portion of the property but the portions do not have to be equal.
Each individual owner can sell or assign his or her share to any other person, subject to any
restrictions that were originally stated in the deed. Rights of survivorship do not exist in this
case, so upon the death of one of the owners, their share becomes part of their estate and
is dealt with according to the provisions set out in their will. Or, if no will, according to the
relevant provincial law.
C9. Fractional Interest Properties
Fractional Interest properties come in many varieties. The most common are quarter
share, tenth share, and time share (1/51st). The title structure for most Fractional Interests
includes a proportionate share of the fee simple title, which is charged with a headlease to
a management company or owner’s association, and a sublease of the headlease, which
defines when occupation associated with the fraction actually takes place. In some instances
(Montebello, Whistler, BC) the owner also receives a share of the company that holds the
headlease.
The choice of Lenders may be limited for these Fractional Interest properties. If the title
structure is unconventional, then finding a lender may be much more difficult as there may
be no formal structure to allow the lender to foreclose if they have to.
One lawyer cannot act for both borrower and lender in financing Fractional Interests. The
borrower will have to pay for both their lawyer and the lender’s lawyer, so the costs of
closing a Fractional Interest property are greater.
D. MORTGAGE OPTIONS D1. Closed Mortgage
The term ‘closed’ mortgage refers to the fact that there are penalties incurred in the
event the mortgage is fully paid, either from sale of the property, a refinance to a different
lender, or from your own resources. Some ‘closed’ mortgages can only be paid off from
the sale of the property. The penalties can vary depending on if you are in a closed
fixed rate mortgage, or a closed variable rate mortgage. It is best to obtain the specific
penalty policy from your lender regarding the specific type of mortgage you are taking.
Most lenders allow prepayments based on a certain percentage that can be paid each
year, the percentage varying depending on the lender. The usual range is 10 to 20%
per annum, and based on the original amount borrowed. Closed fixed rate mortgages
usually have a lower rate than open mortgages, and are a good choice for those who
want the security of knowing their mortgage rate and payments will not change until the
end of the mortgage term.
D2. Open Mortgage
Allows borrowers to repay all or part of the total amount of their mortgage at any time without
penalty. Because of this flexibility, this mortgage is ideal for borrowers who plan to sell their
homes or otherwise pay out their mortgage in the near future. An open mortgage also provides
flexibility for mortgagors who may wish to take advantage of lower rates and lock in (convert)
to a longer term mortgage at a moment’s notice. However, if the sole reason for wanting an
open mortgage is to allow conversion to a longer term, the mortgagors may be better served
by obtaining a convertible mortgage.
D3. Convertible Mortgage
A closed, short term mortgage, usually 6 or 12 months, which allows the borrower to switch
into a longer term at any time without penalty. The rate is usually lower than the open
mortgage because the only option available is to convert. These mortgages are best suited
for people who want to watch the market over the short term before deciding if and when to
lock in.
D4. Fixed Rate Mortgage
Both closed and open mortgages can have the feature of a fixed rate. This means that the
rate of interest is set for the term of the mortgage, which may be as long as 25 years or as
short as 6 months. Because of this, the regular payment amount of the principal and interest
remains the same throughout the term.
10
D. MORTGAGE OPTIONS D5. Variable Rate Mortgage
The rate of interest changes from time to time as money market conditions change, but
usually no more often than once a month. This type of mortgage was developed in order
to provide maximum flexibility to borrowers in times of volatile or fluctuating interest rates.
Although the interest rate charged on the mortgage fluctuates, the amount of the regular
payment usually does not change throughout the term of the mortgage. Because of this,
the rate fluctuation will affect the way each payment is applied. Since payments are made
up of both principal and interest, when rates go down, more of the payment will be applied
towards the principal. If interest rates rise, more of the payment goes towards interest. If
interest rates rise dramatically, the borrower may be required to make a lump sum payment
against the mortgage, or increase the payments to ensure pay down as per the original
amortization. Most variable rate mortgages offer conversion options to allow you to “lock-in”
to a fixed rate mortgage term.
D6. Payment Options
Payments are usually made either monthly, bi-weekly, weekly, or semi-monthly. Bi-weekly
means every 2 weeks, weekly means every week, and semi-monthly means twice a month.
By paying bi-weekly or weekly you pay the equivalent of approximately 1 extra monthly
payment against the principal per year and this helps to pay your mortgage off sooner.
D7. Amortization and Payment Frequency Comparisons
Example:
Mortgage Amount: $100,000
Interest Paid*: $128,964.04
Interest Rate: 8% *Assumes a constant rate of interest
11
Amortization: 25 years
D. MORTGAGE OPTIONS D8. Portable & Assumable Mortgages
Portability and assumability features offer additional flexibility. Portable means that the borrower can
take their current mortgage to a new home at the same rate, etc. If the current mortgage is not enough
to cover the purchase of the new home, the lender will often let you increase the mortgage and charge
you current rates only on the portion being increased (called “blending” the rate).
Assumable means that, with the approval of the lender, the purchasers of a home may “take-over” the
vendor’s mortgage. Allowing a prospective buyer to assume your mortgage when the rate is lower than
the current market rates may increase the marketability of the property being sold.
12
E. CMHC/GENWORTH POLICIES & PROCEDURES E1. What Is CMHC’s Role?
Canada Mortgage and Housing Corporation is a crown corporation whose broad mandate
includes programs to assist Canadians with housing matters. The most frequent contact
most people will have with CMHC will be as a provider of mortgage insurance on high
ratio mortgages.
GENWORTH provides the same service and high ratio insurance as CMHC, however they are
privately owned and operated.
By law, financial institutions require that all mortgages with a loan to value ratio greater than
80% be insured against default. CMHC provides mortgage loan insurance to approved
lenders in the event that the home owner defaults on their mortgage. Depending on the
situation, a lender may also request that a conventional mortgage be insured through CMHC.
E2. CMHC/GENWORTH Fees & Premiums
The following is a summary of the insurance premiums for different loan to value ratios:
LTV Ratio
Purchase Premium
Cash-Out Refinance
The Lesser of Premium as % of
Total Loan Amount
Top Up Portion
Up to 65.%
0.50% of the mortgage
0.50%
0.50%
65.01 to 75%
0.65% of the mortgage
0.65%
2.25%
75.01 to 80%
1.00% of the mortgage
1.00%
2.75%
80.01 to 85%
1.75% of the mortgage
1.75%
3.50%
85.01 to 90%
2.00% of the mortgage
2.00%
4.25%
90.01 to 95%
2.75% of the mortgage
2.75%
4.25%
90.01 to 95%
2.90% of the mortgage
CMHC Flex Down
* Please note that for extended amortizations, CMHC will add .20 for every 5 years beyond a
25 year amortization. So, for a 35 year amortization, there is a .40 premium surcharge added.
This premium surcharge applies no matter which high ratio insurance program you are
applying under.
In a refinance transaction, the premium payable is the lesser of a) the new loan amount
multiplied by the full premium rate below, or b) the increase in loan amount (top-up amount)
multiplied by the top-up premium rate in the table above. The insurance premium may be
paid in full on closing or added to the mortgage amount. If added to the mortgage, interest
is then paid on the insurance premium over the amortization of the mortgage. Since most
buyers do not have the extra cash on closing, it is most common to add the premium to
the mortgage.
13
E. CMHC/GENWORTH POLICIES & PROCEDURES E3. Extended Amortization Options A premium surcharge of .20 is added for every 5 years beyond 25 years, up to a maximum of
35 years. So, to amortize your mortgage up to 35 years you would add .40 to the insurance
premium.
E4. CMHC’s multiple UNIT RENTAL PROGRAMS
This program is broken down into two categories — 1-2 Units or 3-4 Units. This means the
number of CMHC insured mortgages owned or being acquired for rental properties. Eg. if |
applicants have one CMHC insured rental property and are buying a second one for rental,
they would qualify under the first category. If they already own two CMHC insured rental
properties, and are acquiring a third, they would qualify under the second category.
1 - 2 unit rental program Up to 95% Financing for purchase or refinancing.
3 - 4 unit rental program Up to 90% Financing for purchase or refinancing.
•
Maximum amortization is 35 years.
• Not allowed for Self-Employed program. Applicants must be fully qualifying.
• Minimum beacon score requirement for a purchase of up to 95% financing, and with
down payment from own resources is 600.
• Minimum beacon score requirement for a refinance up to 95% is 650.
• Qualifying based on following formula:
PITH (all properties) + All Other Debt Obligations
less 80% of Gross Rental Income (All Properties)
Gross Annual Household Income
42%
PITH = Principal, Interest, Taxes and Heat
Insurance Premiums
Purchase
Refinance/
Premium on Increase to
Loan Amount
Up to and including 65%
1.25%
2.75%
65.01% to 75%
1.75%
3.00%
75.01% to 80%
2.50%
3.75%
80.01% to 85%
3.50%
5.00%
85.01% to 90%
4.75%
6.25%
90.01% to 95%
Traditional Down Payment
Non-Traditional Down Payment
6.50%
6.75%
8.00%
N/A
* Please note that for extended amortizations, CMHC will add .20 for every 5 years
beyond a 25 year amortization. So, for a 35 year amortization, there is a .40 premium
surcharge added. This premium surcharge applies no matter which high ratio
insurance program you are applying under.
14
E. CMHC/GENWORTH POLICIES & PROCEDURES E5. High Ratio Financing For Self Employed Applicants
There are lending programs available to assist applicants that are self-employed. CMHC and
GENWORTH each have their own program. Financing is available up to 95%. Applicants
must be up to date with tax filings, and showing no tax arrears. The reported income is not
looked at for qualifying purposes. Applicants need good credit with a minimum credit bureau
beacon score of 700 for 95% financing. In a refinance transaction, the premium payable
is the lesser of a) the new loan amount multiplied by the full premium rate below, or b) the
increase in loan amount (top-up amount) multiplied by the top-up premium rate in the table
below.The premiums are higher, as follows:
Cash-Out Refinance
The Lesser of Premium as % of
Purchase
LTV Ratio
Bureau Scores
Premium
Total Loan Amount
Top Up Portion
65.01% - 75%
600
1.00%
1.00%
2.60%
75.01% - 80%
620
1.64%
1.64%
3.85%
80.01% - 85%
620
2.90%
2.90%
5.50%
85.01% - 90%
650
4.75%
4.75%
7.00%
90.01 - 95%
700
6.00%
-
-
* Please note that for extended amortizations, CMHC will add .20 for every 5 years beyond
a 25 year amortization. So, for a 35 year amortization, there is a .40 premium surcharge
added. This premium surcharge applies no matter which high ratio insurance program you
are applying under.
Ideally, applicants need to be self-employed for at least 2 years, or have 2 years in the same
type ofwork even if not the self-employed capacity. Down payments can NOT be gifted.
E6. CMHC Second Home Lending Program CMHC will allow home owners to have 2 CMHC insured mortgage loans with them, one for
their principal residence, and one for a 2nd home, or home occupied by a family member.
Financing is available to 95% at the standard insurance premiums, as outlined on page 12.
The property can be anywhere in Canada and must be suitable for and available for, year
round occupancy. Properties located on an island must have year-round bridge or ferry
access. Time-share interests, life leases, and properties in rental pools are not eligible.
Applicants must qualify without the use of rental income. Applicants under the SelfEmployed program are also eligible to a maximum loan to value of 95%.
15
f. OTHER GOVERNMENT INCENTIVES F1. Using Your RRSP For Down Payment
The guidelines are as follows:
• You cannot have owned your principal residence in the last 5 years.
• Commencing January 28, 2009, first-time home buyers can withdraw $25,000 from a Registered
Retirement Savings Plan (RRSP) to purchase or build a home, without incurring tax. Previously, the
limit was $20,000.
• You must make repayments to your RRSP of equal amounts over the next
15 years.
• If the amount is not repaid in a year, that year’s amount will be taken into income and taxed.
• It is acceptable to repay more than 1/15th of the funds per year.
• If less than 1/15th is repaid in one year, the difference is taken into income for that year and taxed.
• The home must be intended to be your principal residence.
• The funds must be in your RRSP for at least 90 days prior to withdrawal.
The government website for more information is:
http://www.cra-arc.gc.ca/tax/individuals/topics/rrsp/hbp/menu-e.html.
F2. Property Transfer Tax Information
When buying a home in BC, there is usually a government charged property transfer tax. As a first time home
buyer however, this can be waived if certain conditions are met. Here are a few of the basic conditions:
• Must be a Canadian citizen, or a permanent resident as determined by Immigration Canada.
• Purchase price cannot exceed $425,000.
• You must not have previously owned your principal residence, anywhere in the world.
• You must have resided in BC for the period 12 months before the date of purchase, or you have filed
2 income tax returns as a BC resident during the 6 years before the date of property registration.
For complete details, please go to:
www.rev.gov.bc.ca/individuals/Property_Taxes/Property_Transfer_Tax/brochures.htm.
F3. FIRST-TIME HOME BUYERS’ TAX CREDIT
First-time home buyers that acquire a qualifying home after January 27, 2009, can claim a 15%
non-refundable tax credit on up to $5,000, for a maximum credit of $750. If a home is purchased jointly,
the total credit that may be claimed by all purchasers is $750. The unused portion of the credit can be
transferred to a spouse or common-law partner.
16
g. CLOSING THE DEAL G1. Estimated Costs
15
A few days before closing, your lawyer will have you come into his or her office to sign all the
mortgage documents. When they set up this appointment, they will give you the final figure
of how much you should write your cheque for and to whom it should be payable (usually the
lawyer or legal firm “in trust”). You will receive a Statement of Adjustments which will show
you exactly how your funds are being disbursed.
*Costs are estimated and will vary depending on each individual transaction and property.
17
H. MORTGAGE PAYMENT CALCULATOR Mortgage Payment Calculation Chart Per $1,000 Of Mortgage
Example: $100,000 mortgage @ 5% amortized over 25 years = $5.82 per $1,000, so,
100 x 5.82 = $582 per month.
Interest Rate (Compounded Semi-Annually) Amortization Period
(In Years)
You can also visit our internet web site at:
garibaldimortgage.com
At this site you can calculate your mortgage amortization schedule and then print out the
details of all your payments. You can also view the latest best rates that we have access to.
18
I. NON-RESIDENT I1. Non-Resident Lending
We frequently receive requests from non-residents of Canada looking for financing for the
purchase of revenue or vacation property. While the general guidelines from most banks
observe a maximum 65% loan to value policy, we do have lenders that will make exceptions
to 75% depending on each application, and the type of real estate you are buying.
Depending on your purchase price, the lender may reduce the loan to value ratio, as every
bank has different formulas they follow on larger loan amounts. For example, a high value
purchase in excess of $2,000,000 may have a maximum loan availability of 55%. As every
client situation and property is different, we are able to obtain exceptions and provide
financing over and above guidelines, on a case by case basis.
You may hear terms like ‘payment hypothecation’ and ‘assignment of rents’.
Payment Hypothecation refers to a deposit equal to 3 -6 months’ worth of payments held
for at least 1 year in a separate, interest-bearing vehicle. It provides additional security for the
loan, and is more common when financing up to 75%. These funds are usually released after
one year at the lender’s discretion, as long as the mortgage has been repaid as agreed.
Assignment of Rents refers to a lender issued document registered on the title of your
purchase at the time of mortgage registration. It entitles the lender to use rental income to
make up any funds in arrears if the mortgage were ever to go into default. As long as the
mortgage is in regular repayment, the lender has no cause to use the ‘assignment of rents’.
I2. Whistler Condo Financing
In the Whistler area, condominiums are generally divided into 2 types: Phase I and Phase
II. Phase I properties allow full year round use at the owner’s discretion, and when not in
use, there is an expectation that the property be placed in a rental pool. Participation is not
mandatory. Phase II properties allow the owners to use the condo 28 days in the summer and
28 days in the winter, and when not in use it must be placed in the rental pool. Rental pool
participation is mandatory.
Financing is generally available to 65%. Rates and possible fees should be discussed
wtih your mortgage broker, as the available financing and terms for these properties vary
depending on where you are filing tax returns, and your overall qualifications as an applicant.
19
I. NON-RESIDENT I3. how canadian mortgages work
The way fixed rate Canadian mortgages work is like this:
They are closed interest rate contracts – closed for the term you select, ie one to 10 years.
The maximum amortization available is 25 years. The penalty to break the interest rate
contract prior to the maturity date is the GREATER of 3 months interest, or the IRD (interest
rate differential). The IRD is the bank’s loss of interest for the time remaining in the term. So
if you take a 5 year fixed and pay it off after 3 years, either from your own resources, or by
sale, the bank will calculate the IRD by comparing your rate, with the current rate for 2 years,
and charge that on the balance to the end of the term. The estimate for 3 months interest is
approximately 2 months worth of payments.
Additionally worth noting is that in the Bank Act, the maximum penalty that can be charged
after the 5th anniversary is 3 months’ interest – so this is applicable for terms longer than 5
years.
All of our lenders allow a prepayment percentage from 10 to 20%, based on the original
amount borrowed. Some allow it only on the anniversary date, and some allow it
cumulatively throughout the year.
When any mortgage is up for renewal, you may pay off as much as you wish without penalty.
The renewal process is very easy. As long as you are just renewing the balance, and not
changing anything, you just choose a new term at whatever the prevailing interest rates are.
There are no lawyers involved or re-qualifying procedures to go through. Please note, at
the end of the term you are able to switch lenders if you are not getting a competitive offer
- however by switching lenders, you will have to go through the re-qualifying process. Many
of our clients contact us at renewal, and we assist you with either switching lenders, or
negotiating a better rate from your existing.
There is also variable, prime based financing available. The Canadian prime rate is reviewed
every 6 weeks. Generally, with a closed variable rate mortgage, the penalty to pay off early is
3 months’ interest. With an open variable rate mortgage, there are no penalties for early
pay off.
20
J. construction mortgage guide J1. Understanding the Construction Financing Process
Building your own home is an exciting and rewarding
project. We are here to help you understand the process
of financing the construction of your new home so that
you can get started with confidence and proceed with
peace of mind.
Determining what you need to get started
You may have some experience in obtaining mortgage
financing but as you’ll see, construction financing is
a more detailed process, with several important milestones that don’t take place when you buy an existing
home.
Land
To secure construction financing you are required to own
the land, as the bank will need to register a first mortgage on it.
A substantial amount of your own funds are required up
front. You are not “reimbursed” until the end, when the
dwelling is 100% complete.
Now is the time to plan
It is never too early to plan. Read through the example
sheets to ensure you have a clear understanding of
how your advances work so that you request the right
mortgage amount.
What to Expect
When you build your home, there are more steps and
expenses than if you buy an existing home. In the simplest terms, a typical mortgage is advanced in one lump
sum. Construction financing is different. At the bank, the
total amount borrowed to complete a project is usually
advanced in three stages within one year.
Typical Mortgage
You receive all of the money you borrowed at
the time you obtain the property.
Construction Financing
At the Bank, you pay the up-front costs, then
generally receive up to three advances.
First advance at the Foundation stage.
Second advance at the Lock-up stage.
Third advance at the Completion stage.
During the application process, you will need to
understand the initial costs that you will be responsible
for.
Servicing
The land you intend to build on needs to be fully serviced. This includes site preparation and municipal
services such as septic service, water connection, sewer
connection, hydro and gas service.
Soft costs
These are out-of-pocket expenses for services and
charges you are likely to incur at the outset of, and
throughout, the construction phases. Depending on
your plans and the location of your home, these will
likely include:
• Property taxes
• Municipal permits
• Fees for architects and engineers
• Fees for realtors and solicitors
• Fees for appraisals and inspections
Initial building costs
You are expected to finance the initial stage of
construction (approximately 15 to 20% of construction)
with your own money. As every construction project is
different, this percentage is an estimate only for example
purposes.
Cost overruns
We recommend that you set aside an additional 15% of
the estimated construction costs to cover unexpected
overruns.
Interest costs
You are required to make interest -only payments on all
amounts advanced until your regular principal and interest payments begin.
In addition to the costs already outlined, you will also
need to budget for lien holdbacks.
21
J. construction mortgage guide Lien holdbacks
Different banks observe lien holdbacks in different ways.
They may also be subject to change. It is best to clarify
your lender’s policy with your mortgage broker.
Your solicitor may be required to hold back some of the
money advanced at each of the Foundation, Lock-up
and Completion stages of your construction project.
This money is held in reserve in the event that a
contractor or supplier claims a lien on your property. A
lien is a claim by a contractor against the property to
secure repayment of unpaid construction costs.
The amount of your lien holdback and the number of
days that your funds will be held in trust varies by
province. The bank will instruct your solicitor to hold
back a percentage based on the chart below.
Ask your solicitor for details.
The application
Here’s what you should plan to bring to your first meeting
with a mortgage representative.
All information associated with the construction
• Construction contract, including costs
• Construction plans or blueprints
• Quotes for labour and material if you are acting as the
general contractor
• Site preparations, including municipal services for the
lot (e.g. excavation, septic service, water, sewer, hydro,
gas, etc.)
• Evidence of ownership of the land and/or a copy of the
purchase agreement with evidence of
available funds
Other requirements to help fulfill the application
or construction financing
Province
Percentage of
Holdback
• Confirmation of required funds to complete the
Foundation Stage
Alberta
10
• Confirmation of income/employment
British Columbia
10
• Name, address and telephone number of your solicitor
Manitoba
7.5
New Brunswick
20
As we familiarize ourselves with the details of your
project, we can tell you what, if any, other documents
specific to your application may be required.
Newfoundland
10
Nova Scotia
10
Ontario
10
Prince Edward Island
20
Quebec
15
Saskatchewan
10
The appraisal
Determining the estimated value of your completed home.
The Lender will obtain an appraisal to estimate the value
of your completed home, including the land.1 To arrive at
an estimate, your appraiser will review your construction
plans and blueprints to understand the type of home you
are building.
For the purpose of the mortgage application, the value of
the completed project is the lesser of a) the cost to construct
including land value or b) the appraised value.
1
22
J. construction mortgage guide Your 1st advance - the FOUNDATION stage
Your 2nd advance - the LOCK-UP stage
When you have completed the Foundation stage, we
will send an appraiser to your home to inspect the
property and confirm that the Foundation stage is
complete.
The Lender will release your second advance to your
solicitor. Once again, a lien holdback may be applied.
Up to this point, you will have paid all expenses from
your own resources.
At each stage, when you are ready for an advance, the
bank will send out their appraiser to confirm that the
work is completed and what percentage of work is left
to complete.
The lender will release your first advance of funds to
your solicitor, who may keep a percentage of it as a
lien holdback. The percentage varies by province.
At this point monthly interest-only payments will
commence.
The amount of your second advance is dependent on
the requested mortgage amount, the amount of the first
advance and the remaining cost to construct
your home.
Your 3rd advance - the Completed stage
When you have completed your home, we will send an
appraiser to your home to inspect the property.
When the appraiser has determined that your building is
complete, the Lender will release the final advance of finds
to your solicitor. A lien holdback may be applied.
Prior to releasing the final advance, your solicitor may
request further documentation, which may include:
The amount of your first advance is determined by
a formula based on the total requested mortgage
amount and the remaining cost to construct
your home.
• Well Water Potability Certificate (if applicable)
Prior to releasing the first advance, your solicitor
will need -
Release of lien holdbacks
• Builder’s all-risk insurance assigned to the Lender
• A survey showing the location of all buildings to be constructed
• Confirmation that all necessary building permits are in place
IMPORTANT NOTE
• Flow Certificates and Septic Certificates (if applicable)
• Occupancy Permit
• New Home Warranty Certificates (if applicable)
All lien holdback will be release to you approximately 30-60
days (depending on your province) after your project has
been completed, assuming there have been no lien claims
made against your property.
Anticipating mortgage interest and principal payments
By the time your reach the Completed stage, most of your
mortgage amount will have been advanced to you through
your solicitor. You will be required to start making regular
mortgage interest and principal payments shortly after
receiving your third advance.
It is important that you request the right mortgage
amount. Review the examples found in the guide
on pages 25 - 28 prior to applying for a mortgage
so that you understand how the advance
schedule works.
23
J. construction mortgage guide J2. Construction financing example sheets
This example illustrates why it is so important to to apply for the maximum amount of financing you can obtain,
rather than just the minimum budgeted amount. The higher financing allows for maximum flexibility during your
advances which is important as unforeseen costs, due to materials, scheduling etc., can arise as construction
progresses. Keep in mind that your final advance is not released until the project is completed.
EXAMPLE 1
The land is owned free and clear of any financing, and the borrower is applying
only for the minimum budgeted amount.
Funds Needed
Land Value:
Build Cost:
Total Value:
$500,000
300,000
$800,000
$300,000
45,000
15,000
5,000
20,000
$385,000
BuildCost
Overruns
GST on Build Cost
Estimated Legal Costs
Soft Cost
Financing Applied For
1. You spend approximately $50,000 to establish the Foundation.
2. The bank sends out their appraiser.
3. The appraiser determines there is $250,000 required to complete the construction.
4. The first draw is calculated as follows:
Approved Financing
$385,000
- $250,000
less amount required to complete
1ST ADVANCE released through Lawyer to use through to
next stage - Lock-up
=
$135,000
5. $135,000 spent and the bank’s appraiser is called out. The appraiser confirms there is $115,000
worth of work required to complete, calculated as follows:
Build Cost
less Foundation
less 1st Advance
Amount required to complete
24
=
$300,000
- $50,000
- $135,000
$115,000
J. construction mortgage guide J2. Construction financing example sheets
6. The 2nd Advance is calculated as follows:
Approved Financing
less First Advance
less Work required to complete
2nd Advance Available
=
=
$385,000
- $135,000
$250,000
- $115,000
$135,000
7. The $135,000 is used towards the completion of the structure.
8.At this point, you will have spent $270,000 in advances, leaving approximately $30,000 needed in
available credit to complete. This figure could be higher depending on how much in overruns you
have incurred, and GST.
At this stage, the funding to complete construction will have to come from outside resources
and credit, as the final advance from the bank is not paid until completion. It is very important
to plan for this. Will you be able to get funding from other resources at this stage?
9. The dwelling is 100% finished and the bank’s appraiser is sent out once again to confirm if there is
any work required to complete. If the appraiser confirms completion of the work, the bank releases
the balance of the construction mortgage funds - $115,000 ($385,000 financing - $270,000 advances
paid = $115,000) which at that point reimburses you to pay down any credit lines used.
10. Important POINT:
This alternative scenario shows why it is important to try to obtain a higher than needed construction
mortgage loan at the very beginning to provide flexibility in the mortgage draws.
If $485,000 had been approved at the beginning, then outside credit lines would not have been
needed to complete the structure:
$50,000 Spent on Foundation
$250,000 Required to Complete
irst Advance
F
$485,000 Approved
250,000
$235,000
Available for Advance
Second Advance
$235,000 Spent and Appraiser
confirms $15,000 required to
complete
$485,000
- 250,000
- 15,000
$235,000
Approved
less First Advance
less Amount to complete
Available for Advance
$470,000 has been made available in advances to complete structure completely, cover
overruns, GST and legal costs. In this scenario, there is no need to go to outside resources
for funding to reach the completion stage.
25
J. construction mortgage guide J2. Construction financing example sheets
This example shows the construction mortgage process when there is also a lot loan involved.
EXAMPLE 2
There is a lot loan registered against the land.
Lot Loan
$250,000
Land Value
Build Cost
Total Value:
500,000
$300,00
$800,000
Funds Needed
$250,000
300,000
45,000
15,000
5,000
20,000
$635,000
to Pay off Lot
Build Cost
Overruns Estimate
GST
Legals
Soft Costs
Financing Applied For
1. You spend approximately $50,000 to establish the Foundation.
2. The bank sends out their appraiser.
3. The appraiser determines there is $250,000 required to complete the construction.
4. The 1st Advance is calculated as follows:
Approved Financing
Required to Complete
1st Advance released through Lawyer to use through to next
stage - Lock-up AND to pay off lot financing
=
$635,000
- $250,000
$385,000
- 250,000
Lot Loan mus be paid off
$135,000
Amount remaining to spend on construction
5. $135,000 has been spent and the bank’s appraiser is called out. The appraiser confirms there is
$115,000 worth of work required to complete, calculated as follows:
Build Cost
Foundation Cost
First Advance
Work required to complete
26
=
$300,000
- $50,000
- $135,000
$115,000
J. construction mortgage guide J2. Construction financing example sheets
6. The 2nd Advance is calculated as follows:
Approved
First Draw
Work required to complete
2nd Advance Available
$635,000
- $385,000
- $115,000
$135,000
7. The $135,000 is used towards the completion of the structure. Once again, there will have been
$270,000 used towards the build, with approximately $30,000 plus GST plus overruns to be covered
from an outside source at this point in time.
8. IMPORTANT POINT:
In this example, the $635,000 applied for is 79.3% financing based on the end value cost
(ie. $635,000/ $800,000 = 79.3% loan to value ratio).
In this case, to apply for higher financing at the beginning would provide you with flexibility during the
advances, BUT would also incur CMHC mortgage insurance costs.
Remember that any mortgage with a loan-to-value ratio of 80% or higher will incur CMHC mortgage
insurance costs. Your decision in this case as to how much financing to apply for at the beginning
would be determined by th availability of outside lines of credit and/or family assistance and the cost
of the CMHC premium. (See Section E for insurance premium tables).
9. The dwelling is 100% finished and the bank’s appraiser is sent out once again to confirm if there is
any work required to complete. If the appraiser confirms completion of the work, the bank releases
the balance of the construction mortgage funds, which at that point reimburses you to pay down any
credit lines used.
27
K. GLOSSARY OF MORTGAGE & REAL ESTATE TERMS Accrued Interest
Interest which has accumulated unpaid since
last payment date.
Amortization
The gradual retirement of a debt by means of partial
payments of the principal at regular intervals.
Amortization Period
A time of arrangement for paying off a mortgage
by equal installments or periodic constant
payments. Repayments of principal and interest
in “blended” amounts. Fully amortized means
complete repayment without a “balloon”
payment at the end of the term. Can be as short
as 5 years or as long as 40 years.
Amortization Schedule
The amortization schedule shows monthly
installments of principal and interest and how
much of the payment is allocated to each. It also
shows the unpaid principal balance.
Appraised Value
A dollar amount assigned to taxable property, by
the assessor, for the purpose of equalizing the
burden of taxation.
Assets
What the borrower owns. Liquid assets are
those that can be quickly converted to cash.
Assignment of Mortgage
The assigning of a mortgagee’s interest in the
mortgage to a new mortgagee. The legal sale
of the mortgage with or without an agreement
to repurchase.
Assignment of Rents
Refers to a lender issued document registered
on the title of your purchase at the time of
mortgage registration. It entitles the lender to
use rental income to make up any funds in
arrears if the mortgage were ever to go into
default. As long as the mortgage is in regular
repayment, the lender has no cause to use the
‘assignment of rents’.
28
Assumption of Mortgage
The purchaser of property assumes the liability
for an existing mortgage against a property
and becomes liable for timely payment of the
mortgage. This action might occur with or without
approval of the existing mortgagee depending on
the terms of the existing mortgage.
Blanket Mortgage
A single document which is registered covering
more than one title to property.
Blended Mortgage
Combining the amount owing on an existing
mortgage with additional mortgage money for
the purpose of buying another property. The
interest rate changes to one that combines the
rate on the old loan with the rate in effect at the
time you add additional financing.
Blended Payments
The method of repayment where periodic
payments of principal and interest are made in
such a way that the payments remain constant
in amount, although the portions attributed to
principal and interest vary with each payment.
Bridge Financing
A special short-term loan needed to cover
(bridge) the gap in time between completing
the purchase of one property and finalizing
arrangements to pay for it. This is often the
result of mismatched closing dates.
Carrying Costs
The actual cost of living in and maintaining
property, including mortgage payments,
property tax, heating and repairs.
Closed Mortgage
The restriction or denial of repayment rights until
the maturity of the mortgage.
Closing Date
The date on which the sale of a property
becomes final and the new owner takes
possession.
K. GLOSSARY OF MORTGAGE & REAL ESTATE TERMS CMHC
Canada Mortgage and Housing Corporation,
a Crown Corporation which administers the
National Housing Act.
Compound Interest
Interest charged not only to the principal sum
but also on interest amounts charged in a
preceding period.
Co-operative
The ownership of a separate amount of space in
a multiple dwelling or other multiple-occupancy
building with proportioned tenancy in common
ownership of common elements. Used jointly
with other owners however, the owner does not
own his/her specific unit but he/she becomes
a shareholder of the corporation which owns
all the real property and occupies by way of a
tenancy agreement subject to a shareholders
agreement administered by an elected board of
directors.
Condominium
The ownership of a separate amount of space in
a multiple dwelling or other multiple-occupancy
building with proportioned tenancy in common
ownership of common elements used jointly
with other owners.
Co-ownership
Co-ownership occurs when the ownership of
the whole property is divided (not necessarily
on a pro-rated basis) between two or more
persons. Usually there is a written agreement
between the co-owners in which the rights of
each co-owner is described. Each co-owner
may sell his/her right of ownership or dispose of
it as he/she wishes.
Collateral Mortgage
A loan backed by a promissory note and the
security of a mortgage on a property. The money
borrowed may be used for another purpose,
such as home renovations or a vacation.
Commitment
A notice from a mortgage lender to a
prospective borrower that the lender will
advance mortgage funds in a specified amount
under certain conditions.
Commitment Fee
This fee is charged by a lender for keeping
an agreed amount of funds available to the
borrower for a specified period of time.
Contract
An agreement between two or more parties
given receipt of lawful consideration to do or
refrain from doing some act.
Conventional Mortgage
A first mortgage, outside the conditions of
NHA (the National Housing Act), granted by an
institutional lender such as a bank, mortgage,
loan or trust company wherein the amount of
the loan does not exceed 80% of the appraised
value of the property.
Convertible Mortgage
A short term mortgage, usually 6 or 12 months,
allowing the borrower to switch into a longer
term at anytime without penalty. There are
several different variations to the convertible
mortgage.
Debt Service
The amount of principal and interest repayments
made under a mortgage on a periodic basis.
If payments are equal they are “constant
payments”, if amounts vary they are known as
“variable payments”.
Deed
An instrument in writing, duly executed and
delivered, that conveys title or an interest in real
property.
Default
Failure to fulfil an obligation.
29
K. GLOSSARY OF MORTGAGE & REAL ESTATE TERMS Default Note
Payment is made on demand, usually within a
few days notice to the borrower.
Deposit
A sum of money (in the form of cash) required
to be paid with an offer to purchase as a symbol
of the purchaser’s commitment. If the offer is
accepted, the deposit is applied to the down
payment. If the offer is later turned down by the
buyer, the deposit may or may not be returned.
Discharge of Mortgage
A document executed by the mortgagee, and
given to the mortgagor when a mortgage loan
has been repaid in full before, at, or after the
maturity date.
Down Payment
The amount of money (in the form of cash) put
forward by the buyer toward the purchase price
of a home.
Floating Rate of Interest
Rate of interest which fluctuates a certain
number of percentage points above or below
prime lending rates.
Foreclosure
Remedial court action taken by a mortgagee when
default occurs on a mortgage, to cause forfeiture
of the equity of redemption of the mortgagor.
Freehold
The ownership of a tract of land on which the
building(s) are located. The most common type
of ownership of real estate.
Gross Debt Service Ratio (GDS)
The annual charges for principal, interest
and taxes as a function of gross income of
the mortgagor.
Effective Interest Rate
The actual interest rate on investment where
a debt or loan was bought at a discount or at
a premium.
Gross Income
The scheduled income from the operation
of the business of the management of the
property, customarily stated on an annual
basis. Also refers to the total personal income
(from all sources) of an individual, before taxes
and other deductions.
Equity
The remaining interest an owner of real property
has in its total value allowing for encumbrances
and creditors’ claims.
Guarantor
A third party person without interest in the
property who agrees to assume responsibility for
a debt in the event of default by the mortgagor.
First Mortgage
A mortgage on property creating a prior claim
over any subsequent mortgages or charges
and usually conveying the legal estate to the
mortgagee. Upon foreclosure of the mortgage,
the first mortgagee must be fully satisfied out of
the proceeds before any subsequent claims.
High Ratio Mortgage
A mortgage loan that exceeds the normal limit
of a conventional first mortgage, in regard to the
ratio of the loan amount to the property’s lending
value; the higher loan amount is made possible
by a mortgage insurance plan. e.g. CMHC.
Fixed-rate Mortgage
This is the usual form of mortgage where
interest rate remains the same during the entire
life of the loan.
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Holdback
An amount of money retained by a construction
lender or owner until satisfactory completion of
the work performed by a contractor.
K. GLOSSARY OF MORTGAGE & REAL ESTATE TERMS Income/Expense Ratio
Ratio of operation expenses to gross income
and expressed as a percentage (also known as
operating ratio).
Interest
“Annual” profit on a loan of money. The price paid
to rent money. A function of the rate of interest
over a period of time on a specific sum of money.
Interest Adjustment Date (IAD)
The date on which the mortgage really begins,
usually the first of the month. The borrower is
required to pay interest on the loan between the
date of receiving the funds and the IAD before
regular mortgage payments start.
Interest Only Loan
Borrower pays back interest only on the loan
and there is no amortization until later or until
the end of the term. This may occur when a
purchaser wishes to resell property after a
short period or if he wishes to build up enough
income from the property before amortization.
Letter of Intent
Similar to a commitment letter where a lender
issues a letter to a borrower outlining their intent
to lend them money for a specific purpose and
under what conditions that money will be loaned.
Liabilities
What the borrower owes.
Lien
The lender’s legal claim to the borrower’s property.
Line of Credit
A maximum credit limit allowed by a lender to a
borrower, as long as the borrower maintains an
acceptable balance on account or has a good
credit rating. The credit line will vary from time to
time according to the changing circumstances
of the borrower or the lender.
Loan Coverage
The ratio of net operating income to mortgage
debt service; in general, loan coverage of 1.2 is
considered adequate.
Loan Fee
A charge for making a loan in addition to the
interest charged to the borrower.
Joint Tenancy
Ownership of land by two or more persons
whereby, on the death of one, the survivor or
survivors take the whole estate.
Leasehold
A person has use of the property for a limited
time. This person can rent the building or own
the building and rent the land on which the
building sits.
Leasehold Mortgage
A mortgage for the purchase of a home or
improvements to a home where the building is
on land that is leased or rented.
Lending Value
An independent appraiser’s value interpreted by
the lender as to the worth of a property in the
current market given a reasonable time period to
sell the property.
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Loan to Value Ratio
The advance ratio of the principal amount of the
mortgage as a function of the lending value of
the property.
Maturity Date
The last day of the term of the mortgage
agreement. The mortgage must be paid in full or
the agreement renewed by the maturity date.
Mortgage
A 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.
More recently referred to as a Charge in the new
Polaris registry system. An
encumbrance registered on
the title of the lands.
K. GLOSSARY OF MORTGAGE & REAL ESTATE TERMS Mortgage Insurance Premium
A premium which is charged as a percentage
of the mortgage. The mortgage insurance
insures the lender against loss in case of
default by the borrower.
Mortgage Life Insurance
A form of reducing term insurance
recommended for the borrower. In the event
of the death of the borrower or one of the coborrowers, the insurance pays the balance
owing on the mortgage. The intent is to protect
survivors from losing their home.
Payment Hypothecation
Refers to a deposit equal to 3 -6 months’
worth of payments held for at least 1 year in a
separate, interest-bearing vehicle. They provide
additional security for the loan, and are more
common when financing up to 75%. These
funds are usually released after one year at the
lender’s discretion, as long as the mortgage has
been repaid as agreed.
P.I.
Principal and interest due on a mortgage.
P.I.T.
Principal, interest and property taxes due on a
mortgage.
Mortgagee
The one to whom property is conveyed. (The
lender). The holder of the mortgage.
Mortgagor
The one who makes the payments. The owner
of the property. (The borrower).
National Housing Act (NHA) Loan
A mortgage backed (insured) to a certain
maximum by CMHC or an approved private
insurer.
Net Rate of Interest
The interest rate received by a mortgage lender
net of the servicing fee deducted by a loan
correspondent, etc.
Nominal Rate
The quoted interest rate for a mortgage.
Offer to Purchase
A formal, legal agreement that offers a certain
price for a specified property. The offer may be
a firm (no conditions attached) or conditional
(certain conditions must be fulfilled).
Open Mortgage
A way of registering a mortgage which allows
the mortgagor to make extra payments, make
principal repayments, or pay the loan off in full
at anytime without penalty.
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P.I.T.H.
Principal, interest, taxes, and heating costs due
on a mortgage. These payments are used to
calculate the GDS and TDS of a borrower.
Penalty
A sum of money paid to a lender for the privilege
of prepaying a mortgage in part or in full,
outside the privileges set out in the terms of the
mortgage.
Portable Mortgage
Upon the consent of the lender, the mortgagor
may transfer the balance of their existing
mortgage to a new property being mortgaged.
Power of Sale
The right of a mortgagee to force sale of the
property without judicial proceedings should
default occur.
Pre-approved Mortgage
Preliminary approval by the lender of the
borrower’s application for a mortgage to certain
maximum amount and rate. Usually conditional
upon the property being purchased meeting the
lender’s criteria.
Pre-Authorized Cheque (PAC)
see Pre-Authorized Payment.
K. GLOSSARY OF MORTGAGE & REAL ESTATE TERMS Pre-Authorized Payment (PAP)
This method of making mortgage payments
allows the lender to deduct the agreed upon
mortgage (tax & insurance, if applicable)
payment directly from the borrower’s chequing
account.
Prepayment Charge
A fee charged by the lender when the borrower
prepays all or part of a mortgage more quickly
than stated in the mortgage agreement. The fee
is charged to compensate the lender for loss of
revenue.
Prepayment Options
The clause in the mortgage agreement
that specifies when, how much and how
prepayments of the mortgage principal (above
and beyond the regular mortgage payments)
can be made by the borrower.
Prime Rate
The rate charged by banks to their most creditworthy borrowers.
Principal
The amount of money borrowed. Could be part
of the repayment plan that lowers this original
amount.
Priority of Mortgages (i.e. first,
second, third)
Dates of registration by number and date in the
local Registry Office and/or Land Titles, then
given to the mortgagee. First mortgages have
priority over second mortgages; and so on.
Priority refers to the mortgagee’s claim to the
property should payments go into default.
Promissory Note
An unconditioned note or written promise by
the promisor to pay a sum of money to the
payee on demand or at a fixed or determinable
future date.
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Rate (interest)
The return the lender receives for loaning the
borrower the money for the mortgage.
Redemption
The buying back of a mortgage estate by
payment of the sum due on the mortgage.
Refinance
To pay in full and discharge a mortgage and any
other registered encumbrances and arrange for a
new mortgage with the same or a different lender.
Renegotiate
To change the terms and conditions of a mortgage
agreement prior to maturity. Renegotiation occurs
with the lender who currently holds the mortgage.
Renewal Agreement
An agreement whereby the lender may agree
to extend the term of the loan, but possibly on
revised terms as to principal repayments and
interest rate.
Reserve Fund
A fund set up by a condominium corporation for
major repairs and replacement of such items as
the roof, elevators, plumbing, heating systems,
etc. All condo corporations, by law, require a
reserve fund.
Roll-over Mortgage
A mortgage loan where the interest rate is
established for a specific term. At the end of this
term the mortgage is said to “roll over” and the
borrower and lender may agree to extend the loan.
If satisfactory terms cannot be agreed upon, the
lender is entitled to be repaid in full. In this case,
the borrower may seek alternative financing.
Second Mortgage
A mortgage placed on real property which
is already encumbered with one mortgage.
Determination of first, second, third, etc. mortgage
is by priority of registration (time and date).
K. GLOSSARY OF MORTGAGE & REAL ESTATE TERMS Security
Property offered as backing for a loan. In
the case of mortgages, the property being
purchased with the loan usually forms the
security for the loan.
Shelter Payment Ratio
Gross debt service plus annual heat costs as a
function of the gross income of the mortgagor.
Survey
The accurate mathematical measurements of
land and buildings thereon made with the aid of
instruments.
Tenancy in Common
Ownership of land by two or more persons:
unlike joint tenancy in that the interest of the
deceased does not pass to the survivor, but is
treated as an asset of the deceased’s estate.
Term of Loan
The actual length of time for which the money
is borrowed. Anywhere from one month to 25
years. The period for which the mortgage is
registered, in months.
Total Debt Service Ratio (TDS)
Gross debt service plus payments on other
debts such as bank loans, finance company
loans, credit card payments, alimony, etc. as a
function of the gross income of the borrower.
Transfer
To convey from one person or institution to
another.
Transfer of Charge
Assignment of a mortgage under the Land Titles
System.
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Underwriter (mortgage)
A person employed by a mortgage lender
or mortgage broker who assesses loan
applications based upon the following: quality
of the real property, credit worthiness and ability
to pay of the applicant and guidelines of the
lender with regard to ratio of mortgage loan to
value of property.
Variable Interest Mortgage
A loan where the interest rate may vary during
the term of the mortgage. The variance is
usually tied to some specific factor such as
prime bank rate or the guaranteed investment
certificate rate for a designated lender.
Vendor Take Back Mortgage
A mortgage which a vendor of real property
takes from the purchaser usually as part
payment of the purchase price for that property.
A private first or second mortgage that the
vendor lends to the purchaser/borrower.
Zoning
The public regulation of the character and intensity
of the use of real estate. This is accomplished by
the establishment of districts in each of which
uniform holding restrictions related to use, height,
area, bulk and density of population are imposed
upon the private property.
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